Tesla rejected offer to pay

Oct 3 (Reuters) – A brewing fee dispute in Delaware Chancery Court poses a novel question: Can stock options be worth one price to the company that issued them and another to the board members who received them?

Last July, when Tesla’s outside directors agreed to settle a shareholder derivative lawsuit accusing board members of granting themselves outsized compensation, the deal was billed as being worth a staggering $919.4 million — the biggest-ever recovery in a shareholder derivative suit and the second-highest settlement in the history of Chancery Court.

Nearly half of that $919 million was in the form of stock options that had been awarded to Tesla board members but would be returned to the company under the terms of the settlement. Those returned options, according to the shareholder lawyers who negotiated the settlement, are worth $458 million.

Another $184 million of the total value of the settlement, according to the plaintiffs firms, was in three years of unpaid compensation, from 2020 to 2022, that board members agreed to forgo entirely.

In September, plaintiffs’ lawyers from Bleichmar Fonti & Auld, Fields Kupka & Shukurov and McCarter & English asked Delaware Chancellor Kathaleen McCormick to award them fees of $229.6 million, or 25% of the $919 million monetary value of the settlement. The request worked out to a lodestar rate of more than $10,000 per hour, but the shareholder firms said their jumbo fee request was justified by the historic results they obtained.

Tesla thinks otherwise.

In a brief made public on Monday, the company argued that shareholder lawyers deserve only $63.5 million — less than one-third of their requested fee — because the settlement, according to Tesla, is actually only worth $295 million, not the $919 million plaintiffs claimed.

Huh?

Plaintiffs’ lawyers, after all, did not ask for fees based on the amorphous value of corporate governance reforms or additional disclosures in an M&A proxy filing. Their request was based on money that would either flow back to Tesla — in the form of $276.6 million in actual Tesla shares and $458 million in stock options — or would be retained by Tesla because the director defendants had agreed to forgo three years of compensation.

Nor did plaintiffs’ lawyers pull their stock options valuation out of thin air: The number was calculated by an outside expert based on a widely accepted methodology that took into account Tesla’s share price on the day of the tentative deal and the cost of the options to the director defendants.

Indeed, in a Sept. 22 brief supporting the settlement, Tesla’s outside directors did not dispute plaintiffs’ asserted $458 million valuation of the options, even as they took considerable umbrage at plaintiffs’ description of their conduct. (They argued that Tesla’s system of compensating directors with stock options actually aligned board members with shareholders.)

But Tesla told McCormick in its newly public brief that stock options can simultaneously be worth vastly different amounts of money to the company that granted them and to the board members who received them.

And regardless of the value of the options to the board members who agreed to return them to the company, Tesla said, the returned options are worth only about $19 million to the corporation itself.

“The value of an option in the hands of a director defendant is not the same as the value of that option in the hands of Tesla,” wrote the company’s lawyers at Bayard. “Tesla cannot exercise the option and capture the difference between the settlement stock price and the strike price of an option. The returned options will just be canceled as part of the settlement.”

Those cancellations, Tesla said, will reverse accounting charges of about $19 million that were entered when the company issued the options. And that, according to Tesla, is the entire value of the returned options as far as the corporation is concerned. The directors’ returned options, as Tesla tells the tale, will simply go back into a big pool of authorized but unissued options — and Tesla already has all of the options it needs to recruit new talent and to meet its obligations under its executive incentive plan.

Tesla also disputed plaintiffs’ $184 million valuation of the compensation that its outside directors agreed to forgo as part of the settlement. That number was based on unissued stock options, but Tesla said it was pure speculation that directors would have been issued any additional options after the board voted to halt automatic grants in 2020.

Shareholder firms contended that they should be credited for averting any opportunity for the board to issue retrospective awards to outside directors who went without pay for three years when the board halted stock option grants. Tesla said the plaintiffs should not receive fees based on that hypothetical.

Remember, Tesla is the beneficiary of the settlement with its board members because the case is a shareholder derivative action, in which shareholders stepped into the shoes of the corporation to prosecute claims against board members.

Tesla said that from its perspective, the deal is worth just$295 million — the value of the actual shares directors agreed to return to the company plus the $19 million in options grant accounting charges that will be canceled when the options are returned.

Plaintiffs’ lawyers, according to Tesla, are entitled to no more than 21.5% of that total, based on the stage of the litigation when the case settled and time and effort shareholders dedicated to the case. Shareholder firms had pointed in their brief requesting fees to a whopper $267 million fee awarded in August to plaintiffs’ lawyers who obtained a $1 billion cash settlement with Dell board members.

Tesla said in its opposition brief that the billing records underlying the Dell fee, which amounted to about 27% of the $1 billion settlement, show why the shareholder firms in its case deserve less.

Javier Bleichmar of Bleichmar Fonti declined to comment on Tesla’s brief opposing shareholders’ fee request. Plaintiffs are scheduled to file their response on Friday. Neither Tesla nor its lawyers from Bayard responded to my email query on the fee dispute.