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Delaware Supreme Court Finds Attorneys’ Fee Award Excessive In Excessive Compensation Case
02/10/2026On January 30, 2026, the Delaware Supreme Court, sitting en banc, affirmed a settlement resolving excess compensation claims against non-employee director defendants but reversed and modified the portion of the settlement allocated by the Court of Chancery to plaintiffs’ counsel fee award, reducing it from approximately $173 million to $71 million. In re Tesla, Inc. Dir. Comp. S’holder Litig., C.A. No. 2020-0477 (Del. Jan. 30, 2026). Defendants alleged that the fee award improperly took into account the intrinsic value of stock options returned to the company for cancellation and applied an excessive percentage to the valuation of the associated financial benefit.
To settle the excessive compensation claims, the director defendants agreed to return cash and stock, as well as approximately three million unexercised stock options, which were to be canceled upon receipt by the company. The Court of Chancery awarded attorneys’ fees of 24% of the overall settlement value, which it determined to be $734 million, comprising (i) the unexercised stock options valued at $458 million, and (ii) cash and stock totaling $296 million.
On appeal, the company argued that the lower court overvalued the benefit of the settlement by including the intrinsic value of the unexercised options. The company reasoned that it had not agreed that the unexercised options be included in the calculation of attorneys’ fees, nor would the company derive any benefit from the options because they would be canceled upon receipt. Plaintiff argued that the options were properly included as an investor-level benefit under the settlement stipulation, and alternatively, even if they did not qualify as an investor-level benefit, the company still benefited because it could still use the options for employee compensation.
The Court agreed with the company. After determining that the settlement stipulation did not require the inclusion of the returned options in the benefit valuation, the Court noted that in all events the lower court was obligated to conduct an independent analysis. The Court concluded that the forfeited options were not an entity-level recovery and thus should not have been included in the benefit valuation. The Court emphasized the general rule that, in a derivative action, only benefits to the corporation should be considered in the financial benefit analysis. While there are certain circumstances in which an investor-level benefit is appropriate, such as when settlements are structured to directly benefit stockholders or to prevent unjust enrichment, the Court noted that none of those exceptions applied here. The Court clarified that, in so holding, it was not eliminating purported investor-level benefits, just cabining them to certain defined exceptions. The Court also rejected plaintiff’s argument that the company benefited from the returned options because plaintiff did not demonstrate that the relatively small increase to the shares already available under the company’s equity compensation plan would be of value to the company. Accordingly, the Court reduced the attorney’s fee award from $173 million to $71 million.
