In Kuo v. Genius Products, Inc., No. 3329-CC (Del. Ch., July 30, 2009), read opinion here, the Court of Chancery awarded counsel for Plaintiff Betty Kuo (“Kuo”), a minority shareholder in Defendant Genius Products (“Genius”), Inc., $100,000 in fees and expenses following a stipulation and dismissal recognizing the claims Kuo filed as moot.
Kevin Brady, a highly respected Delaware litigator, provided this synopsis.
In October 2007, Genius announced that its board and shareholders had approved a 1 to 8 reverse stock split of the company’s common stock. The objective of the reverse stock split was to meet NASDAQ’s minimum listing requirement of $5.00. Genius’s controlling stockholders approved the reverse stock split on October 29, 2007 and gave the Genius board one year to select an exchange ratio and effectuate the reverse stock split or alternatively abandon the transaction. As a result of the reverse split, Genius announced that shareholders with less-than-one post-split shares would be cashed out.
In November 2007, Kuo filed suit alleging that Kuo’s board had breached its fiduciary duties and that the reverse stock split violated the fair value requirement of 8 Del. C. § 155(2). Immediately after the filing of the complaint, the parties entered into settlement negotiations. During the negotiations, the stock price fell to such a low level that Genius alleged it could no longer list on NASDAQ. As a result, in October 2008, Genius abandoned the stock split and, with the litigation being moot, the parties stipulated to its dismissal. On October 29, 2008 the option to effectuate the reverse stock split expired and on November 7, 2008, the parties filed a stipulation and order of dismissal recognizing the plaintiff’s claims as moot. Plaintiff then sought an award of attorneys’ fees and expenses. Thus, the Court was faced with the issue of awarding attorneys’ fees in a mooted class action.
Court Finds Fee Warranted Under Common Corporate Benefit Doctrine
The Court considered Kuo’s application for fees under the common corporate benefit doctrine, where “a litigant who confers a common monetary benefit upon an ascertainable stockholder class is entitled to an award of counsel fees and expenses for its efforts in creating the benefit.” However, for the Court to award fees under this doctrine, “the applicant must show: (i) the suit was meritorious when filed; (ii) the action producing the benefit to the corporation was taken by the defendants before a judicial resolution was achieved; and (iii) the resulting corporate benefit was casually related to the lawsuit.”
In opposition, Defendants argued that fees were not warranted because the decision not to pursue the reverse split was not the result of the litigation, but rather the precipitous stock price decline. However, the Court noted that a “strong presumption in favor of plaintiff’s counsel exists in these types of cases” and defendants have the burden to show that the lawsuit did not “in any way” cause the action. In finding that the defendants had not met their burden and that the lawsuit “played at least some part in Genius’s decision to abandon the stock split,” the Court noted: (1) the onset of settlement of negotiations immediately after the filing of the complaint; (2) the failure to move for immediate dismissal (which it arguably would have done had the case been meritless); and (3) Genius’ inability to persuade the Court that the decline in stock price precluded the reverse stock split. The Court noted that the defendants failed to show why Genius “needed to obtain a $15 per share outcome rather than NASDAQ’s required $5 per share and why they could only do a 1 to 8 reverse stock split to achieve that goal.”
Despite a Benefit, Only a Modest Award Was Warranted
As the Court recognized, “[i]t has long been the policy of Delaware to ‘insure that, even without a favorable adjudication, counsel will be compensated for the beneficial results they produced.” Relying on the factors in Sugarland Indus. Inv. v. Thomas, 420 A.2d 142 (Del. 1980), the Court noted that:
[i]n arriving at the specific amount for the award, Sugarland rejected a more mechanical approach, establishing that the Court must exercise its sound discretion to determine fee awards. In assessing whether a fee is reasonable the Court typically considers a number of factors, including: “(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.” This Court has consistently noted that the most important factor in determining a fee award is the magnitude of the benefit achieved.
Plaintiff’s counsel requested $200,000 in fees and $2,440.67 in expenses. However, the Court was not persuaded that a “significant benefit was obtained or that counsel’s actions were solely responsible for the aborted transaction.” Instead, the Court found that the benefit was modest, in part, because no independent appraisal of shares had been done. Thus, the Court could not determine how much less shareholders would have received in the cash out. The Court reduced the award to $100,000 because “plaintiff’s counsel has expended modest efforts in this case.” As the Court reasoned, no substantive motions had been filed, the only brief or paper filed was the motion for fees, and, despite representing that they had expended 140 hours on the case, counsel failed to distinguish the hours spent working on the motion for fees from substantive work for the client.