In a notable decision on Friday, the Delaware Supreme Court sharply curtailed the legal fees charged to Tesla Inc. (NASDAQ: TSLA) in a shareholder lawsuit contesting director compensation. Originally, a Delaware Chancery Court judge had set the legal fees at $176.1 million. However, the state's highest court concluded that this amount was an overvaluation and revised the fee award down to $70.9 million.
The lawsuit was initiated by representatives of the Detroit firefighter and police pension fund who alleged that certain Tesla directors received excessive compensation. These directors, including Chair Robyn Denholm and James Murdoch, ended up agreeing to return about $277 million to Tesla in cash and stock options. The settlement related to this case totals approximately $919 million according to shareholder attorneys involved in the Detroit pension fund's suit.
Responding to the ruling, Tesla CEO Elon Musk posted on the social media platform X that “Delaware Supreme is saving the state,” indicating approval of the Supreme Court’s intervention in reducing legal expenditures.
This decision comes amid broader scrutiny regarding legal fees charged in high-profile Delaware cases. Earlier in 2024, a judge awarded $267 million in legal fees to attorneys in the Dell Technologies Inc. (NYSE: DELL) litigation, prompting Delaware's bar association to prepare reform recommendations for lawmakers to address potential issues with fee entitlement and assessment.
The Delaware Supreme Court also clarified that the intrinsic value of stock options returned by the directors should not have been included in the settlement's valuation for calculating attorney fees. This adjustment contributes to the reduced fee obligation for Tesla.
It is noteworthy that Elon Musk himself was not a party to this particular settlement. He successfully defended his own compensation package in a separate legal case where the Delaware Supreme Court overturned a previous ruling that had nullified his 2018 Tesla pay package. The Supreme Court deemed that earlier ruling improper and inequitable, thereby reinstating Musk’s compensation arrangement.
The reductions in attorney fees and director repayments at Tesla highlight ongoing tensions and complexities around director remuneration and legal costs within corporate governance disputes. Furthermore, the Delaware Supreme Court's active role in reviewing fee awards signals possible shifts in how legal fee calculations may be approached in the future, an issue that carries significance for corporations and shareholders alike.
Additional industry attention remains on Delaware as it faces pressure to consider legal fee reform legislation to balance fair compensation for legal professionals with reasonable cost expectations for litigants in shareholder disputes.