Gatz v. Ponsoldt, No. 174-CC (Del. Ch., June 12, 2009), read revised opinion here.
This short letter decision by the Chancery Court approved attorneys’ fees and expenses in the amount of 33% of the settlement fund plus expenses in connection with the settlement of a class action on behalf of shareholders of Regency Affiliates, Inc. Three complaints alleged breaches of fiduciary duties in connection with a recapitalization plan and related transactions which reduced the ownership of public shareholders from approximately 61% to approximately 40%, as well as allegations about unreasonable compensation. The Delaware Supreme Court previously ruled in this case that the claims of the plaintiffs were direct in nature.
In January 2008 the parties reached an agreement in principal to settle and executed a memorandum of understanding in April 2008. In December 2008 the parties sought approval of the settlement and a hearing was held in Chancery Court on March 16, 2009, after which the court asked for further briefing to clarify the position of the parties. The settlement agreement calls for defendants to pay $3 million plus interest. In exchange for the cash payment. Defendants received a dismissal of this action and a release of all class member’s claims relating to or arising from the settlement or the action.
The Chancery Court observed that it is required to exercise its own sound judgment in deciding whether to approve a class action settlement as fair and reasonable. In doing so, the court must weigh and consider “the nature of the claim, the possible defenses to it, and the legal and factual obstacles facing the plaintiff in the event of a trial.”
One of the obstacles faced by plaintiff was whether their claims would be subject to the entire fairness standard or the less demanding business judgment rule. In order to succeed in having the entire fairness standard applied, the plaintiffs would have to establish that the CEO dominated and controlled the parties on both sides of the transaction and further that the appointment of a special committee to overview the recapitalization was sham and not sufficient to shift the burden back to plaintiffs to show that the recapitalization was unfair.
The court stated that the plaintiffs faced difficult hurdles to achieve success but were nonetheless able to obtain a cash settlement of $3 million. The court observed that the plaintiffs’ claims “lacked a significant probability of success on the merits” and thus the monetary benefits obtained were reasonable in light of the obstacles that they faced, thus allowing for a conclusion that the settlement was fair and reasonable.
The court explained that the policy of Delaware was to insure that “even without a favorable adjudication, counsel will be compensated for the beneficial results they produced.” (citing Allied Artists Pictures Corp. v. Baron, 413 A.2d 876, 878 (Del. 1980))(emphasis an original). The court emphasized that such a policy exists in order to promote the policy of providing professional compensation when such suits are meritorious. However, the court acknowledged that it must make its own independent determination of reasonableness of fees and the court recited the five Sugarland factors that it considers in determining whether a fee is reasonable. The court emphasized that it has consistently noted that the most important factor in determining a fee award is the size of the benefit achieved.
The court concluded its reasoning by emphasizing that the shareholders would not be “paying themselves” and that the settlement fund would not be a “circular transfer (minus attorney’s fees)” but rather the settlement was an actual benefit to the shareholder class that was allegedly harmed by the recapitalization transaction because “of the shareholder class that brought this lawsuit, Regency maintains that no more than 27%, and as little as 7% remain as Regency shareholders. Accordingly, as much as 93%, and not less than 73%, of the proposed settlement payment will be borne by non-class members.”