Some corporate practitioners could have the impression that significant fee awards are granted as a matter of course in M&A class action litigation, even where the results obtained by class counsel were supplemental (and arguably routine) disclosures regarding the proposed transaction. Recent comments by the judges of the Delaware Court of Chancery, however, may suggest an increasing concern over what might be perceived as “default” fee awards in this context, as well as the value of purely supplemental, as opposed to remedial, disclosures.
In 2011, Vice Chancellor J. Travis Laster analyzed M&A fee awards in a published case titled In re Sauer-Danfoss Inc. Shareholders Litigation, 65 A.3d 1116 (Del. Ch. 2011). This undertaking, it reasonably could be hoped, would serve to promote consistency and establish reasonable expectations, especially in an area where precedent frequently lies in transcripts and unpublished orders. Of particular note, Vice Chancellor Laster wrote:
Recent contested fee awards in disclosure-only cases reveal a range of discretionary awards with concentrations at certain levels. This Court has often awarded fees of approximately $400,000 to $500,000 for one or two meaningful disclosures, such as previously withheld projections or undisclosed conflicts faced by fiduciaries or their advisors. … Disclosures of questionable quality have yielded much lower awards. … Higher awards have been reserved for plaintiffs who obtained particularly significant or exceptional disclosures.
Some construed this, and other chancery rulings, as effectively establishing a “floor” for fee awards based on supplemental disclosures. Several recent statements by the court emphasize, however, that fee awards in the $400,000 to $500,000 range should not be perceived as automatic, or the “default.” Recent comments from the bench should re-focus litigants’ attention on the materiality (or lack thereof) of supplemental disclosures.
Vice Chancellor Laster has departed downward from the $400,000 to $500,000 range, and has intimated that he may not be comfortable with requests to sign off on such awards, as if they were pre-ordained. In In re Complete Genomics, Inc. Shareholder Litigation, Cons. C.A. 7888-VCL (Del. Ch. Oct. 2, 2013) (TRANSCRIPT), Vice Chancellor Laster examined the value of a corrective disclosure that the target company’s CEO discussed post-acquisition employment with the eventual acquirer:
The annual household income in this country is about $50,000. Is the CEO disclosure worth 10 people … who actually go out and build things, who … work hard in blue-collar jobs? Is it really worth one year’s work from 10 of those folks? No, I can’t get there.
Vice Chancellor Laster further juxtaposed the fee sought in Complete Genomics with a recent fee petition by a firm that was retained by a large, sophisticated stockholder. The firm litigated the case through trial and recovered over $2 million. The bargained-for fee arrangement resulted in a fee of about $500,000, notwithstanding the considerable effort required to try such a case.
Scrutiny of fee awards in disclosure-based settlements also was recently evident in In re Talbots, Inc. Shareholders Litigation, Cons. C.A. 7513-CS (Del. Ch. Dec. 16, 2013) (TRANSCRIPT), where Chancellor Leo E. Strine, Jr. discussed fee awards in the context of a case where the claims had “very little vibrancy.” According to the court, “if it were a perfect world, this case would have simply been graciously withdrawn by all the plaintiffs’ lawyers everywhere ….” However, the chancellor approved the settlement under the “peppercorn” theory, apparently viewing the settlement and release to be acceptable despite the weakness of the underlying claims.
The court commented that the agreed-upon fee award – $237,500 – was “at the very highest end of what could ever be justified for disclosures of such modest value,”1 and warned future litigants against citing it as “some sort of market indication.” Indeed, the court noted that, if the requested fee weren’t a negotiated amount, it “could have easily given [$]50,000, [$]75,000, [or] [$]100,000.” The court’s deference to the negotiated amount, however, should not be understood to mean that the court will not carefully scrutinize each class action settlement or proposed fee award. Rather, it is to be expected that the court will give careful scrutiny to each class action settlement and proposed fee award. See In re Transatlantic Holdings Inc. Shareholders Litigation, Cons. C.A. No. 6574-CS (Del. Ch. Feb. 28, 2013) (TRANSCRIPT) (denying disclosures-based settlement even in the absence of opposition).2
In Talbots, Chancellor Strine warned litigants against asserting, based on Sauer-Danfoss or similar authority, that “you sort of automatically start with 4 or $500,000. That’s not the law. That’s never been the law.” Rather, the court emphasized that materiality was key to whether the disclosure supported a fee award, and at what level.
The chancellor provided a potential rubric for assessing the materiality of disclosures and the appropriate level of fees:
Much more material is something which the board has said A, B, and C about a deal, a plaintiff identifies D and says, “This is a fact which contradicts – tends to contradict A, B, and C, and the stockholders ought to receive it as part of the full mix of information.” That is what is likely to be material. And if somebody says, “If you have one of those, we start with 4 or 500,000,” that might be a fairly accurate factual statement. That conceptually is not this case. It is not most of the cases. And that’s why, frankly, if you look at the fees in cases like this, they tend to be more materially south of that 4 or $500,000.
Thus, the court might be willing to attribute greater value to disclosures that remedy, rather than merely supplement, the information previously provided to stockholders. Yet, the court awarded only $300,000 for the “corrective” CEO disclosure in Complete Genomics, and called that amount “generous.”
Although the court’s comments suggest concern over the level of fees sought for arguably “routine” disclosures, the future of disclosure-based M&A fee awards is unpredictable.3 While the court must attempt to prevent unwholesome windfalls, it also must ensure that class counsel will be compensated properly for beneficial results obtained in meritorious litigation. As the M&A litigation landscape changes, it should be expected that the court will consider carefully those changes and adjust its assessment of the appropriate level of fees for benefits obtained by class counsel.
1 According to the transcript, the additional disclosures included an analyst’s target for the potential value of the company, various information related to the financial advisor’s analyses, and the fact that target’s financial advisor had not done work for the acquirer for two years.
2 According to the transcript, the disclosures were “simply more information which did not contradict the mix of information that was already available.”
3 The court’s comments in transcripts, which are not reflected in written decisions, must be considered in the context of the large body of Delaware law on requests for attorneys’ fees and on the duty of disclosure in the transactional setting.