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By Tom Hals
WILMINGTON, Delaware (Reuters) – Lawyers who effectively struck down Elon Musk’s $56 billion pay package for Tesla as overkill have admitted his $6 billion pay request is “unprecedented” but that some measures recommend it could simply be cheap.
The payment request, like Musk’s pay package that this case targets, defies a simple comparison. An opinion will be sought in Delaware in the coming weeks on whether this is moderate and meets various legal requirements.
The fees involve an hourly rate of $288,888 for the work of the 37 attorneys, partners and paralegals included in the case, according to documents filed in the Delaware Court of Chancery.
For comparison, high-profile business lawyers charge $2,000 per hour, and partners with several years of experience at the largest law firms earn about $288,000 per year.
At that $2,000 per hour rate, the total time spent through the shareholder legal team (about 19,500 hours) would be about $39 million, a far cry from the $6 billion.
Apart from its amount, the payment consists of the legal team seeking to be paid by taking a portion of what Musk sells, Tesla shares, in his salary package. They are seeking 29 million of the 266 million Tesla shares the company receives. as a result of the decision. They argue that those payments won’t charge Tesla anything.
The shareholder’s legal counsel consisted of 3 law firms, Bernstein Litowitz Berger
Typically, in shareholder lawsuits like the one filed through Richard Tornetta in 2018 over Elon Musk’s salary, lawyers tread lightly and expect to get a share of any eventual settlement or judgment.
The record payout in a shareholder lawsuit is $688 million awarded in 2008 to lawyers representing Enron shareholders at Stanford Law School. The securities fraud case arises from the commodity trader’s hidden debts that led to his bankruptcy.
The judges do not only look at the amount of the fees, but even through other measures, the prices of the Musk case exceed those of Enron.
Enron’s fees accounted for 9. 5% of the record $7. 2 billion settlement.
For comparison, lawyers in the Musk case said their payment claim was equivalent to 11% of the shares Musk would return to Tesla.
Federal judges tend to award lower percentages as the settlement amount increases, especially in cases over a billion dollars.
TWO EXCEPTIONS
But there are exceptions, and those exceptions are the Musk case.
In 2016, a federal judgment awarded an unusually high payout of 25 percent, or $422 million, on a $1. 6 billion settlement in a securities lawsuit against client finance firm Household International for covering up its poor lending practices.
This case lasted 14 years and, like the Musk case, was a lawsuit, which is rare in shareholder litigation. The court said the years of work and risks justified the payment.
Luckily for the shareholder’s lawyers in the Musk case, the case made it to Delaware state court, which takes into account points such as the lawyers’ efforts and the complexity of the case when assessing fees.
Delaware’s strategy was highlighted in a 2011 settlement that approved $304 million in fees for a legal team in a case challenging a Southern Copper Corp deal that it found was taking undue advantage of its majority shareholder, Grupo Mexico.
Delaware Judge Leo Strine faced an unprecedented pay demand at the time of $35,000 an hour, which the defendants said would “destabilize” the justice system.
Strine said it featured a healthy incentive and fee, which accounted for 15% of the $2 billion judgment.
Delaware’s technique may be about to change.
The Delaware Supreme Court is considering an appeal on charges amounting to 27% of a $1 billion settlement in 2022 involving Dell Technologies. The company filed a lawsuit over a 2018 stock conversion similar to Dell’s stake in VMware.
In May, the court will hear oral arguments, and two teams of law professors have filed opposing amicus curiae briefs: one says Delaware encourages shareholder lawyers to seek larger settlements and the other says payout percentages decrease as recoveries increase.
“Academics have spent many lifetimes looking for the most productive way for clients to pay their lawyers,” the brief says through law professors, adding Brian Fitzpatrick of Vanderbilt Law School, who defended the 27% fee. With all due respect, we think it’s a silly mission. “
(Reporting by Tom Hals in Wilmington, Delaware; editing by Leslie Adler)