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Tesla Challenges $230 Million Legal Fee Request in Director Pay Settlement
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In a legal battle that has captured the corporate world’s attention, Tesla Inc. is strongly pushing to dismiss a staggering $230 million legal fee request by a team of shareholder attorneys who secured a settlement in a contentious dispute related to director compensation. The electric vehicle giant is adamant that this request constitutes an “unwarranted windfall,” with an hourly rate that ranks among the highest ever witnessed in Delaware’s Court of Chancery – a renowned arena for shareholder-related litigation.

Tesla’s Stand: Advocating for a $64 Million Fee

Tesla’s firm stance on this matter is clear: the company urges Chief Judge Kathaleen McCormick, who presides over the court, to approve a legal fee no greater than $64 million. This stark contrast in the proposed fee has set the stage for a legal showdown, with implications extending far beyond this particular case’s boundaries.

  
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The Origin of the Dispute: Director Compensation

At the heart of this legal dispute lies the compensation of Tesla’s directors from 2017 to 2020. The shareholder attorneys represented a Detroit police union pension plan that raised concerns about what they deemed excessive director pay. Notably, most of the directors’ compensation consisted of stock options, and they were only compensated if Tesla’s stock value saw substantial growth, which it indeed did, multiplying tenfold in recent years.

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Notable Exclusion: Elon Musk’s Compensation

It’s essential to underline Elon Musk’s formidable $56 billion in compensation as Tesla’s Chief Executive was not part of this lawsuit. A separate legal challenge is underway concerning Musk’s compensation package.



The Settlement and Its Fallout

The lawsuit, initiated in 2020, was settled in July. The directors agreed to return $735 million to Tesla, forming part of a comprehensive $919 million agreement. The directors maintained that their compensation was equitable, and they only agreed to settle to eliminate the looming risk of prolonged litigation.

The Attorney’s Demands: 25% of the Settlement

The attorneys representing the Detroit police union pension plan are now seeking a fee equivalent to 25% of the settlement involving the twelve directors, among whom are high-profile figures such as James Murdoch, son of media magnate Rupert Murdoch, and Larry Ellison, co-founder of Oracle. This case, known as a “derivative lawsuit,” directly benefits the company rather than individual shareholders.

Tesla’s Counterargument: Discrepancy in Valuation

Tesla is steadfast in its claim that the shareholder attorneys have artificially inflated the value of the settlement and, consequently, the requested legal fee. Their assertion is grounded in the argument that the value has been pegged to the cost incurred by the directors rather than the benefit derived by the company. According to Tesla, their net gain from the agreement stands at $295 million.

The Crux: Dissecting Stock Options

The main point of contention revolves around the valuation of stock options. At the time of the July settlement, the directors deemed these options worth approximately $458 million. Tesla, however, emphasizes that the benefit of reclaiming these options lies not in exercising them but in reversing the accounting costs recorded when they were initially issued, which amounted to approximately $20 million.

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Musk’s Non-Involvement and Compensation

An important note is that Elon Musk is not participating in this settlement, and he has not received any compensation for his role on the board, as confirmed by a court filing submitted by the plaintiff.

This legal battle between Tesla and the shareholder attorneys over legal fees promises to be a precedent-setting case that will shape the landscape of future disputes involving corporate governance and director compensation. The outcome will be closely watched by the involved parties and by corporate entities, legal practitioners, and the broader business community.

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