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Lawyers for shareholders who defeated Elon Musk’s $56 billion Tesla pay package have asked a Delaware state court to award them shares of the electric vehicle maker worth nearly $6 billion as payment.
In a filing in the Delaware Court of Chancery on Friday, Bernstein Litowitz Berger & Grossmann, the lead counsel for the plaintiff shareholders, admitted that such an award was “unprecedented” in absolute value. However, they noted that the implied percentage of shareholder value achieved remained “conservative” and in line with previous Delaware awards.
“This structure has the advantage of linking the premium directly to the benefit created and avoids taking even a single cent from Tesla’s balance sheet to pay commissions,” we read in the document, regarding the choice to take shares of the car company instead of a cash prize. “We are ready to ‘eat our own cuisine’.”
The request follows a landmark ruling last month in which Kathaleen McCormick, the judge overseeing the case, overturned a 2018 pay package that Tesla’s board had awarded to Musk, which included multiple tranches of stock vested after that the company had achieved aggressive operational and financial milestones.
McCormick ruled that Tesla’s board of directors was not sufficiently independent from Musk and that the governance process that led to the award, as well as the value of the shares, had been “unfair” to other shareholders.
Lawyers who file civil cases typically work on a contingency basis: Instead of billing clients for hours worked, they will instead take on the odds of winning a case or getting a settlement, and seek a share of the winning pot. Musk’s pay case is more complex as no cash changed hands in the cancellation of the stock grant.
Bernstein wrote in his statement that he believed he could rightly claim a third of the “benefit conferred” by the canceled $56 billion award, based on past precedent. He said the benefit amounted to 267 million of the 304 million shares Musk had gained: the difference reflects the cost to Musk of exercising the options.
Bernstein cited a 2012 Delaware case in which plaintiffs’ lawyers were awarded compensation of nearly $300 million, or 15% of the shareholder recovery, which had been a record for that court.
He noted that his claim represented only 11% of the recovery, less than 15% in the previous case. Bernstein also requested that he be allowed to freely sell Tesla shares without a mandatory holding period: for that concession, he said, he was willing to accept the lower 11% commission.
Based on Tesla’s closing price on Friday, 11% of the 267 million shares total about 29 million shares, which would be worth $5.9 billion. If the Delaware court grants it, Bernstein would be among the company’s 10 largest shareholders. The law firm wrote in the filing that even a commission paid in stock would be tax deductible to the automaker.
Musk may dispute the compensation request. He is also expected to appeal the decision to cancel his pay. Musk’s lawyers did not immediately respond to requests for comment. Greg Varallo, Bernstein’s lead attorney, declined to comment beyond the filing.
Bernstein stressed how difficult he thought the case would be to proceed on a contingent fee basis, describing the saga as a “steep uphill climb” in which “you were taking a significant risk going forward against an elite defense attorney.”
After the February decision, Musk complained about Delaware’s corporate court and urged other companies to move their headquarters to Nevada and Texas. Since then, he has moved the incorporation of two of his companies from Delaware: SpaceX to Texas and Neuralink to Nevada.
In his statement Friday, Bernstein noted that two major jury awards have been awarded in previous U.S. civil cases, both of which occurred in Texas.