DealLawyers.com Blog

January 9, 2012

Contingency Fees in M&A Litigation

Here’s news from Steven Haas of Hunton & Williams LLP

The contingency fee practice in corporate litigation is alive and well in Delaware. Last month, Chancellor Strine awarded a much-publicized $285 million fee award to the plaintiffs’ attorneys in In re Southern Peru Copper Corp. S’holder Deriv. Litig. The fee relates to the court’s $1.2 billion damages award announced in October in which the court found that a controlling stockholder’s sale of an asset to its partially-owned subsidiary was not entirely fair.

Also in December, Vice Chancellor Laster awarded $22.3 million to the plaintiffs’ attorneys in the Del Monte litigation. The fee award was based on the court’s February 14, 2011, decision that enjoined a stockholders meeting and the operation of certain deal protections in a merger agreement. The decision was followed by an $89.4 million settlement payable to the stockholder class. The $22.3 million fee award is in addition to the $2.75 million previously awarded by the court to the plaintiffs’ attorneys as a result of Del Monte’s voluntary disclosures about the sale process, which were made after the litigation was commenced but prior to the court’s injunction decision.

Vice Chancellor Laster also recently awarded $2.4 million in attorneys’ fees in the Compellent litigation. There, he found that the plaintiffs had conferred a “benefit” on the target company’s stockholders by “relaxing” certain deal protections in a merger agreement, even though no topping bid emerged.

The issue of fee awards has received significant attention lately, particularly in the context of disclosure-based settlements — the most common form of settlements in M&A litigation. Delaware courts seem to have increased their scrutiny of these settlements, partly to make sure that “good cases” are not settled “on the cheap” and partly to police the filing of “bad cases.” As an example of the latter category, Vice Chancellor Laster issued a length opinion in April 2011 in In re Sauer-Danfoss. There, he awarded $75,000 to the plaintiffs’ attorneys for a “kitchen sink” list of disclosures that he generally termed as “not helpful.” In that case, he also assembled a list of prior fee awards granted by Delaware courts, categorizing them into three “buckets” ranging from small fee awards for marginally helpful disclosures to large fee awards for “significant” disclosures.

Disclosure-based settlements and attorneys’ fee awards remain important areas for deal lawyers and litigators, especially for purposes of obtaining deal certainty through pre-closing settlements and for valuation purposes (i.e., buyers taking into account the cost of litigation and any potential settlement payments). It’s also worth noting that Delaware arguably continues to walk a fine line with attorneys’ fees. M&A litigation has risen significantly over the years, with some commentators suggesting that 85% of M&A transactions are now challenged. In addition, a particular transaction may be challenged in multiple venues.

If Delaware cracks down too much on what many in the defense bar perceive as “knee-jerk reaction” lawsuits, it risks losing market share as plaintiffs could file elsewhere. There is evidence that this migration to other states has occurred in recent years, perhaps due to a perception that Delaware courts are not “generous” with fee awards. Recent cases should show, however, that Delaware courts will award significant fees where its judges believe the plaintiffs have strong claims. To that end, Ronald Barusch recently wrote this in Deal Journal piece that the Southern Peru award is an invitation for good cases.