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Aug. 25 — The Delaware Court of Chancery Aug. 22 held that minority stockholders of a company that successfully perfected their appraisal rights did not have standing to obtain attorneys' fees and expenses despite contributing causally to a larger settlement.
In a memorandum opinion, Vice Chancellor J. Travis Laster noted that even if a plaintiff could establish a prima facie case to support a fee award, the court could deny standing “if the plaintiff has proceeded in a manner designed to benefit the plaintiff individually—rather than the class as a whole—and any benefit achieved for the class has happened as an incidental by-product of the plaintiff's self-interested pursuit.”
Laster found that because the minority stockholders in this case did not purse classwide claims, but merely pursued an appraisal action after a merger, they were not entitled to a fee award.
In July 2010, The Orchard Enterprise Inc. and its controlling stockholder, Dimensional Associates, LLC, effected a merger in which minority shares were converted. After the merger closed, certain minority Orchard stockholders (“Appraisal Claimants”) perfected their appraisal rights and the chancery court determined that the fair value of Orchard's common stock at the time of the merger was more than double the value of the original merger consideration.
Two months later, plaintiffs retained a different counsel (“plenary counsel”) and filed a plenary action on behalf of all minority shareholders challenging the merger on the basis that Dimensional and members of Orchard's board of directors breached their fiduciary duties. The case eventually settled for $10,725,00 and included a stipulation that the payment be allocated across the entire class, including Appraisal Claimants.
Appraisal Claimants objected to the settlement, and contended that they should be reimbursed for the fees and expenses they incurred in their appraisal proceeding because they contributed causally to the creation of the settlement fund.
In Delaware, the chancery court under its equitable powers can shift attorneys' fees under the “common benefit exception” when (1) a meritorious lawsuit is filed, (2) an ascertainable group received a substantial benefit and (3) there is a causal connection between the ligation and the benefit.
The court determined that both the appraisal proceeding and the plenary action causally contributed to the settlement. Specifically, the court determined that plenary counsel was responsible for conferring a benefit of $9,368,904 and Appraisal Claimants $1,356,096 of the settlement. Moreover, the court pointed out that if the same counsel had litigated both proceedings, it “would have no difficulty awarding fees and expenses for the aggregate effort in both proceedings based on the total benefit conferred.”
However, the court found that plenary counsel deserved full credit for the settlement consideration consisting of the amount in excess of the court-determined appraised share price. The court also found that plenary counsel was primarily responsible for conferring the difference between the original deal price and the appraised share price because “without Plenary Counsel suing on behalf of the class, the other minority shareholders would have gotten nothing.”
Accordingly, the court held that Appraisal Claimants and their counsel did not have standing to obtain a fee award. Opining that “[n]ot everyone who contributes to a benefit gets a fee award,” the court found that Appraisal Claimants did not seek a classwide recovery on behalf of the other minority stockholders despite having the opportunity to do so and although discovery revealed information to support a breach of fiduciary action.
“They were content with what they obtained for themselves. That was a perfectly acceptable choice, but it carries a consequence,” Laster wrote.
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The opinion is available at http://www.bloomberglaw.com/public/document/IN_RE_ORCHARD_ENTERPRISES_INC_STOCKHOLDER_LITIGATION_2014_BL_2341.
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