Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 35 years, prepared this article

The full Delaware Supreme Court recently ruled that $26.67% fee and expense award to plaintiffs’ attorneys in the $1 billion settlement of a challenge to Dell Technologies Inc.’s redemption of its Class V stock for what shareholders claimed was an unfair price did not exceed the Chancery Court’s discretion in the ma tter styled In re Dell Techs. Inc. Class V S’holders Litig., C.A. No. 2018-0816 (Del.Supr. Aug. 14, 2024).

Chief Justice Collins Seitz Jr., writing for the unanimous en Banc court, affirmed the Chancery’s decision that although the $266.7 million award was near the top of the applicable range for settlements of that type, under the high court’s milestone Sugarland ruling, each of the fee objections and reductions filed by selling Class V shareholders were rightly rejected. In re Dell Techs. Inc. Class V S’holders Litig., 300 A.3d 679 (Del. Ch. 2023), as revised (Aug. 21, 2023).  

The decision is a fresh application of the high court’s Sugarland yardstick ruling on Chancery fee disputes that is sure to be closely examined by corporate law specialists nationwide, because the justices, among other things:

 *Took a comprehensive look at how the famous five Sugarland factors should be applied in large settlement fee request disputes. Sugarland Indus., Inc. v. Thomas, 420 A.2d 142, 149–50 (Del. 1980).

*Turned down a call to apply a declining fee percentage award to large settlements as judges in federal securities often do and said Chancery awards should be based on the “stage” of the litigation at settlement.

*Rejected the federal lodestar approach — that takes the time counsel expended and multiplies it by an approved hourly rate –because it would require Chancery to engage in “elaborate analyses” when the existing practice was sufficient, and

*Noted that, when applying the Sugarland factors, “Delaware courts have assigned the greatest weight to the benefit achieved in litigation.”

Background

Michael Dell and private equity firm Silver Lake Group LLC, who took Dell, Inc. private through a leveraged buyout in 2013, owned a controlling stake in the successor tech hardware company, and immediately set their sights on EMC Corporation, a publicly traded data-storage firm which held an 81.9% equity stake in VMWare, also a publicly traded data company. 

The court said Mr. Dell would have preferred to acquire those companies in an all-cash buy, but Dell was already over-leveraged, so he  settled for using a newly-issued V class of Dell stock in a part-stock deal.  The price Dell arrived at and the method it used prompted some of the class to sue the Dell directors for breach of duty in the Court of Chancery Court for two and a half years before a $1billion settlement was reached.

Their complaint alleged that the director defendants breached their fiduciary duties by approving the redemption, coercing the Class V stockholders to vote in favor of the redemption, and for making materially false and/or misleading proxy statements.

That complaint resulted in a $1billion settlement after two and a half years of discovery and litigation.

Clients vs. attorneys

But when the law firms that represented the plaintiff investors filed a motion for fees of 26.67% of the settlement that the Dell defendants had agreed to, some of the investors objected that the amount was so disproportionately large that their recovery was unfairly compromised. 

In its decision to dismiss the objectors’ action, Chancery observed that the Supreme Court’s seminal decision in Sugarland governs fee awards in representative actions so, when the court considers a fee application, the court should at the outset, review:

(1) the results achieved;

(2) the time and effort of counsel;

(3) the relative complexities of the litigation;
(4) any contingency factor; and

(5) the standing and ability of counsel

Chancery ruling ratified

The Court of Chancery found that the proposed fee met all five factors and the objectors appealed, arguing that among other things, the court misapplied the first two Sugarland factors — the results achieved and the time and effort of counsel. For the former, they claimed the recovery was a small fraction of what could have been obtained after trial. And for the latter, that the fee is seven times counsel’s customary rate, resulting in an award at the high end of fee awards in the Court of Chancery.

The high court said one of the exceptions to Delaware’s “each pays his own attorney fees” rule is the common fund exception which is “founded on the equitable principle that those who have profited from litigation should share its costs.”

As to the reasonableness of the fee amount, the justices agreed that, in addition to considering the other Sugarland factors, Chancery must weigh “the degree of the ’cause and effect’ between what counsel accomplished through the litigation and the ultimate result.”  Instead of adopting a “formulaic” approach such as the lodestar, to fee requests, we commit the fee award to the discretion of the Court of Chancery.

In summary, the Chief Justice wrote that, “On appeal, this Court will not usually disturb the Court of Chancery’s ruling if the court adequately explains its reasons and properly exercises its discretion when it applies the Sugarland factors”,

What about windfalls?

However, he cautioned that there may be an increasing number of corporate cases on the horizon that could generate so-called “megafund” outcomes with possible fee awards so large that “typical yardsticks, like stage-of the-case percentages, must yield to the greater policy concern of preventing windfalls to counsel.”

Some Delaware corporate law practitioners believe at least one case in the Chancery—involving Elon Musk’s attempt to earn a $56 billion pay package from his Tesla automaker’s investors—could present such a windfall award if objecting shareholders are the final winners.