In re Jefferies Group, Inc. Shareholders Litigation, Cons. C.A. No. 8059-CB (Del. Ch. June 5, 2015). This Delaware Court of Chancery letter ruling describes the standards that apply to a request for attorneys’ fees in connection with the settlement of a class action. This action arose out of a stock-for-stock merger of Jefferies Group, Inc. and the Leucadia National Corporation in 2013. The core of the suit was an alleged conflict of interest affecting four of the eight members of the board of Jefferies that, if proven, could result in the application of the entire fairness standard.
Highlights of Case
Delaware counsel sought attorneys’ fees in the amount of $27.5 million plus expenses in an amount exceeding $1 million. The requested fee equates to approximately 27.5% of the “gross value of settlement” (approximately $100 million) after taking into account the requested fees and expenses incurred by Delaware counsel, and an assumed amount of administrative expenses to be paid by defendants. The “gross value amount” was calculated approximately as follows: $70 million distributed to the class, $27.5 million fee award, $1 million in out-of-pocket expenses for which reimbursement was sought, and an estimated $1.5 million in administrative expenses.
The court notes in footnote 5 that where a settlement is structured upon a net payment to stockholders without an agreement on the amount of the maximum fee award that the defendants will not oppose, as in this case, the defendants have an incentive to oppose fee requests viewed as unreasonable in order to manage their total payments. By contrast, the court observed that: “Defendants are usually indifferent as to what percentage of a gross settlement is awarded to plaintiffs’ counsel because their exposure is capped at the gross amount.” The court expressed its preference for fee applications subject to adversarial inquiry in order to provide the court with a better record regarding the quality of the benefit achieved in the proposed settlement and the related Sugarland factors.
The court also observed at footnote 6 that the case relied on upon by the defendant “did not conduct any analysis and reached no conclusion concerning whether fee awards should be based on the net or gross value of a settlement.” Referring to five recent settlements cited by the defendants, the defendants argued that the Court of Chancery traditionally has awarded attorneys’ fees between 20% and 25% of the value of settlements exceeding $65 million. Defendants suggested that the midpoint of that range supports an award of $15.75 million in fees in this case, which is equal to 22.5% of the $70 million net settlement fund, not including reasonable expenses.
Issues Presented:(1) Whether the fee award should be calculated on a net or a gross basis; and (2) the appropriate amount of the fee.
The decision announced that: “This court traditionally has granted fee awards in common fund settlements based on the percentage of the gross settlement value” (though no cases were cited in support of that statement.) For example, the fee awards in each of the five settlements relied on by the defendants exceeded $65 million and defendants describe them as based on the gross value of the settlement. Indeed, the court observed that the “defendants were unable to identify a single case in which this court made a considered judgment to award a fee based on a percentage of the net recovery that stockholders would receive in a common fund case.”
One observation that can easily be made based on the court’s statement that a fee award is based on the “gross settlement value” in a common fund settlement, is that it is counterintuitive. For example, if the gross value of settlement is calculated by adding the net payment to the class to the attorneys’ fees payable, the plaintiff is obtaining an award based at least in part on a percentage of the attorneys’ fees that are paid to him, which seems as if the plaintiff is receiving a double advantage.
The court reviewed the familiar Sugarland factors, namely: (1) the results achieved; (2) the time and effort of counsel; (3) the relative complexities of the litigation; (4) any contingency factors; and (5) the standing and ability of counsel involved. Of course, the benefit achieved is the most significant factor. The court explained that the quality of the benefit depends on several factors, including whether the business judgment rule applied in which case the plaintiffs presumably would have received no recovery had they gone to trial. On the other hand if the entire fairness standard had applied, “the benefit takes on a different complexion.” Of course, the settlement was reached without either side knowing what standard of review ultimately would apply and which financial experts would be more persuasive at trial.
The court cited to the recent decision in the matter of In re Activision Blizzard, Inc. S’holder Litig., highlighted on these pages here, which awarded between 22.7% to 24.5% of cash and non-monetary benefits achieved in a case involving “complicated legal issues and the need for extensive discovery,” including over 800,000 pages of discovery documents and 23 fact depositions taken in a compressed schedule.” The court also noted other cases at footnote 11 in which it was observed that: “Delaware case law supports a wide range of reasonable percentages for attorneys’ fees, but 33% is the very top of the range of percentages.” The court concluded that 23.5% of the gross value (approximately $91.5 million) of the settlement, inclusive of expenses, would be the appropriate award in this case. The court also spent several pages at the end of this letter opinion on a separate discussion explaining why it rejected the request for a share of the fee award by New York counsel who engaged in related litigation involving the challenged transaction.