Merger Litigation Update: Plaintiffs’ Attorneys’ Fees Under Increased Scrutiny
Shareholder challenges have become a cost of doing business for public companies involved in M&A transactions. In 2013, shareholders filed lawsuits challenging 94% of M&A deals valued over $100 million. [1] The vast majority of these lawsuits settled – with 75% seeing resolution before deal closing. [2] In the past few years, most comparable M&A litigation has settled on a disclosure-only basis – i.e., supplemental disclosures were made regarding the transaction but substantive deal terms did not change. [3]
In response to the surging rates of merger challenges, courts have begun to scrutinize plaintiffs’ fee requests more closely and, where appropriate, have reduced or denied plaintiffs’ attorneys’ fees in disclosure-only settlements. For example, in Delaware, which remains the most popular state of incorporation and most frequent forum for merger challenges, several decisions from 2013 indicate that the Delaware Court of Chancery is increasingly wary of awarding substantial fees in connection with disclosure-only settlements involving non-material additional disclosures.
In March 2013, then-Chancellor Strine (and current Chief Justice of the Delaware Supreme Court) rejected an unopposed request by plaintiffs’ counsel for $500,000 in fees arising from the disclosure-only settlement in In re Transatlantic Holdings Inc. Shareholders Litigation. [4] Strine denied the plaintiffs’ request for attorneys’ fees because he had serious doubts about the usefulness of the agreed-upon supplemental disclosures. [5] Subsequently, in In re Medicis Pharmaceutical Corp. Shareholders Litigation, one of Strine’s last rulings before being sworn in as Delaware Chief Justice, Strine went beyond denying the plaintiffs’ fee request and altogether refused to approve a disclosure-only settlement because the additional disclosures were neither material nor beneficial to the shareholders. [6] Although he recognized that the defendants wished to settle the litigation, Strine determined that he could not certify a class for settlement purposes and left the plaintiffs with the option of dismissing their claims or proceeding with their damages claims. [7]
Even when awarding fees, Chancellor Strine has questioned large fee awards in connection with disclosure-only settlements. For example, in In re Talbots, Inc. Shareholders Litigation, Strine stated his view that Delaware law does not support “automatically start[ing] with a 4 or $500,000” attorneys’ fee figure in disclosure-only settlements. [8] Ultimately, Strine awarded $237,500 in fees because he found that the class had received a “peppercorn” of benefit from the additional disclosures. [9] In doing so, however, Strine made clear that he was deferring to counsels’ agreement to the fees in light of the “phenomena they deal with” and that “[i]f it weren’t clearly negotiated I could have easily given 50,000, 75,000, 100,000 for this.” [10]
Chief Justice Strine is not alone in what appears to be momentum for opposing a lock-step attorneys’ fee structure in disclosure-only settlements. Vice Chancellor Laster, too, has questioned the typical $400-500,000 fee range, stating that he is “starting to think of that range as too high” for disclosure-only settlements. [11] On two occasions in 2013, Laster reduced the plaintiffs’ attorneys’ fee request. In In re Gen-Probe Inc. Shareholders Litigation, Laster rejected the agreed-upon fee award of $450,000 and awarded $100,000 instead. [12] And, in In re Complete Genomics Shareholders Litigation, Laster denied plaintiffs’ opposed request for $1.4 million in attorneys’ fees and awarded only $315,000. [13] Finally, Vice Chancellor Glasscock also has rejected the notion that the court should rubber stamp the agreed-upon fees, pointing to the “longstanding practice of exercising judicial scrutiny over attorneys’ fees even in cases where the fee request is uncontested by the defendant or by any members of the stockholder class.” [14]
Recent decisions from outside of Delaware also have questioned and rejected fee awards in disclosure-only settlements where the shareholders received no benefit or the claims lacked merit. [15] In denying fees, courts have relied on a variety of legal authorities, including, among other things, legislation preventing such fee awards [16] and precedent rejecting the common benefit doctrine as grounds for attorneys’ fee awards in class action litigation. [17]
Although it is too early to determine the broader impact of these and other decisions on merger litigation and settlements, they may mark a turning point in how courts value disclosure-only settlements. If Courts continue to deny or reduce substantial fee awards in connection with disclosure-only settlements, plaintiffs’ attorneys may become more selective in the transactions they challenge; however, as demonstrated by Strine’s decision in Medicis, the denial of fees or settlements also may make it more difficult for defendants to settle merger challenges on a disclosure-only basis.
[1] Olga Koumrian, Shareholder Litigation Involving Mergers and Acquisitions: Review of 2013 M&A Litigation, Cornerstone Research (March 2014), available at
http://www.cornerstone.com/getattachment/73882c85-ea7b-4b3c-a75f-40830eab34b6/Shareholder-Litigation-Involving-Mergers-and-Acqui.aspx.
[2] Id.
[3] Robert M. Daines and Olga Koumrian, Shareholder Litigation Involving Mergers and Acquisitions, Cornerstone Research (February 2013 Update), available at https://www.cornerstone.com/Publications/Reports/2012-Shareholder-Litigation-Involving-M-and-A.pdf.
[4] In re Transatlantic Holdings Inc. S’holders Litig., No. 6574-CS, 2013 Del. Ch. LEXIS 90 (Del. Ch. Mar. 8, 2013).
[5] Id.
[6] Settlement Hr’g Tr. & Rulings of the Ct. at 19-22, In re Medicis Pharm. Corp. S’holders Litig.,No. 7857-CS (Del. Ch. Feb. 26, 2014) (emphasizing that “[w]hat we should be awarding fees
for – and I have happily awarded big fees for disclosures – is when a disclosure involves the disclosure of facts or other kinds of information that materially changes the informational mix”).
[7] Id. at 24-25.
[8] Settlement Hr’g Tr. & Rulings of the Ct. at 16, In re Talbots, Inc. S’holders Litig., No. 7513-CS (Del. Ch. Dec. 16, 2013).
[9] Id. at 11.
[10] Id. at 15.
[11] Settlement Hr’g Tr. & Rulings of the Ct. at 46, In re Gen-Probe Inc. S’holders Litig.,No. 7495-VCL (Del. Ch. Apr. 10, 2013).
[12] Id.
[13] Settlement Hr’g Tr. & Rulings of the Ct. at 52-60, In re Complete Genomics S’holders Litig., No. 7888-VCL (Del. Ch. Oct. 2, 2013).
[14] In re PAETEC Holding Corp. S’holders Litig., No. 6761-VCG, 2013 Del. Ch. LEXIS 72, at *17 (Del. Ch. Mar. 19, 2013) (ultimately approving the $500,000 fee request upon finding that a significant benefit
arose from the supplemental disclosures).
[15] See, e.g., Jones v. WSB Holdings Inc., No. CAL12-31262 (Md. Nov. 12, 2013).
[16] See, e.g., Kazman v. Frontier Oil Corp., 398 S.W.3d 377 (Tex. Ct. App. 2013) (rejecting $600,000 fee award request in proposed disclosure-only settlement where state rules of civil procedure precluded
any fee award in a class settlement that did not provide cash benefits to the class).
[17] See, e.g., Curnow v. Pfischner, No. 428 WDA 2013, 2014 Pa. Super. LEXIS 27 (Pa. Super. Ct. Jan. 6, 2014).
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