Lawyers are seeking Elon Musk's payment for $6 billion in Tesla shares

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Lawyers for shareholders who defeated Elon Musk's $56 billion Tesla pay package have asked a Delaware court to give them shares in the electric car maker worth nearly $6 billion as payment.

In a filing with the Delaware Chancery Court on Friday, Bernstein Litowitz Berger & Grossman, lead counsel for the plaintiff shareholders, acknowledged that such a decision was “unprecedented” in absolute terms. However, they noted that the implied percentage of value earned to shareholders remained “conservative” and in line with previous Delaware awards.

“This structure has the advantage of tying the award directly to the benefit created and avoids taking a dime off Tesla's balance sheet to pay the fee,” the filing said, regarding the choice to receive the automaker's stock instead of a cash award. “We're ready to eat.”

The order follows a landmark ruling last month in which Kathleen McCormick, the judge overseeing the case, overturned the 2018 pay package that Tesla's board of directors awarded to Musk, which included multiple tranches of stock that were awarded after the company achieved strong operational and financial milestones.

McCormick ruled that Tesla's board of directors was not sufficiently independent from Musk, and that the governance process that led to the grant as well as the value of the shares was “unfair” to other shareholders.

Lawyers who bring civil actions typically work on a contingency basis – rather than billing clients for hours worked, they will instead assume the odds of winning the case or securing a settlement, and seek a share of the winning bet. The issue of Musk's payment is more complicated as no cash changed hands in the cancellation of the stock grant.

Bernstein wrote in his filing that he believed he could have fairly asked for a third of the “concerned interest” from the canceled $56 billion award, based on prior precedent. It said the benefit amounted to 267 million of the 304 million shares Musk received — the difference reflecting the cost to him of exercising the options.

Bernstein pointed to a 2012 Delaware case in which plaintiffs' lawyers were awarded fees of about $300 million, or 15 percent of shareholder recovery, which was a record for that court.

She noted that her request represents only 11 percent of the recovery, that is, less than 15 percent in the previous case. Bernstein also asked to be allowed to sell Tesla shares freely without a mandatory holding period — and said she was willing to accept a lower 11 percent fee for the privilege.

Based on Tesla's closing price on Friday, 11% of the 267 million shares amount to approximately 29 million shares, which would be worth $5.9 billion. If the Delaware court approves, Bernstein would be among the company's 10 largest shareholders. The fees paid in the stock would also be tax deductible to the automaker, the law firm wrote in the filing.

Musk can appeal the fee request. He is also expected to appeal the salary cancellation decision. Musk's lawyers did not immediately respond to requests for comment. Greg Varallo, Bernstein's lead attorney, declined to comment after the request was filed.

Bernstein stressed how difficult it would be to litigate the case on a stipulated fee basis, describing the saga as a “very uphill climb” that “holds significant risks going forward against elite defense counsel.”

After the February decision, Musk complained to a Delaware corporate law court and urged other companies to move their headquarters to Nevada and Texas. He has since moved the startups of two of his companies away from Delaware – SpaceX to Texas, and Neuralink to Nevada.

In his filing on Friday, Bernstein noted that two larger awards had been awarded by juries in previous U.S. civil lawsuits — both of which were in Texas.