Court of Chancery Critically Reviewing “Mootness” Fee Applications

In two recent decisions, the judges of Delaware’s Court of Chancery have demonstrated their intent to carefully review fee applications made by counsel for stockholder plaintiffs where the litigation has been rendered moot by actions of the company, and the litigation has been dismissed.

In In re Xoom Corp. Stockholder Litigation, C.A. No. 11263-VCG (Aug. 4, 2016), Vice Chancellor Glasscock awarded plaintiff’s counsel fees of $50,000 (of a requested $275,000) after the company rendered the litigation moot by making supplemental disclosures in advance of a transaction, and which were only marginally beneficial to the stockholders.   A few weeks earlier, in In re Keurig Green Mountain, Inc. Stockholders Litigation, C.A. No. 11815-CB (July 22,2016)(trans. ruling), Chancellor Bouchard refused to award any fees to plaintiff’s counsel (of a requested $300,000) where he found the additional disclosures by the company in advance of the transaction were of no additional value to the company’s stockholders.

A “mootness” fee application is typically filed by counsel for class or derivative plaintiffs where their litigation has arguably caused the company to take action that renders the pending litigation moot.  In the two cases discussed here, that action took the form of supplemental disclosures in advance of a stockholder vote to approve a transaction.  Once it has been determined (or conceded) that the actions of the stockholder plaintiff caused the company to take the mooting action, the court will apply “a subspecies of the common-benefit doctrine, which recognizes that, where a litigation provides a benefit to a class or group, costs necessary to the generation of that benefit should also be shared by the group or its successor.”  See In re Xoom, at p. 8.

In the Xoom matter, Vice Chancellor Glasscock declined to apply the “plainly material” standard for reviewing the value of disclosures to stockholders in advance of a stockholder vote that was announced in the Court’s earlier decision in In re Trulia, Inc. Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016).  He held that where the court is reviewing a proposed settlement that includes a broad release of claims by the stockholders, the “plainly material” standard would be appropriate.  Where, however, no such release is being sought (as in Xoom, where the litigation had been dismissed, with prejudice, as to the named plaintiff only), the Vice Chancellor found that a fee could be awarded where the disclosures have provided “some benefit to stockholders.”  To determine the fee that might be appropriate in the circumstances, the court will look to the five factors announced in Sugarland Indus., Inc. v. Thomas: (1) the benefit achieved; (2) the contingent nature of the undertaking; (3) the difficulty of the litigation and the efforts of counsel; (4) the quality of the work performed; and (5) the standing and ability of counsel.

Looking primarily at the benefit achieved, in Xoom the court found that the requested fee of $275, 000 was not warranted where the benefit achieved was marginal and where the effort expended by counsel (63 hours) on the matter would result in an implied hourly rate of $4,000/hr.  Instead, he awarded counsel for the plaintiff a fee of $50,000, which reflects an implied hourly rate of $794.00/hr.

In the Keurig matter, Chancellor Bouchard also looked primarily at the benefit achieved by the litigation efforts of the stockholder plaintiff and found that the supplemental disclosures made by the company to moot the litigation did not “confer any benefit on the corporation because they did not correct a materially misleading disclosure” in the original proxy materials.  Because he found no benefit at all had been achieved, the Chancellor rejected, in whole, the request by plaintiff’s counsel for a fee of $300,000.

Richard L. Renck
Richard L. Renck

Representative Litigation: “Mootness” Fee Awards

It is a nearly universal truth that counsel representing stockholder-plaintiffs in class or derivative litigation against (or on behalf of) Delaware entities will seek an award of fees and costs where their efforts have produced a benefit on behalf of the company or the class they represent.  This might occur via settlement or upon a successful conclusion of the litigation.  In most instances where a benefit is achieved, that benefit takes the form of a “common fund” (where there has been a payment of money) or some type of “therapeutic benefit” (for instance, amended disclosures or revised governance procedures).  Counsel for stockholder-plaintiffs also have the ability to seek an award of fees and costs where the claims asserted in representative litigation are effectively mooted by the entity taking action in response to the claims.

In recent months, the Court of Chancery has issued two letter decisions in which it refused to enter stipulations by the plaintiffs and the companies to dismiss the purportedly mooted litigation or to award a negotiated fee award to plaintiffs’ counsel unless and until the parties provided notice to the class of the dismissal and proposed fee award.   See In re Zalicus, Inc. Stockholders Litig., Consol. C.A. # 9602-CB (Del. Ch. Jan. 16, 2015)(Chancellor Bouchard); and In re Astex Pharm., Inc. Stockholders Litig., Consol. C.A. # 8197-VCL (Del. Ch. Aug. 25, 2014)(Vice-Chancellor Laster).  In both of these letter decisions, the court noted the benefit to the class of stockholders–on whose behalf the litigation was being prosecuted–of having these types of mootness dismissals (with a fee award) exposed to the watchful eyes of the purported beneficiaries so that they may police any chance of an improper “buy-off” of plaintiffs’ counsel or to “object to the use of corporate funds” by “challeng[ing] the fee payment as waste in a separate litigation.”

These two letter decisions can be read as evidence of the Court of Chancery’s re-affirmation of its role in scrutinizing the interactions of fiduciaries who purport to act on behalf of a class of stockholders or the company on one hand and the officers and directors of the company on the other.  Whether these decisions also signal an intent by the court to more carefully circumscribe fee awards for mooted claims (which have not infrequently been in the neighborhood of $250,000-$500,000) remains to be seen.

 

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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