Wednesday, August 02, 2023

Deconstructing one of Delaware’s largest attorney’s fee awards

By Mark S. Nelson, J.D.

The Delaware Chancery Court has awarded one of the largest fee awards in that court’s history in a case that required plaintiff’s counsel to litigate a complex M&A case until a late-stage settlement amounting to $1 billion was reached. Although the case may on the surface suggest a kind of implicit splitting of the difference, there actually is much more to the court’s decision, which extensively reviews Delaware law, precedential cases, and academic literature. As a result, plaintiffs’ counsel was awarded $266.7 million based on an indicative award of 26.67 percent, with a $50,000 lead plaintiff incentive bonus to be paid from the fee award (In re Dell Technologies Inc. Class V Stockholders Litigation, July 31, 2023, Laster, T.).

The case arose from the lengthy litigation over Michael Dell’s and Silver Lake Group LLC’s 2013 attempt to take Dell, Inc. private. Three years later, the newly private company sought to acquire EMC Corporation, including EMC’s large majority stake in VMware, Inc. To realize the value of the EMC transaction, the parties to the merger created a complex tracking stock that, despite the attendant hype upon its launch (it was supposed to be the “highest quality tracker in the history of trackers”), ultimately traded at a significant discount to VMWare’s publicly traded shares. This litigation resulted from objections by holders of the tracking stock to a negotiated redemption.

Preamble. The court’s pre-analysis review of the basics of setting the fee amount and Delaware policy presaged the court’s adoption of some adjustments while rejecting others urged by the parties. For one, the court explained that under current Delaware law, primarily judicial opinions, the Chancery Court follows the stage-of-case approach, a method chosen by Delaware courts to incentivize plaintiffs’ counsel to dig deep and take necessary risks to obtain better results. This approach also comports with multiple lines of Delaware cases in recent years that seek to curb some litigants’ abuses of the state’s Chancery Court.

In the Dell case, plaintiff’s counsel sought a 28.5 percent fee, or $285 million. Eight investment funds objected to that amount and instead told the court it should apply a declining-percentage approach that adjusts the fee award downward as the common fund increases in size. The funds would apply a 10 percent to 12 percent factor much like some federal courts do in securities class actions. Amici law professors also concurred with the investment funds, but they urged a 15 percent fee award.

The court explained the math applicable to the objecting funds, who owned 26.1 percent of the relevant class shares. Under the plaintiff’s approach the funds obviously would get the least recovery. The funds would get the largest recovery under their method which, for purpose of example, the court calculated at 10 percent, producing about $49 million in additional recovery for the funds. Under the law professors’ 15 percent fee award, the funds would get about $36 million more in recovery.

Results and one-third of the late-stage tasks. The court began with an analysis of the Sugarland factors: (1) the results achieved (as the court said, this is the “primary factor”); (2) time and effort of counsel; (3) relative complexities of the litigation; (4) contingency factors; and (5) standing and ability of counsel.

The court’s analysis largely focused on the results achieved. Here, the court said the settlement arrived during the late-stage tasks of the litigation, which was roughly the point at the end of expert discovery and about 19 days before trail was to begin. As a result, counsel had taken on tasks beyond the mid-stage of the case, but not quite into the late stage of the case, which would encompass full adjudication.

According to the factors and Delaware precedent, a late-stage settlement should produce a fee in the range of 25 percent to 30 percent of the common fund. The court further refined its judgment about how far plaintiffs’ counsel had taken the case into the late-stage tasks of the litigation and determined that counsel had reached the one-third mark between 25 percent and 30 percent. Thus, the proper percentage fee award would be for one-third of the way between 25 percent and 30 percent, or 26.67 percent.

The court rejected plaintiff’s counsel’s request for a fee of 28.5 percent because that would have accounted for more tasks than counsel actually accomplished during the late-stage settlement or put another way, it would have accounted for two-thirds of the way between 25 percent and 30 percent.

The court also engaged in what might be called a bit of judicial pragmatism about the wisdom of allowing counsel to obtain awards at the high end of the applicable range. Said the court: “Plus, if plaintiff’s counsel gets 28.5 [percent] in this case, it will be difficult to find room in the late-stage tier for a settlement that occurs during trial, or during post-trial briefing, or after post-trial argument. It is always uncomfortable to reduce a fee request when plaintiff’s counsel has performed well, so the judicial urge would be to reward counsel by pushing the percentage for a late-stage settlement upward. That in turn would compress the relative reward for going the distance to a final adjudication. To reiterate, some step-up should exist for a post-trial adjudication.”

Moreover, the court, after extensive analysis, decided not to entertain application of the declining-percentage method, which states that as the common fund increases, the fee award should be comparatively smaller. The two main reasons for doing so, said the court, were, first, that Delaware precedent has not endorsed or applied the declining-percentage method. A second reason for passing on the invitation to apply the declining-percentage method was that, while that method may work for federal securities class action suits, where the court said it functions as a quasi-lodestar, those cases also differ from M&A cases brought under Delaware law in Delaware courts.

Remaining Sugarland factors. The remaining four Sugarland factors, while significant in terms of the court’s analysis, ultimately did not tip the scale away from the indicative amount arrived at by the court when considering the results obtained by plaintiffs’ counsel.

Plaintiff’s counsels’ time and effort required a bifurcated analysis. Time amounted to 53,000 hours which, at customary rates, the court said would suggest an attorney’s fee of more than $39.4 million. With respect to effort, the court said plaintiff’s counsel began the case the right way with a Section 220 demand and then deftly negated the application of MFW (i.e., the business judgment rule would apply instead of entire fairness standard if certain deal protections are put in place ab initio), conducted extensive and contested discovery, and continued to do “real work” after the court denied Dell’s motion to dismiss almost in its entirety (the court dismissed claims brought against one director). Similarly, the relative complexities of the case were significant, including the handling of expert testimony about a unique tracking stock.

Lastly, the court said plaintiff’s counsel’s standing and ability were substantial because of counsel’s experience in advocating for stockholders in multiple cases at all phases of litigation. Contingency factors mulled by the court resulted in no downward reduction.

The case is No. 2018-0816-JTL.