U.S. Court Significantly Reduces Tesla Shareholders' Lawsuit Lawyer Fees: From $176 Million Down to $70.9 Million

Tech Home, February 3rd — The Delaware Supreme Court last Friday ruled to cut over $100 million in attorney fees awarded to the legal team that reached a settlement with Tesla Inc. representing proxy shareholders. The legal team had filed a lawsuit over Tesla’s four-year director compensation and settled with the company.

The Chief Justice of the Delaware Supreme Court, J. Seth, on behalf of the five-justice panel, stated that the decision by the state’s elite-level trial court, the Delaware Court of Chancery, to award $1.76 billion (Note: at current exchange rates approximately 1.224 billion RMB) to a pension fund proxy law firm was “erroneous, as it included the intrinsic value of Tesla’s board-reimbursed options in the financial benefit analysis.”

The justices ultimately set the attorney fees at $70.9 million (approximately 493 million RMB at current exchange rates), while upholding the lower court’s approval of the settlement agreement. Seth wrote, “Based on our calculations, $71 million reflects a reasonable fee for the attorneys’ work and does not constitute unjust enrichment.”

Previously, the Delaware Court of Chancery had ordered Tesla to pay $1.76 billion to a pension fund proxy lawyer. The pension fund had filed derivative shareholder lawsuits regarding director compensation from 2017 to 2020, including CEO Elon Musk, Oracle founder Larry Ellison, Musk’s brother Kimbal Musk, and Rupert Murdoch’s son.

Under the settlement, Tesla’s board must return up to $735 million (about 5.11 billion RMB at current exchange rates) in stock and options, and waive $184 million (about 1.279 billion RMB) in future compensation over the next three years. The Supreme Court was not asked to review the fairness of the settlement or the transaction that triggered the lawsuit.

Seth stated that the $458 million worth of returned options “are necessary to calculate the options to be returned,” but Tesla and its directors did not agree to include that value “in the financial benefits used to determine attorney fees.”

During oral arguments, Tesla argued that an award of approximately $70 million in attorney fees was appropriate.

Justice Karen L. Valihura pointed out during a hearing on October 29 that this fee was $60 million higher than the Delaware judicial system’s annual budget last year, “and this is a case of a mid-case settlement.” The pension fund side said that this settlement was one of the largest in Delaware history, and the Chancery Court did not support its full request of $230 million.

Last year, the Delaware Supreme Court showed cautious approval of nine-figure attorney fees, upholding a $267 million award to lawyers who settled a contentious $1 billion stock conversion dispute with Dell Technologies.

Last month, Tesla successfully persuaded the Delaware Supreme Court to reduce the $345 million in attorney fees awarded in a case challenging Elon Musk’s record-breaking CEO compensation package. Investor Richard Tonet’s legal team argued that the fee reflected the benefits created by their lawsuit — the reversal of the largest compensation plan in human history.

When restoring the global billionaire’s compensation agreement, the justices cut the attorney fee to no more than $54.5 million. They also sought to avoid remanding the fee issue back to the Chancery Court for reconsideration, stating in an en banc opinion: “Although we typically remand cases for a re-evaluation of fees, given the lengthy litigation history, the significant time and effort invested by the Chancery Court over the years, and the substantial personal sacrifices made, we make an exception in this case.”