Tesla shareholder lawyers defend proposal

Tesla shareholder lawyers defend proposal

Elon Musk

Oct 11 (Reuters) – Shareholder lawyers who want to collect about $229 million in fees for forcing Tesla board members to surrender nearly $920 million in compensation fired back this week at the company for asserting that they are entitled to no more than $63.5 million.

In a new brief, plaintiffs lawyers from Bleichmar Fonti & Auld, Fields Kupka & Shukurov and McCarter & English told Chancellor Kathaleen McCormick of Delaware Chancery Court that Tesla’s arguments for slashing their fees defy both Delaware precedent and Tesla’s own signature on a settlement stipulation that acknowledges the value of the compensation surrendered by the company’s outside directors.

Tesla (TSLA.O), as I’ve told you, contends that shareholder lawyers have drastically overstated the value of the settlement with the outside directors.

The directors agreed, among other things, to return millions of stock options to the company and to forgo any compensation for the three years following the filing of the lawsuit challenging their pay.

In the settlement stipulation, the returned stock options were valued at about $458 million and the forgone compensation at about $184 million.

But Tesla argued that the returned options are worth only about $20 million to the company itself. Tesla is the beneficiary of the lawsuit, in which shareholders stepped into the shoes of the corporation to litigate claims that the outside directors were overpaid. The company did not dispute that the returned stock options were worth $458 million to the directors who agreed to surrender them — but said, essentially, that the company has little use for the surrendered options. Tesla said it does not need the options in order to compensate executives or recruit new employees and will simply cancel them on its books.

Tesla also argued that shareholder lawyers should not be awarded fees for the pay its directors agreed to forgo. The company said the board voted to halt automatic stock option awards to its members in 2020, so it’s entirely speculative to assume that directors would have reversed course and awarded themselves $184 million. Plaintiffs lawyers, Tesla said, should not be paid based on the speculative value of compensation that might not have been paid out anyway.

In all, Tesla said, the true value of the deal to the company is only $295 million – the value of the actual cash and shares board members agreed to return, plus a nominal $19 million bookkeeping entry to reflect the cancellation of the returned stock options.

The company argued that shareholder lawyers are only entitled to 21.5% of that $295 million, not the requested 25% of $919 million.

Shareholder lawyers said the benefit of the deal to Tesla is just what they said when they applied for $229 million in fees: $919 million. (The new brief didn’t mention it, but shareholders have previously characterized the settlement as the biggest-ever derivative deal in the history of Delaware Chancery Court and the second-largest Chancery Court settlement of any kind.)

Delaware precedent stretching back to the 1950s, plaintiffs lawyers said, stands for the principle that stock options should be valued based on their worth at the time of the settlement. When Tesla’s directors pledged to return millions of options to the company, shareholders said, the parties agreed that those returned options were worth $458 million to board members, so that is the appropriate valuation.

Moreover, shareholders said, Tesla acknowledged that valuation when it signed the stipulation underlying the settlement – an acknowledge that the company conveniently left out of its brief opposing the fee request by plaintiffs lawyers.

“Tesla’s argument that the returned options have enormous value warranting settlement approval, but miniscule value for fee approval, is transparently inconsistent,” shareholder lawyers argued. “Without giving the court an explanation to depart from authority and the clear terms of the stipulation, Tesla is effectively asking the court to ignore both.”

Shareholder lawyers were even more scathing about Tesla’s assertion that the directors’ forgone compensation for 2021, 2022 and 2023 is worthless. If it hadn’t been for their lawsuit, they said, the board would not have voted in 2020 to pause new stock option grants. And their settlement with the directors, shareholders said, provided the only guarantee that board members would not revert to their old ways and retroactively award themselves new options.

“Tesla’s assertion that the forgone compensation provides zero value to the company is absurd,” they said. “Not to have to pay for services is a benefit.” (For good measure, the brief throws in “specious,” “misleading” and “unreasonable” to describe Tesla’s argument that three years’ of abandoned compensation to board members is worthless to the company.)

Tesla and its counsel at Bayard did not respond to my request for comment on shareholders’ defense of their fee request. I also reached out to shareholder lawyer Javier Bleichmar of Bleichmar Fonti and outside directors’ counsel Vanessa Lavely of Cravath, Swaine & Moore but didn’t hear back.

The outside directors, who have not contested the $458 million valuation of their returned stock options, have taken no position on plaintiffs’ fee request. In a Sept. 29 brief, the director defendants argued that plaintiffs lawyers had mischaracterized board members’ conduct in their petition for settlement approval. They nevertheless urged McCormick to bless the deal.

The Delaware judge will hear arguments from shareholders, Tesla directors and the company itself at a hearing on Friday.

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