How do you turn nine shares of Tesla stock into $345 million? Just add lawyers.
That’s the reaction of many business leaders and Tesla shareholders in response to a Delaware judge’s ruling that threw out the company’s compensation package for CEO Elon Musk. The judge orders the automaker to pay the plaintiff’s attorneys $345 million for their trouble.
The lawsuit was brought by Norristown resident — and former heavy metal drummer — Richard Tornetta, who held nine shares of Tesla stock when he filed his complaint in 2018. He also had the elite plaintiff’s law firm of Bernstein, Litowitz, Berger & Grossmann.
Now, Tesla is struggling to find a way to compensate their celebrity chief executive that keeps him focused on the car company (amid his many other interests) and will pass muster with Delaware Court of Chancery Judge Kathaleen McCormick, who has interjected herself into the process.
The legal fight began in 2018, after shareholders approved an unusual compensation package for Musk. Rather than a regular paycheck or even a standard stock option plan, Musk was given 10 years to hit 28 performance targets.
“The package was essentially Musk’s bet on himself,” wrote Al Root at Barron’s. “He was betting he could get Tesla stock to rise from a valuation of $60 billion to at least $650 billion, a 983 percent rise, while making it profitable over 10 years.”
Tesla stock has since risen, giving the company a value of $1.1 trillion. As a result, the stock Musk earned in his deal is worth $100 billion.
Tornetta’s attorneys argued Musk had too much influence over the Tesla executives who made the deal. Judge McCormick ruled in favor of Tornetta and upheld her ruling again on Dec. 2 — despite 72 percent of Tesla shareholders voting this summer to re-ratify the compensation package. Shareholders were fully informed of the judge’s rulings and the plaintiff’s arguments before they cast that vote.
While $345 million on behalf of a plaintiff holding just nine shares of stock may sound like a lot, the lawyers initially requested $5 billion — or $18,000 per billable hour.
Court documents show the plaintiff’s lawyers acknowledged their award request was “unprecedented,” but they argued it was also necessary. “Our law rewards counsel’s efforts undertaken on a fully contingent basis that, through full adjudication, produce enormous benefits to the company and subject the lawyers to significant risk,” they wrote.
For advocates of tort reform, this case is a textbook example of the need to limit on how much lawyers can take from the companies they target. According to the U.S. Chamber of Commerce Institute for Legal Reform, businesses paid more than $529 billion in legal fees and related costs in 2022. That’s 2.1 percent of the U.S. gross domestic product.
The Institute for Legal Reform’s most recent Tort Costs in America report revealed costs rose 7.1 percent nationwide between 2016 and 2022 — faster than the average annual inflation rate and GDP growth. Researchers feared tort costs could eventually hit 14 percent by the next decade.
Those rising costs and the high-profile Musk case caused supporters of Donald Trump to push for nationwide tort reform.
The problem is particularly acute in Delaware. Walter Olson, a legal scholar and senior fellow at the libertarian Cato Institute, said the current Delaware rules allow lawyers to cash in by, in essence, hiring themselves to litigate a case.
“You have a system that follows sort of dubious rules … to make lawyers very rich, totally aside from whether the outcome was actually a good one for shareholders,” Olson said.
Olson argued there needs to be a better way to protect shareholder rights in class-action lawsuits. “It just doesn’t seem to line up with what we would want if we were the shareholders being protected.”
California attorney Keith Paul Bishop agreed, questioning how the $345 million fee will benefit Tesla and its shareholders. “It is hard to see the equity in one judge overturning not once, but twice, the will of directors and shareholders,” he wrote.
Attorney Mike Davis, who served as a law clerk under Supreme Court Justice Neil Gorsuch, said such reform would reduce costs, improve efficiency and save taxpayer dollars. “This should be a big priority for next year,” he posted on X.
Getting tort reform through Congress won’t be easy.
The most promising bill is the Litigation Transparency Act, sponsored by Rep. Darrell Issa, R-Calif., and Rep. Scott Fitzgerald, R-Wis. It requires law firms to reveal what third-party interests are bankrolling civil suits.
Last year, it was discovered that a Chinese firm had financed four intellectual property lawsuits in U.S. courts.
“Our legislation targets serious and continuing abuses in our litigation system and achieves a level of transparency that people deserve, and our standard of law requires,” Issa said.
Critics say it’s no coincidence that Musk — an ally of Trump — was the target of a law firm that gave 100 percent of its $252,983 in political donations over the last two election cycles to Democrats.
Musk and Tesla plan to appeal the judge’s ruling.
