Creative Defense Firms Fail To Revise Decision In Musk Litigation

The Delaware Court of Chancery rejected an effort to revise the decision in litigation that had challenged the compensation award to Elon Musk

This decision marks the trial-level denouement in a derivative suit asserting fiduciary challenges to the largest executive compensation award in the history of public markets—Tesla, Inc.’s 2018 award to Elon Musk.

In January 2024, the court issued a post-trial opinion finding that the award was subject to review under the entire fairness standard, the defendants bore the burden of proving entire fairness, they failed to meet their burden, and the plaintiff is entitled to rescission. The plaintiff’s attorneys then petitioned for fees and expenses, which is typical in a derivative suit when the plaintiff prevails. Atypically for this court, the defendants responded by putting the rescinded compensation plan—the exact same plan that the post-trial opinion deemed a breach of the duty of loyalty—to a stockholder vote for the stated purpose of “ratifying” it. The defendants then moved to “revise” the post-trial opinion based on the stockholder vote, asking the court to flip its decision and enter judgment in their favor. This decision resolves the motion to revise and the fee petition.

The motion to revise is denied. The large and talented group of defense firms got creative with the ratification argument, but their unprecedented theories go against multiple strains of settled law. There are at least four fatal flaws. First, the defendants have no procedural ground for flipping the outcome of an adverse posttrial decision based on evidence they created after trial. Second, common-law ratification is an affirmative defense that must be timely raised, which means that, at a minimum, it cannot be raised for the first time after the post-trial opinion. Third, what the defendants call “common law ratification” has no basis in the common law—a stockholder vote standing alone cannot ratify a conflicted-controller transaction. Fourth, even if a stockholder vote could have a ratifying effect, it could not do so here due to multiple, material misstatements in the proxy statement. Each of these defects standing alone defeats the motion to revise.

The fee petition is granted in part. The plaintiff’s attorneys asked for $5.6 billion in freely tradeable Tesla shares. In a case about excessive compensation, that was a bold ask. To be sure, their methodology for calculating this figure is sound. Delaware courts award fees based on a percentage of the value of the benefit achieved, scaled to reflect the stage of the case, and adjusted for other factors. Applying this approach to rescission of a $55.8 billion compensation award results in an eyepopping figure. Yet, as the Delaware Supreme Court cautioned in In re Dell Technologies Inc. Class V Stockholders Litigation, a fee award “can be so large that typical yardsticks, like stage of the case percentages, must yield to the greater policy concern of preventing windfalls to counsel.” The fee award here must yield in this way, because $5.6 billion is a windfall no matter the methodology used to justify it. To reach a reasonable number, this decision adopts the defendants’ approach and uses the $2.3 billion grant date fair value to value the benefit achieved. Applying a conservative 15% to that figure results in a fee award of $345 million—an appropriate sum to reward a total victory. The defendants may elect to pay the fee award in cash or freely tradable shares.

At the end of 101 pages

Defendants make other arguments too, but this decision is already long enough. Perhaps there is a case in which requiring a defendant to pay attorney’s fees in shares over the defendant’s objection is appropriate and just. But Defendants win on this point for a simple reason: Plaintiff’s most compelling argument for payment in shares is that this form of payment benefits Tesla. Tesla does not see it as a benefit. So, the court will not force it. It is up to Defendants. They may elect to pay the fee award in freely tradeable shares or in cash.

(Mike Frisch)