In deciding an issue of first impression, the Delaware Court of Chancery in City of Miami General Employees’ and Sanitation Employees’ Retirement Trust v. C&J Energy Service, Inc., et al., C.A. No. 9980-CB (Del. Ch. January 23, 2018), addresses several principles that should be of interest to corporate litigators:
- A fee award, such as one that would typically be granted when a corporate benefit or a common fund is created in a derivative suit, cannot be imposed on one stockholder or a subset of stockholders even if the corporation is unable to pay, when the benefit accrued to all stockholders.
- Pursuant to DGCL Section 325(b), a creditor is barred from seeking to collect from a stockholder prior to first obtaining a judgment against the corporation. In this case, a corporate bankruptcy discharged any fee obligation that the corporation might otherwise have had.
- Also, for policy reasons it would be unprecedented and inconsistent with the rationale of the corporate benefit doctrine, as well as being inequitable, to require a stockholder or a subset of stockholders to pay fees in this situation.
- The court provided an additional reason to reject the fee request: finding that the litigation did not create a price reduction which was the alleged benefit of the litigation on which the fee request was based
A prior decision of the Delaware Supreme Court in this matter was highlighted on these pages, and that opinion was selected by Vice Chancellor Laster as especially noteworthy.