Attorneys’ Fees for Non-Monetary Corporate Benefit Upheld by Supreme Court

EMAK Worldwide, Inc. v. Kurz, No. 512, 2011 (Del. April 17, 2012). Several prior decisions in this matter by both the Delaware Supreme Court (whose stately building in Dover is featured at right), and the Court of Chancery were summarized on these pages and highlighted and linked in a previous post. A LexisNexis videocast about this Supreme Court decision is available here, featuring yours truly interviewed by Steve Berstler of LexisNexis.

Issue Addressed

Whether the Court of Chancery properly granted an interim fee award in a shareholders’ suit which did not produce an immediate monetary benefit.

Short Answer: Yes.

Short Background

This case involved a control dispute involving the common and preferred shareholders of EMAK Worldwide, Inc. and the largest shareholder, Donald Kurz.  Kurz was a former longtime CEO.  All of EMAK’s preferred shares were held by Crown EMAK Partners, LLC but the preferred shares could not vote in elections for directors, although they could vote on all other matters and they could unilaterally appoint two directors.  As prior decisions linked above explained, the battle for control involved written consents and an ill-fated attempt to reduce the size of the board without first properly removing the existing board members.  If the consents of Crown to reduce the EMAK board before the annual meeting succeeded, Crown would have controlled the EMAK board.  However, in a prior decision by the Court of Chancery, the Vice Chancellor found that the attempt to reduce the size of the board violated the DGCL and the Delaware Supreme Court affirmed in relevant part in a prior decision also linked above.

After the prior decision in this matter by the Delaware Supreme Court, the attorneys for the plaintiff filed an interim fee application.  The Court awarded interim fees in the amount of $2.5 million, finding that the efforts of the attorneys in assuring a free election was a benefit to all shareholders and that the control of Crown was not inevitable.

Standard of Review

The Supreme Court reviews an award of attorneys’ fees for abuse of discretion and does not substitute their own notion of what is right for those of the trial judge if the judgment was based on reason as opposed to capriciousness.  The Court will not overturn a factual finding of the Court of Chancery unless it is clearly wrong and justice requires it.

Analysis

The Supreme Court explained the corporate benefit doctrine as a basis for awarding attorneys’ fees if:  (1) the suit was meritorious when filed; (2) the defendants took an action that produced a corporate benefit before the plaintiffs obtained a judicial resolution; and (3) the suit and the corporate benefit were causally related.  Under the mootness rule, when the defendant took an action after the suit was filed that mooted a claim, it is a rebuttable presumption that the suit and the benefit were causally related.

The Court gave examples of prior opinions which granted attorneys’ fees for non-monetary benefits, including suits that caused a defendant to abandon a going-private transaction; making corrective disclosures in proxy materials; returning voting rights to common shareholders; and cancelling a preferred stock issue to a controlling shareholder that, allegedly, was not entirely fair.

The Court emphasized the bedrock Delaware law that: ”shareholder voting rights are sacrosanct.”  The Court also explained that:

a fundamental governance right possessed by shareholders is the ability to vote for the directors the shareholder wants to oversee the firm.  Without that right, a  shareholder would more closely resemble a creditor than an owner.  Shareholders have limited opportunities to exercise their right to vote.  When plaintiffs’ counsel obtains a corporate benefit by protecting shareholder voting rights, the benefit’s size does not depend on the corporation’s monetary value.”

The Court also emphasized that the ability of the corporation to pay fees does not impact the proper award of fees. The Court also upheld the analysis done by the trial court of the amount of the award based on the Delaware Supreme Court decision in Sugarland Industries, Inc. v. Thomas, 420 A.2d 142, 149-53 (Del. 1980).