Greg Varallo, the lead plaintiff’s lawyer from the Bernstein Litowitz firm, described Musk’s efforts since the January ruling to reinstate the pay plan as a “clown show”. Varallo claimed that his client, Richard Tornetta, a shareholder holding fewer than 200 shares, has faced death threats from Tesla partisans.
The Wilmington courtroom was packed with dozens of lawyers on Monday local time. Tesla and its directors have collectively hired 10 top law firms, both from Delaware and New York, to plead their case. Lawyers representing some Tesla shareholders, including Calpers and Cathie Wood’s Ark Invest, also registered appearances with the court.
McCormick occasionally asked questions but mostly listened intently as the sides conceded their arguments were diametrically opposed.
In 2018, Tesla’s board granted Musk that chance to earn shares equal to more than a tenth of the company’s equity if Tesla was able to hit a series of aggressive stock price and operational milestones. Tesla’s market value went from less than US$100b when the package was granted to top US$1 trillion just a few years later. By 2021, with each of the targets met, Musk was awarded 304 million shares.
Tornetta, the Tesla shareholder who sued, argued that the award was excessive, resulting from a Tesla board too intertwined with Musk to represent ordinary shareholders.
McCormick agreed, and the plaintiff’s lawyers, led by Varallo, subsequently requested a fee equivalent to roughly 29 million Tesla shares, as remuneration for saving shareholders the 300 million shares of dilution from the rejected Musk pay package.
Tesla and its board argued to the court that the benefit to the electric vehicle maker stemming from McCormick’s cancellation of the share grant was “unquantifiable” and that, rather than receiving several billion dollars worth of shares, the winning lawyers were entitled to less than US$15 million.
“Plaintiff’s counsel [say] that they are entitled to part of the economic miracle even though they didn’t have any role in it,” testified Daniel Fischel, a University of Chicago professor who was an expert witness for Tesla. “The rescission of the grant didn’t save Tesla US$1.”
Varallo conceded that the fee would be record-shattering in absolute terms, but told the court that precedent cases allowed him to ask for one-third of the benefit to shareholders. He characterised his request of roughly 10 per cent as deliberately conservative.
Varallo said in court papers that he would also agree to a cash fee of US$1.4b, a figure he based on the implied hourly rate from another case similar to the Tesla lawsuit.
“We are just receiving a slice of the value pie,” he told McCormick, deflecting Tesla’s claims of a windfall.
Robert Jackson, a NYU law professor and former commissioner at the Securities and Exchange Commission who testified on behalf of Tornetta, challenged Tesla’s contention that avoiding share dilution did not benefit a company: “We don’t distinguish between shares and cash, none of this [distinction] makes economics or governance sense”.
As it fights for its fee, Bernstein Litowitz is also seeking to keep the original ruling from being set aside after the Tesla shareholder vote.
Tesla, which had formed an independent committee to approve the latest pay package, wrote in court papers that the vote “may have been one of the most well-informed stockholder votes in Delaware history”. With shareholders’ stamp of approval, “Delaware law should respect that vote because it reflects the will and sound ‘business judgment’ of Tesla’s stockholder-owners”, it argued.
Varello has maintained that there was no basis in Delaware case law for a shareholder vote to retroactively upend a court ruling.
“To put it bluntly, litigating against Tesla is never easy,” he told the court during the hearing.
Written by: Sujeet Indap
© Financial Times
