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By Jacob Rund
Lawyers representing Facebook Inc. stockholders who may have caused the company to nix its plan to create a new, non-voting stock class are asking for $129 million in fees.
The shareholders alleged Facebook directors breached their fiduciary duties by backing new Class C shares. Their suit, filed in Delaware Chancery Court, claimed this move would have improperly entrenched Facebook founder and controlling stockholder Mark Zuckerberg.
The chancery court dismissed the case last September after Zuckerberg—days before he was scheduled to testify in court—asked Facebook’s board to drop its attempt at the share reclassification.
A $129 million fee award would be uncommon, although not unheard of, for a case this size when there is a definitive judgment or settlement, business law professors told Bloomberg Law. But because the claims were rendered moot and dismissed, the question of how much the investors’ attorneys should be awarded—if at all—becomes problematic.
The fees requested are “very, very high,” said Brian Fitzpatrick, a Vanderbilt University law professor who specializes in class litigation.
“A fee this large is unusual,” said Geoffrey Miller, a New York University law professor who co-authored a research paper on attorneys’ fees awarded in class actions. “Unless there is something really extraordinary about this case, it’s at the higher end of what you would expect to see.”
The $129 million sought by Facebook investors wouldn’t be the largest granted by a Delaware court. Jill Fisch, a business law professor at the University of Pennsylvania, pointed to a $300 million fee granted by the Delaware Supreme Court in the 2012 shareholder derivative action against Southern Peru Copper Co., where $2 billion in damages were awarded.
For most class and derivative actions in federal court, attorneys’ fees are determined by one of two methods.
“One way is [the courts] give the lawyers a percentage of whatever benefits they have obtained for the class members or shareholders,” said Brian Fitzpatrick, a Vanderbilt University law professor who specializes in class litigation.
That percentage varies depending on the circumstances surrounding the case and the total amount received in settlement or through judgment, Fitzpatrick said.
Courts may also determine attorneys’ fees using the “lodestar” method, where the lawyers’ hourly rates are multiplied by both hours worked and what’s known as a risk multiplier.
But in Delaware Chancery Court, the fees depend “pretty much on what the chancellor, in his or her discretion, decides is appropriate,” Miller said. “The chancellor has huge discretion as to what to award, [and] a lot depends on the nature and the circumstances of the case.”
The Delaware courts mandate that each party to a lawsuit pay its own attorneys’ fees. However, there are some exceptions.
Without a settlement fund to pull a percentage from, the attorneys’ argument “has to be that they have created a benefit” for the class and deserve an award this large, Miller said. “It’s a complicated situation.”
“Intrinsically it’s not an unreasonable fee, but it would require significant justification” to prove a benefit was provided, he said.
The investors’ attorneys’ brief supporting the motion for a fee award was filed Feb. 2 under seal. But exhibits to the brief include a Forbe’s article highlighting that Zuckerberg pulled the plug on the proposal prior to his scheduled testimony.
This could mean the attorneys will try to prove the class action caused Facebook’s board to abandon the new stock class.
“When you don’t have a pot of cash” to take fees from, and you don’t have a court-ordered injunction or a settlement where the defendant agrees to change their practices, “then you are kind of in a land of speculation about why” the company changed its intentions, Fitzpatrick said.
The lack of both clear causation and a pool of cash from either judgment or settlement makes it “a little more complicated to get money,” he added.
Vice Chancellor J. Travis Laster presides over the Facebook class action.
A Facebook representative declined to comment.
The case is In re Facebook Inc. Class C Reclassification Litig. , Del. Ch., No. 12286-VCL, motion for attorneys’ fees filed 2/2/18 .
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