In re National City Corp. Shareholders Litigation, No. 4123-CC (Del. Ch. July 31, 2009), read opinion here.
Kevin Brady, a highly respected Delaware litigator, provided this synopsis.
In this case, the Court of Chancery approved a settlement agreement, certified a class, and awarded attorneys fees and expenses in the amount of $400K instead of the $1.2 million amount initially requested by the plaintiffs and agreed to by the defendants.
In the fall of 2008, National City Corporation (“NCC”), was in the same troubled situation that many large financial institutions were in at that time — capital and liquidity issues as a result of the problems in the credit and housing markets. Indeed, the Office of the Comptroller of the Currency (“OCC”) told NCC that it was “very possible” that NCC would not receive government assistance under the Troubled Asset Relief Program/Capital Purchase Program which would have had a devastating effect on NCC’s financial outlook. As a result, in September 2008, NCC was considering strategic alternatives.
Proposed Merger Between NCC and PNC
In October 2008, NCC announced a proposed merger with PNC Financial Services Group, Inc. (“PNC”). The merger was a $5.58 billion all-stock deal that was to close by the end of 2008. Starting on October 27, 2008, lawsuits were filed by various shareholders of NCC that, among other things, sought to enjoin the merger alleging that the NCC directors had breached their fiduciary duties and that PNC had aided and abetted those breaches. At the core, each of the shareholders’ actions alleged that NCC had not secured “fair and maximum consideration” for the shareholders. The Court consolidated the various lawsuits and in November 2008, a consolidated class action complaint was filed, which alleged over thirty disclosure violations.
Case Settled Within Month of Filing Consolidated Complaint
Within days of filing the consolidated class action complaint, the parties engaged in settlement discussions and by December 12, 2008, the parties had agreed to settlement terms and a memorandum of understanding was prepared which stated that the plaintiffs would take additional discovery before the settlement was placed before the Court for approval. Following two depositions, the shareholders of both NCC and PNC voted to approve the merger and by February 2009, the parties had signed the memorandum of understanding which required additional disclosures and $1.2 million in attorneys’ fees and expenses for plaintiffs’ counsel.
Numerous shareholders filed objections to the settlement. The objectors argued that “NCC’s management acted in its own self-interest in approving the merger because fourteen officers of the Company received change-in-control payments at the completion of the merger.” The Court however, dismissed these claims because as it noted:
NCC’s board, not its management, approved the merger, and only one member of the board, Peter Raskind, was also an officer of NCC. There are no allegations that any of the other board members received change-of-control or unique payments as a result of the merger. The Delaware Supreme Court has “never held that one director’s colorable interest in a challenged transaction is sufficient, without more, to deprive a board of the protection of the business judgment rule presumption of loyalty.” Indeed, “self-interest, alone, is not a disqualifying factor even for a director. To disqualify a director, for rule rebuttal purposes, there must be evidence of disloyalty.”
Court Approves Settlement
Noting that the Court “applies its own sound judgment in deciding whether to approve a class action settlement as fair and reasonable”, the Court stated that “the settlement of a class action is unique because the fiduciary nature of the class action requires the Court of Chancery to participate in the consummation of the settlement to the extent of determining its intrinsic fairness.”
The Court noted that the probability that the plaintiffs would have been successful on the merits of their fiduciary duty claims was remote. The plaintiffs were able to cause NCC to provide its shareholders with additional information regarding conflicts of interest and “further insight into the strengths and weaknesses of the Company.” After characterizing the additional disclosures that resulted from the settlement of the action as “minor” providing a “meager benefit,” the Court concluded that the settlement was fair and reasonable as the plaintiffs only had a remote chance of success in litigation. The NCC board was entitled to the protections of the business judgment rule and plaintiffs had not offered any evidence to rebut the presumption. The Court held that the NCC directors’ interests were consistent with those of the NCC shareholders as the eleven outside directors held over one million shares of NCC stock and consequently desired the highest value for those shares. Despite weak claims, the plaintiffs nonetheless received a modest benefit from the supplemental disclosures. Taken together, the settlement was “a fair and reasonable compromise.”
Court Determines That Substantial Fee Award Not Justified
Finding that the disclosures constituted only a modest benefit to the shareholders, the Court determined that a substantial fee was not justified. The Court held that the disclosures represented a “non-monetary, therapeutic and modest achievement” that did not warrant the “princely sum of $1.2 million” for plaintiffs’ counsel’s fees and expenses.
In arriving at its conclusion, the Court began with the recitation of the long-standing Delaware policy “to insure that, even without a favorable adjudication, counsel will be compensated for the beneficial results they produced.” In a class action setting where the parties agree upon fees in a settlement, the Court “‘must make an independent determination of reasonableness’ of the agreed to fees” using the factors set forth in In re Abercrombie & Fitch Co. S’holders Derivative Litig., 886 A.2d 1271, 1273 (Del. 2005) (citing Sugarland Industries Inc. v. Thomas, 420 A.2d 142 (Del. 1980)):
(1) the results accomplished for the benefit of the shareholders; (2) the efforts of counsel and the time spent in connection with the case; (3) the contingent nature of the fee; (4) the difficulty of the litigation; and (5) the standing and ability of counsel involved.
Even though the parties’ negotiated the $1.2 million fee, the Court held that “independent judicial scrutiny” is still needed “because of the omnipresent threat that plaintiffs would trade off settlement benefits for an agreement that the defendant will not contest a substantial fee award. A negotiated fee arrangement ‘by its nature deprives the court of the advantages of the adversary process . . . [and] makes heightened judicial oversight of this type of agreement highly desirable.’” In addition, the Court recognized the skepticism present in class action litigations because the claim-holding shareholders are generally not involved with negotiating the settlement or fee agreement. The “Court is required to be vigilant, so that counsel’s fee requests do not take advantage of the agent-principal relationship between class action plaintiffs and their attorneys.”
In applying the Sugarland factors, the Court considered “the amount of fees [the] Court has typically awarded in modest disclosure cases . . . .” Given the modest benefit derived from the supplemental disclosures and the efforts expended, the Court arrived at $400,000. The disclosures were deemed to be of modest benefit because they did not warrant placement in an amended proxy, were only included on NCC’s 8-K, and did not appear to have a large effect on the shareholder vote. As to counsel’s efforts, there was only a motion to expedite and two depositions. Such effort “regardless of the amount of hours spent” did not warrant the agreed upon fee – especially in light of the modest benefit.