Loral Space & Communications Inc. v. Highland Crusader & Offshore Partners, L.P., Del. Supr., No. 623, 2008, (July 23, 2009), read opinion here.

Kevin Brady,  a prominent Delaware litigator, prepared the following synopsis.

The Delaware Supreme Court on July 23, 2009 affirmed the Court of Chancery’s award of $10.6 million in attorneys’ fees to stockholders’ class counsel. Class Counsel had filed a fee petition seeking $27.5 million arguing that: (1) plaintiffs’ counsel obtained a quantifiable benefit of approximately $205 million; (2) plaintiffs’ counsel obtained significant non-quantifiable benefits for the class; and (3) A&L had accepted representation of the class on a contingent fee basis. The Court of Chancery awarded class counsel $10.6 million in fees and expenses.


Briefly by way of background, in 2006, Loral entered into a Securities Purchase Agreement under which its largest stockholder, MHR, would acquire $300 million in Loral convertible preferred stock which had a high dividend rate, a low conversion rate, and significant class voting rights. After the transaction closed, plaintiffs-below appellants Highland Crusader Offshore Partners, L.P., the beneficial owner of approximately 8% of Loral common stock, challenged the transaction first by making a demand for books and records pursuant to 8 Del. C. § 220 and then filing a class action lawsuit alleging direct claims against MHR, Loral, and its directors. The complaint alleged three derivative claims and one direct claim against the same defendants.

Issues on Appeal

There were two issued raised on appeal. First, Loral claimed that the trial court erred in allowing this matter to proceed as both a class and derivative action, because under Gentile v. Rossette, 906 A.2d 91 (Del. 2006), “stockholders may not pursue a class action where, as here, there is a pending derivative action addressing the same alleged wrongs.” Next Loral challenged the amount of the fee petition.

The Supreme Court found no error in the Court of Chancery’s decision to certify the stockholder class because both types of claims may be litigated at the same time. With respect to the fee award, the Court of Chancery found that under Sugarland Industries, Inc. v. Thomas, 420 A.2d 142, 149 (Del. 1980), class counsel created a “hugely substantial benefit” as a direct result of the litigation. The Supreme Court also found that the record from the Court of Chancery supported that court’s finding, and as a result, the Court of Chancery “acted well within its discretion” in the fee award.

The Supreme Court also noted that the Court in Rossette found that the same set of facts could give rise to both direct and derivative claims:

A breach of fiduciary duty claim having this dual character arises where: (1) a stockholder having majority or effective control causes the corporation to issue “excessive” shares of its stock in exchange for assets of the controlling stockholder that have a lesser value; and (2) the exchange causes an increase in the percentage of the outstanding shares owned by the public (minority) stockholders. Because the means used to achieve that result is an overpayment (or “overissuance”) of shares to the controlling stockholder, the corporation is harmed and has a claim to compel the restoration of the value of the overpayment. That claim, by definition, is derivative.


But the public (or minority) stockholders also have a separate, and direct, claim arising out of that same transaction. Because the shares representing the “overpayment” embody both economic value and voting power, the end result of this type of transaction is an improper transfer – or expropriation – of economic value and voting power from the public stockholders to the majority or controlling stockholder…As a consequence, the public shareholders are harmed, uniquely and individually, to the same extent that the controlling shareholder is (correspondingly) benefitted. In such circumstances, the public shareholders are entitled to recover the value represented by that overpayment – an entitlement that may be claimed by the public shareholders directly and without regard to any claim the corporation may have.