In the recent decision of In Re Allion Healthcare Inc. S’holders Litig., C.A.No. 5022-CC (Del. Ch. Mar. 29, 2011), read opinion here, Chancellor Chandler decided the rarely discussed issue of the division of attorneys’ fees between plaintiffs’ counsel in what has become common and problematic in multi-forum deal litigation.
Kevin F. Brady of Connolly Bove Lodge & Hutz LLP prepared this summary.
Background
The underlying transaction involves a going-private transaction regarding Allion Healthcare, Inc. After the merger was announced, there occurred what the Chancellor described as the “fairly typical race-to-the-courthouse.” Various plaintiffs filed suit: first one suit in New York, then three actions were filed in Delaware. In the last filed case, the plaintiff’s lawyers were unhappy with the leadership positions and opted to voluntarily withdraw its suit in Delaware and file in New York where it moved for co-lead plaintiff status, which was granted. The cases moved forward on parallel tracks and preliminary injunction hearings were scheduled in both Delaware and New York. Then the Delaware plaintiffs announced that they had reached a settlement involving corrective disclosures. A supplemental proxy was issued, the stockholders approved the merger and it closed on January 13, 2010.
Plaintiffs in Delaware and New York filed amended complaints asserting claims arising out of the merger. Motions to dismiss were filed. And a few months later the Delaware plaintiffs announced an agreement in principle to settle the Delaware action. The proposed settlement resulted in a $4 million increase in merger consideration. The Court set a date for the settlement hearing and the New York plaintiffs immediately filed an emergency motion to intervene and take discovery. The Court denied the emergency request but did allow some discovery.
Settlement Hearing
The Court approved the settlement between defendants and the Delaware plaintiffs, over the objection of New York plaintiffs. The Court approved the certification of the settlement class and a fee award totaling $1 million, which constituted a $250,000 disclosure fee award and a $750,000 increased share price fee award. When the Delaware and New York plaintiffs’ attorneys could not resolve their disagreement over the fees, the Court was forced to address the division of those attorneys’ fees. The Delaware plaintiffs’ counsel argued that the New York plaintiffs’ portion should not exceed $100,000, amounting to 40% of the disclosure fee and that the New York plaintiffs were “not entitled to any portion whatsoever of the increased share price fee.” Counsel for the New York plaintiffs requested 50% of the disclosure fee and one-third of the increased share price fee, amounting to a total of $375,000.
Problems Associated With Multi-Deal Litigation
The Chancellor discussed the many practical problems that resulted from plaintiffs’ counsel filing multiple actions in different jurisdictions regarding the same deal with no workable solutions.” The Court noted:
Defense counsel is forced to litigate the same case—often identical claims—in multiple courts. Judicial resources are wasted as judges in two or more jurisdictions review the same documents and at times are asked to decide the exact same motions. Worse still, if a case does not settle or consolidate in one forum, there is the possibility that two judges would apply the law differently or otherwise reach different outcomes, which would then leave the law in a confused state and pose full faith and credit problems for all involved.
Efficiency and comity would be better served if these cases were litigated in one jurisdiction. Of course, if a stay or dismissal is not granted in one jurisdiction, defense counsel may attempt to “forum shop” for the jurisdiction in which the best outcome for its client is likely. As has been noted recently before this Court, the forum shopping issue, in and of itself, is not necessarily problematic at all, and indeed may be “unquestionably proper or [] part of the zealous advocacy expected of attorneys.” But it in turn does highlight the potential, at least, for collusive settlements or “reverse auctions”—even if what defense counsel is ultimately doing is simply attempting to litigate its case in one jurisdiction only, wherever that may be. Plaintiffs’ counsel may similarly engage in forum shopping for the jurisdiction where the judge is most likely to approve their settlement.
The problems do not end there. In the event that defense counsel settles in Delaware over another jurisdiction, leaving one set of plaintiffs’ counsel out in the cold, the unfavored forum’s plaintiffs’ lawyers then often flock to Delaware to oppose the settlement (and vice versa). And there are the post-settlement or post-litigation issues as well: class certification, approval of attorneys’ fees, and then dividing those attorneys’ fees between the various plaintiffs’ counsel.
Chancellor Chandler did offer some advice and suggested an approach that has “worked for me in every instance when it was tried”:
My personal preferred approach, for what it’s worth, is for defense counsel to file motions in both (or however many) jurisdictions where plaintiffs have filed suit, explicitly asking the judges in each jurisdiction to confer with one another and agree upon where the case should go forward….[The] defendants [should] “go into all the Courts in which the matters are pending and file a common motion that would be in front of all of the judges that are implicated, asking those judges to please confer and agree upon, in the interest of comity and judicial efficiency, if nothing else, what jurisdiction is going to proceed and go forward and which jurisdictions are going to stand down and allow one jurisdiction to handle the matter.” Of course…judges in different jurisdictions might not always find common ground on how to move the litigation forward. Nevertheless, this would be, I think, one (if not the most) efficient and pragmatic method to deal with this increasing problem.
In the end, the Court determined that because the disclosure benefits were negotiated by both Delaware and New York plaintiffs’ counsel, they were entitled to equally share in the disclosure fee award, 50% or $125,000 to each. With respect to the increased share price fee award, the Court determined that New York counsel were not parties to the settlement agreement between the Delaware plaintiffs and defendants even though they had the opportunity to sign on to the settlement. Based on the evidence presented at the settlement hearing, the Court found that the New York plaintiffs “in no way caused any of the benefit achieved by the Delaware plaintiffs in the settlement.” As a result, the Court awarded the full increased share price fee award of $750,000 to the Delaware plaintiffs.
Supplement: Further expert insights on this case were recently provided by Theodore “Ted” Mirvis, William Savitt and Ryan McLeod of the Wachtell Lipton firm on the Harvard Law School Corporate Governance Blog here.