Attorney’s Fees – Page 3

Chancery Court Holds Fee-Shifting Bylaw Inapplicable to a Former Stockholder Because it Was Adopted After Stockholder’s Equity Interest Was Eliminated

Mar 20 2015

Chancellor Bouchard finds, as a matter of first impression in Delaware, that a non-reciprocal fee-shifting bylaw is inapplicable to a plaintiff stockholder because it was adopted after the plaintiff’s interest in the corporation was eliminated in a reverse stock split.

In Strougo v. Hollander, C.A. No. 9770-CB (March 16, 2015), Plaintiff – a former stockholder of First Aviation Services, Inc. (“First Aviation”) – challenged (on behalf of himself and a putative class) the fairness of a 10,000-to-1 reverse stock split that cashed out the ownership interests of Plaintiff and the putative class at the request of the Chief Executive Officer and controlling shareholder of First Aviation in order to take First Aviation private. Four days after consummation of the reverse stock split, the First Aviation Board adopted a non-reciprocal fee shifting bylaw that required any “current or prior stockholder or anyone on their behalf” who initiates or asserts a claim or counterclaim against First Aviation or any director, officer or employee and who does not obtain a judgment on the merits that substantially achieves the full remedy sought, to be jointly and severally liable for all fees, costs and expenses incurred in connection with the claim or counterclaim. There was no public announcement to the First Aviation stockholders that the board had adopted the bylaw and Plaintiff was notified of the bylaw after the lawsuit was filed.

A Corporation’s Advancement of Legal Fees and Expenses to Its Officers and Directors

Dec 31 2014

By Holly Vance and Sophia Lee Shin

This case involves a plaintiff who sought advancement for his legal fees and expenses in connection with insider trading charges. In opining on the defendant’s motion to dismiss or stay the action and the plaintiff’s motion for summary judgment, the Court considered various issues, including the four-factor analysis of McWane and the difference between advancement and indemnification.

Nipro Diagnostics, Inc. (“Nipro”), the defendant, acquired Home Diagnostics, Inc. (“HDI”) on March 15, 2010. Soon after the merger, the SEC began an investigation of George H. Holley (“Holley”), the founder and chairman of HDI and the plaintiff in this case, for suspicious trading in HDI stock around the time of the merger announcement (the “SEC Investigation”). On May 20, 2010, Holley requested that HDI advance his expenses in the SEC Investigation, and executed an undertaking (required with any advancement) promising to repay HDI for any advanced expenses if it were ultimately determined that Holley was not entitled to indemnification. From June 2010 to November 2010, Nipro advanced Holley’s expenses relating to the SEC Investigation. On January 13, 2011, the SEC commenced an action against Holley for violating federal securities laws by disclosing information about the merger (the “SEC Action”). On February 4, 2011, Holley was indicted in the U.S. District Court for the State of New Jersey for insider trading (the “Criminal Action”). On August 19, 2011, the New Jersey U.S. Attorney’s Office obtained a stay of the SEC Action. Holley eventually pled guilty to two counts of insider trading in the Criminal Action.

In re TPC Group Inc. Shareholders Litigation, Consolidated C.A. No. 7865-VCN (October 29, 2014) (Noble, V.C.)

Nov 03 2014

By Jamie Bruce and Lauren Garraux

The issue before the Court in In re TPC Group Inc. Shareholders Litigation was whether plaintiffs, shareholders of TPC Group Inc. (“TPC”) (“Plaintiffs”), were entitled to attorneys’ fees due to an increase in the merger price obtained between their commencement of shareholder litigation challenging the merger and the acquisition’s closing under an amended merger agreement. Shortly after TPC announced its acquisition by First Reserve Corporation, SK Capital Partners and their affiliates (collective, the “PE Group”), Plaintiffs filed complaints in Delaware Chancery Court challenging the intended merger on a number of grounds, including inadequate price. Ultimately, Plaintiffs’ claims were mooted by subsequent bidding and a supplemental proxy statement, which resulted in, inter alia, an increase of $5 per share ($79 million aggregate), an increase which TPC, its board and PE Group (collectively, “Defendants”) attributed to a competing proposal.

According to the Court, the critical issue with respect to Plaintiffs’ request was causation, i.e., whether Plaintiffs’ legal challenge was the cause of the price increase. Under Delaware law, it is presumed that plaintiffs are a cause; therefore, the burden is on the defendant to prove, by the preponderance of the evidence, that no causal connection (whether direct or indirect) existed between the price increase and plaintiffs’ litigation efforts. PE Group submitted affidavits citing concern over a competing proposal, negative publicity, public opposition by a significant shareholder, and the potential for an unfavorable evaluation by Institutional Shareholder Services when deciding whether PE Group should raise its bid. While acknowledging that these affidavits were self-serving, the Court indicated that Defendants’ account was the most credible and was consistent with the record, and the Court concluded that Defendants had met their burden in this regard and, therefore, denied Plaintiffs’ request for attorneys’ fees relating to an increase in the merger price.

InReTPC

Seaport Village Ltd. v. Seaport Village Operating Company, LLC, C.A. No. 8841-VCL (Sept. 24, 2014) (Laster, V.C.)

Sep 24 2014

By Nick Froio and Zack Sager

Seaport Village Operating Company, LLC (the “LLC”) sought to recover from Seaport Village Ltd. (“Limited”) attorneys’ fees and expenses that the LLC incurred in two related actions. The limited liability company agreement of the LLC (the “LLC Agreement”) provided that if any action was brought by a party against another party relating to or arising out of the LLC Agreement, the prevailing party shall be entitled to recover from the other party reasonable attorneys’ fees, costs and expenses. Limited’s only defense was that because the LLC did not sign the LLC Agreement, it was not a “party” to the LLC Agreement. The Court of Chancery rejected this argument citing Section 18-101(7) of the Delaware Limited Liability Company Act, which states that “[a] limited liability company is bound by its limited liability company agreement whether or not the limited liability company executes the limited liability company agreement.” The court held that since the LLC was bound to the LLC Agreement and that, as a matter of contract law principles, “only parties to a contract are bound by that contract,” the LLC was a party to the LLC Agreement and could enforce the fee-shifting provision.

SeaportVillageLtdvSeaportVillageOperating

In re Orchard Enterprises, Inc. Stockholder Litigation, Consolidated C.A. No. 7840-VCL

Aug 29 2014

By Scott Waxman and Porter Sesnon

On August 22, 2014, Vice Chancellor Laster approved a fee award for counsel to certain plaintiff-stockholders related to a settlement of a class action claim alleging breaches of fiduciary duties related to a freeze-out merger. The settlement amounted to $10.725 million. In the same opinion, V.C. Laster denied a fee award due to lack of standing to counsel for other stockholders in the same freeze-out merger, who separately litigated an appraisal claim, and which was relied upon by the successful class action plaintiffs.

In Re Astex Pharmaceuticals, Inc. Stockholders Litigation, Consolidated C.A. No. 8917-VCL

Aug 26 2014

By Wilson Chu and Jason Jones

On August 25, 2014, Vice Chancellor J. Travis Laster denied a stipulated dismissal order involving the payment of a “mootness fee” as part of the settlement of a disclosure claim because it did not comply with the requirements of In re Advanced Mammography Sys., Inc. S’holders Litig., 1996 WL 633409 (Del. Ch. Oct. 30, 1996).

Astex Pharmaceuticals, Inc. (“Astex”) and Otsuka Pharmaceutical Co, Ltd. (“Otsuka”) entered into an Agreement and Plan of Merger. Various stockholder plaintiffs filed lawsuits asserting claims against Astex, its Board of Directors, and Otsuka, and the court certified a class. One claim asserted that Astex’s stockholders lacked sufficient information to make an informed decision about tendering their shares or seeking appraisal. In response, Astex filed a supplemental Schedule 14D-9 containing additional disclosures on October 1, 2013. After the defendants moved for judgment on the pleadings, the named plaintiffs concluded that their remaining claims lacked merit. The parties then submitted a stipulated dismissal order, which included an agreement whereby defendants would pay a mootness fee relating to the disclosure claim. The court denied the proposed dismissal order pending further submission by the parties explaining how they complied, or proposed to comply, with Advanced Mammography.

Advanced Mammography provides that the board may exercise its business judgment to pay a mootness fee, but it is necessary to (i) notify the court and (ii) provide notice to the class and provide an opportunity for the class to be heard. In addition, “in the context of a claim that is acknowledged to be moot and in which no consideration has been paid to the class, it is not appropriate for the court to purport to release any claims of the class.” Id. at *1. Notice to the class allows the class to argue that the case is not moot, but rather that the mootness fee is in fact a buyout; and enables members of the class to object to such use of corporate funds. Id. In this case, the stipulated dismissal order did not provide notice to the class, and as a result, Vice Chancellor Laster denied the proposal and requested that the parties submit a revised order contemplating notice to the class.

InReAstex

David Raul v. Astoria Financial Corporation, C.A. No. 9169-VCG (June 20, 2014) (Glasscock, V.C.)

Jun 22 2014

By Masha Trainor and Dotun Obadina

Raul v. Astoria Financial Corporation involves the question of whether, under the corporate benefit doctrine adopted by Delaware courts, a stockholder can recover, from a corporation, attorneys’ fees incurred as a result of the stockholder’s attorney investigating the corporation’s activities. In this case, David Raul (“Raul”), as custodian of Malka Raul Utma, NY, a common stockholder of Astoria Financial Corporation (“Astoria”), filed a complaint against Astoria, seeking an equitable assessment of attorneys’ fees incurred in connection with the investigation of potential violations of “say-on-pay” disclosure requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Say-On-Pay Disclosure Requirements”).

The corporate benefit doctrine provides for an award of attorneys’ fees to a stockholder if (1) the stockholder presents a claim to the corporation such that, at the time the claim was presented, a suit based on the actions underlying the claim would have survived a motion to dismiss and (2) a material corporate benefit results.

Crothall, et al. v. Zimmerman, et al., Del. No. 608, 2013 (May 28, 2014)

Jun 13 2014

By Eric Feldman and Naomi Ogan

In Crothall, et al. v. Zimmerman, et al., the defendants in a derivative suit sought to reverse the Delaware Court of Chancery’s decision awarding attorneys’ fees to counsel for Robert Zimmerman, the plaintiff in the underlying action. Zimmerman, a common unitholder of Adhezion Biomedical, LLC (“Adhezion”), originally brought a derivative suit against the directors and certain investors of Adhezion, claiming that (i) certain financing transactions involving the sale of Adhezion units were substantively unfair, and (ii) the units issued in those transactions were not properly authorized in accordance with Adhezion’s operating agreement. The Chancery Court’s opinion rejected Zimmerman’s claim of substantive unfairness, but agreed that Adhezion’s operating agreement had been violated because the units issued in the financing transactions had been issued without an amendment approved by a separate vote of the common unitholders.

The Chancery Court, however, awarded only nominal damages for the breach of the operating agreement, and, before a final judgment was entered, Zimmerman decided to sell his Adhezion units and abandon the lawsuit, thus rendering his claims moot. As a result, the Chancery Court granted the defendants’ motion to dismiss Zimmerman’s claims. Nevertheless, Zimmerman’s counsel was allowed to intervene in the case, and was ultimately awarded $300,000 in attorneys’ fees, on the theory that Adhezion had realized a corporate benefit from the Chancery Court’s decision that a vote of the common unitholders was required to authorize additional units under the operating agreement.

The defendants, while unable to appeal the Chancery Court’s ruling directly due to the absence of a final judgment, asked the Delaware Supreme Court to re-consider the merits of the Chancery Court’s finding that attorneys’ fees were warranted on the basis of a corporate benefit to Adhezion. The Supreme Court reversed the Chancery Court’s ruling, finding that Zimmerman’s counsel had not created a corporate benefit, and therefore was not entitled to the $300,000 in attorneys’ fees originally awarded by the Chancery Court. Without evaluating the Chancery Court’s substantive reading of the Adhezion operating agreement, the Supreme Court held that when a plaintiff takes action to moot his own claim, as Zimmerman did by selling his units and abandoning his claims before entry of a final judgment after trial, no corporate benefit can be created and therefore no attorneys’ fees should be awarded on that basis. The Supreme Court noted that, while attorneys’ fees have previously been awarded on the basis of mooted claims, those claims were rendered moot by the actions of the defendant, not the plaintiff. In contrast, in this case the Supreme Court refused to award fees on the basis of a claim that even the plaintiff himself had chosen not to pursue.

Ravenswood Inv. Co., L.P. v. Winmill & Co. Inc., C.A. No. 7048-VCN (Del. Ch. May 30, 2014)

Jun 02 2014

By David Bernstein and Elise Gabriel

In Ravenswood Investment Co., Vice Chancellor Noble of the Delaware Chancery Court considered the novel issue of whether, under Delaware law, a corporation may condition a stockholder’s right to inspect the corporation’s books and records on an agreement not to trade in the corporation’s stock for a period of time. Here, the defendant Winmill & Co. Incorporated (“Winmill”), a Delaware holding company, had refused to allow plaintiff stockholder Ravenswood Investment Company, L.P. (“Ravenswood”) to inspect its nonpublic financial statements absent Ravenswood’s agreement not to trade in Winmill’s stock for up to a year. Winmill was apparently concerned that Ravenswood would use the material, non-public information to trade in Winmill’s stock, thus threatening “tipper” liability under federal securities law.

Vice Chancellor Noble concluded that a trading restriction imposed on a stockholder’s right to inspection under Delaware General Corporation Law § 220 is contrary to Delaware law. He found that Ravenswood had requested inspection for the proper purpose of valuing its stock, and any purported secondary purpose or ulterior motive was irrelevant. Vice Chancellor Noble was unwilling to incorporate an “inequitable” notion into Delaware’s § 220 jurisprudence that would frustrate a stockholder’s fundamental right to value its stock. In a footnote, he further stated that the Court did not address whether the requested financial statements should be deemed confidential, but if the parties could not agree on a confidentiality agreement, the Court would be available to address that issue. Vice Chancellor Noble refused, however, to require Winmill to pay Ravenswood’s attorneys’ fees, finding that Ravenswood had not produced requisite evidence of Winmill’s bad faith.

Ravenswood v. Winmill

ATP Tour, Inc. v. Deutscher Tennis Bund (German Tennis Federation), No. 534, 2013 (May 8, 2014)

May 10 2014

By David Bernstein and Elise Gabriel

In ATP Tour, Inc., the Delaware Supreme Court responded to certified questions from the United States District Court for the District of Delaware regarding the validity of a fee-shifting provision in a Delaware non-stock corporation’s bylaws. The bylaw at issue provides that any member that asserts a claim against the corporation or another member and does not “substantially achieve, in substance and amount, the full remedy sought” will be obligated to reimburse the corporation or the member for all fees, costs and expenses, including reasonable attorneys’ fees and other litigation expenses. The Supreme Court answered, in relevant part, that such a fee-shifting provision is authorized by the Delaware General Corporation Law (“DGCL”), and therefore is facially valid, but whether it would be enforceable depends on the circumstances under which it is adopted and under which it is invoked. The Delaware Supreme Court stated that bylaws that otherwise may be facially valid will not be enforced if adopted or used for an inequitable purpose.

Here, two members of ATP Tour, Inc. (“ATP”), a Delaware membership corporation operating a professional tennis tour, had unsuccessfully sued ATP for breach of fiduciary duty and antitrust violations. ATP then moved to recover its costs and attorneys’ fees pursuant to the bylaw provision described above. The Federal District Court, in which the suit had been brought, found the issue of enforceability of a fee-shifting bylaw to be novel and certified four questions regarding its validity and its enforceability to the Delaware Supreme Court. After stating that the bylaw provision was facially valid, the Delaware Supreme Court found that it could not answer the questions regarding enforceability because they depended on the circumstances under which the bylaw was adopted and was being invoked, which were not before the Supreme Court. The fourth question was whether the bylaw could be enforced against a party that became a member before the bylaw was adopted. The Delaware Supreme Court answered this in the affirmative because the member had agreed to be bound by rules that may be adopted or amended from time to time.

Although ATP was a non-stock membership corporation, the decision was based on provisions of the DGCL that apply to all corporations, and there is no reason to think the decision would have been different if ATP had been a stock corporation.

ATP Tour, Inc. v. Deutscher Tennis Bund

Catagory:Attorney’s Fees