Guest Post: Every Billionaire Lawyer is a Policy Failure—Ten Ways to Think About the Tornetta Fee Request

03/08/2024

Guest Post: Every Billionaire Lawyer is a Policy Failure—Ten Ways to Think About the Tornetta Fee Request

Herewith a guest post from Anthony Rickey:

Three law firms filed papers last Friday seeking fees for their victory in rescinding Elon Musk’s $55.8 billion pay package at Tesla. The law firms—Bernstein Litowitz Berger & Grossman LLP, Friedman Oster & Tejtel PLLC, and Andrews & Springer LLC—want the Court of Chancery to award them 29,402,900 freely tradeable shares of Tesla common stock, along with over $1.12m in expenses. According to Reuters, this would not only be the largest fee in Delaware history, it may be the largest fee in the history of stockholder litigation, dwarfing the $688 million fee in the Enron securities fraud case.

Some comparative statistics may help to wrap one’s head around this mammoth request. This is not legal advice: most of the numbers below are legally irrelevant under the factors that govern Delaware fee awards. Instead, they offer some amusing perspective on an attempt to make multimillionaires out of attorneys. (These figures use the $202.64 closing price of Tesla stock on March 1, 2024, the day of Tornetta’s fee application. The stock fell considerably after the announcement.)

The Basic Figures

An award of 29,402,900 shares would be worth $5,958,203,656. The law firms spent 19,499.95 hours on the case, so the stock would be worth $305,549.69 per hour, or a lodestar multiplier of 437.32x to the attorneys’ hourly rates. That does not include time spent preparing the fee application or to be spent on appeal. With numbers that high, the appeal won’t move the needle much.
The award would amount to $622,022,628.44 for each of the nine shares of Tesla stock owned by plaintiff Richard Tornetta.
In comparison, it’s a mere $94.55 for each of the 63,014,339 disinterested shares voted in favor of Musk’s compensation package. The opinions of those shareholders are functionally irrelevant because the Court of Chancery held that the vote was not fully informed. Under Delaware law, plaintiffs do not need to prove that any stockholder would have changed their mind had they known the supposedly material information, let alone that the vote would have come out differently.
The requested fee is 19.6 times larger than the current record in the Delaware Court of Chancery set by the $304,742,604.45 granted to plaintiffs in Americas Mining Corp. v. Theriault.

Compared to the Delaware Economy

The fee would be only slightly smaller than the $6.07 billion general fund operating budget proposed by Delaware Governor Carney for FY2025. Alternatively, it represents 6.6% of Delaware’s estimated GDP in 2022.
Assuming (unrealistically) that the entire fee were subject to Delaware’s 8.7% corporate income tax, the state would receive $518,363,718.07. For perspective, that is 15.64% of all business tax revenue collected by Delaware in fiscal year 2022.

Compared to Texas

Elon Musk has proposed reincorporating Tesla in Texas. By statute, class action fees in Texas are limited to four times lodestar. Under a similar rule, Tornetta’s attorneys could receive no more than $54,497,851.00.
That would still represent a return of $2,794.77 per hour for each timekeeper. In other words, Texas plaintiffs could have secured a much smaller recovery while still achieving the same net benefit for Tesla stockholders.

Other Entertaining Figures

According to Calculator.net, there are 2,974,015 minutes between the time that Tornetta filed his complaint and the Court of Chancery reached its decision. If awarded, Tornetta’s attorneys will collectively earn $2,003.42 per minute between those two events
According to Pollstar, Taylor Swift’s “Eras Tour” grossed $1,039,263,762 as of December 2023. The Tornetta attorneys would thus earn 5.7x more than the world’s most successful musical tour.

While I’ve tried to keep these lighthearted, I can’t end without expressing disbelief at this fee application. Elon Musk’s pay was meant to incentivize him to build a company; the lawyers prosecuted a complaint. No attorney deserves six figures in compensation per hour, no matter how complex or risky the litigation, and the concept that this level of incentive is necessary to motivate contingency lawyers is incredible. One can only hope that the Delaware courts channel Dorothy Parker’s perhaps apocryphal comment and do not toss this application aside lightly. It should be hurled with great force.

Posted at 02:19 PM in Lawyers | Permalink

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Herewith a guest post from Anthony Rickey:

The Basic Figures

An award of 29,402,900 shares would be worth $5,958,203,656. The law firms spent 19,499.95 hours on the case, so the stock would be worth $305,549.69 per hour, or a lodestar multiplier of 437.32x to the attorneys’ hourly rates. That does not include time spent preparing the fee application or to be spent on appeal. With numbers that high, the appeal won’t move the needle much.
The award would amount to $622,022,628.44 for each of the nine shares of Tesla stock owned by plaintiff Richard Tornetta.
In comparison, it’s a mere $94.55 for each of the 63,014,339 disinterested shares voted in favor of Musk’s compensation package. The opinions of those shareholders are functionally irrelevant because the Court of Chancery held that the vote was not fully informed. Under Delaware law, plaintiffs do not need to prove that any stockholder would have changed their mind had they known the supposedly material information, let alone that the vote would have come out differently.
The requested fee is 19.6 times larger than the current record in the Delaware Court of Chancery set by the $304,742,604.45 granted to plaintiffs in Americas Mining Corp. v. Theriault.

Compared to the Delaware Economy

The fee would be only slightly smaller than the $6.07 billion general fund operating budget proposed by Delaware Governor Carney for FY2025. Alternatively, it represents 6.6% of Delaware’s estimated GDP in 2022.
Assuming (unrealistically) that the entire fee were subject to Delaware’s 8.7% corporate income tax, the state would receive $518,363,718.07. For perspective, that is 15.64% of all business tax revenue collected by Delaware in fiscal year 2022.

Compared to Texas

Elon Musk has proposed reincorporating Tesla in Texas. By statute, class action fees in Texas are limited to four times lodestar. Under a similar rule, Tornetta’s attorneys could receive no more than $54,497,851.00.
That would still represent a return of $2,794.77 per hour for each timekeeper. In other words, Texas plaintiffs could have secured a much smaller recovery while still achieving the same net benefit for Tesla stockholders.

Other Entertaining Figures

According to Calculator.net, there are 2,974,015 minutes between the time that Tornetta filed his complaint and the Court of Chancery reached its decision. If awarded, Tornetta’s attorneys will collectively earn $2,003.42 per minute between those two events
According to Pollstar, Taylor Swift’s “Eras Tour” grossed $1,039,263,762 as of December 2023. The Tornetta attorneys would thus earn 5.7x more than the world’s most successful musical tour.