Search results for: rule 1.9

A recent decision of the Delaware Superior Court featured an unusual ruling in Delaware: A motion to disqualify counsel was granted based on a conflict of interest under Rule of Professional Conduct 1.9, relating to prior representation of a client.

Why the Decision is Notable:

Although the facts in the 21-page decision styled Sun Life Assurance Company of Canada v. Wilmington Savings Fund Society, C.A. No. N18C-08-074  PRW-CCLD (Del. Super. Dec. 19, 2019), are somewhat unique, and not likely to be often repeated, the court’s opinion is a useful reference that should be in the toolbox of litigators because it provides copious citations to Delaware court decisions that address the standards applicable to motions to disqualify counsel based on a conflict of interest, as well as reciting the familiar and well-established “high-threshold” that must be met because motions to disqualify counsel are looked upon with disfavor.

This ruling is a reminder that it is not sufficient for purposes of disqualifying counsel that a Rule of Professional Conduct be violated. Rather, for purposes of disqualifying counsel, the conflict must be “so extreme that it calls into question the fairness of the proceeding.” See Slip op. at 4 and accompanying footnotes.  Other cases and articles on these pages dealing with motions to qualify are available via these hyperlinks.

In my latest ethics column for The Bencher, the publication of the American Inns of Court, I highlighted a decision of the U.S. Court of Appeals for the Third Circuit which upheld the refusal to disqualify a law firm based on legal ethics rules 1.9 and 1.10.

In sum, those rules codify the fundamental premise of our system of litigation that the same lawyer cannot represent two parties who are adverse to each other in the same case, even if one is a former client. Specifically, Model Rule 1.9 prohibits a lawyer who has formerly represented a client in a matter from:

“representing another person in the same or substantially related matter in which the person’s interests are materially adverse to the interests of the former client.” 

The intriguing factual twist in this case involved a lawyer representing a party in a pending case who moved to the law firm representing the adverse party while the case was still pending–but once she joined the law firm representing the opposing party, that law firm followed all the necessary procedures to create an ethical wall that prevented her from having any access to that litigation.

Of course, the legal analysis and the detailed facts require a lengthier explanation, but for those interested in this topic the complete article is linked above.

Manning v. Vellardita, C.A. No. 6812-VCG (Del. Ch. March 28, 2012), is an important decision of the Delaware Court of Chancery on legal ethics as applied to non-Delaware attorneys who appear before the Court pro hac vice.

Issues Addressed: Whether lack of complete candor to the Court in a Motion for Admission Pro Hac Vice is a basis to either: (i) disqualify counsel, and/or (ii) revoke the admission pro hac vice. The Court also addressed standards (articulated in this context for the first time), of candor and full disclosure, regarding potential conflicts, that those seeking admission pro hac vice must now follow.

Background

This is a summary proceeding pursuant to DGCL Section 225 (which is limited to the determination of who the valid members of the Board of Directors are, when one or more of those positions are contested.) In this matter, that determination will turn, in part, on whether the Board of ValCom, Inc. approved the terms of a loan which included the pledge of 50 million shares of stock as collateral pending the repayment of the debt. The New York law firm of Shiboleth, LLP represented ValCom in the loan transaction.

The lawyer whom defendants seek to have disqualifed and whose pro hac vice admission they seek also to have revoked (“the Non-Delaware Attorney”), did not include in his motion pro hac vice the fact that he is the head of litigation for the Shiboleth firm. Instead he listed himself on his application for admission pro hac vice merely as being with his own eponymous firm. This Non-Delaware Attorney was admitted pro hac vice to represent the plaintiffs in this matter, but the defendants only found out later by chance about his position at the Shiboleth firm.

Defendants’ Main Argument

In light of the Non-Delaware Attorney being a member of the Shiboleth firm, and the Shiboleth firm having represented ValCom in connection with the disputed loan transaction that is at the core of the present matter, defendants argued that Non-Delaware Attorney should be disqualified due to his violation of Delaware Lawyers’ Rule of Professional Conduct (“DLRPC”) Rule 1.9, regarding “Duties to Former Clients”.

Legal Analysis–Ethics Rules

Rule 1.9(a) prohibits a lawyer from representing a client in a matter adverse to a former client in the same or a “substantially related matter”. Comment 3 to DLRPC Rule 1.9 explains that matters are substantially related if there is “… a substantial risk that confidential factual information as would normally have been obtained in the prior representation would materially advance the client’s position in the subsequent matter.” In addition, Rule 1.10 imputes such a conflict of one member of a firm to the other members of that same firm. See generally, my most recent ethics column entitled: The Moral Aspects of a Lawyers’ Fiduciary Duty.

Prerequisites for Motion to Disqualify

As previous Delaware decisions have done, the Court in this case expressed its awareness that there is a potential for abuse with motions to disqualify. Thus, the prerequisite for succeeding on a motion to disqualify is more than a showing that there has been a violation of the DLRPC. That is, there must be “clear and convincing evidence establishing a violation of the DLRPC so extreme that it calls into question the fairness or the efficiency of the administration of justice.” See footnote 6. In addition, the Court explained that a non-client third party generally will not have standing to assert such a violation unless that party proves a personal detriment….” See footnote 7. (emphasis in original).

Instructions to Non-Delaware Lawyers Admitted Pro Hac Vice

The Court recognized that the many attorneys from other states who practice before it are among the “finest attorneys in the country” from which Delaware benefits by their skill and expertise. However, the Court emphasized that:

“to maintain the value to this Court of extending the privilege of pro hac vice admission to attorneys from other jurisdictions, it is necessary that those attorneys accorded this privilege are held to a high level of conduct including, importantly, candor with the Court.”

Potential Conflict Must Be Disclosed in Pro Hac Vice Motion

Court of Chancery Rule 170 governs admissions pro hac vice but it does not explicitly require the attorney seeking admission to disclose conflicts under DLRPC Rule 1.9, but now this decision provides a warning that such a duty of disclosure exists, based on the following reasoning:

First: When an attorney seeks pro hac vice admission, a certificate must be submitted to the Court that confirms that the attorney has reviewed, and agrees to be bound by, Delaware rules.

Second: 

A duty of candor dictates that, where a colorable claim of conflict under DLRPC  Rule 1.9 exists, at a minimum facts sufficient to put the Court and opposing counsel on notice should be disclosed in the Rule 170 application.

Third: “The duty of an applicant for admission pro hac vice, however, goes beyond simply not affirmatively attempting to mislead the Court. Here, [the Non-Delaware Attorney] ignored the obvious potential conflict and structured his application in such a way that the conflict was not revealed to the Court and the other parties. [Non-Delaware Attorney] has failed to make the kind of full and candid disclosure this Court expects of attorneys practicing within its jurisdiction.”

See generally, overview of Delaware pro hac vice standards compiled by the former head of the arm of the Delaware Supreme Court that enforces Delaware legal ethics, The Honorable Andrea L. Rocanelli.

Bottom Line

The Court determined that it need not decide whether a conflict exists because the defendants did not meet their burden to show “a violation so extreme that it calls into question the fairness or efficiency of this proceeding.” But because the Court wanted to send a message that such lack of candor would not be condoned, the Court referred this matter to the Office of Disciplinary Counsel in Delaware and the corresponding legal ethics enforcement agency in New York, the home state of the Non-Delaware Attorney, for any action those enforcement agencies deemed appropriate.

A recent decision of the Delaware Court of Chancery serves as a reminder of the high threshold that must be met before a motion to disqualify counsel will be granted–and why such motions are viewed with some skepticism by the court. This ruling also provides a useful guide for corporate and commercial litigators in its description of the various prerequisites for such a motion to be successful, as well as the general principle in Delaware that the trial courts are not the appropriate forum to enforce violations of the Rules of Professional Conduct for Lawyers.

In Dollar Tree Inc. v. Dollar Express LLC, C.A. No. 2017-0411-AGB (Del. Ch. Nov. 21, 2017), the court addressed a motion for disqualification of counsel by an investment bank and the defendant entities who alleged that a local Delaware law firm had represented the investment bank in connection with the challenged transaction.  That same Delaware firm (“the Firm”) represents the plaintiffs in this case alleging wrongdoing regarding the challenged transaction.  The detailed facts are essential in order to grasp a complete understanding of the determinative nuances involved.  But for purposes of this short post, which focuses on the legal principles that can be applied in future cases, I will merely refer to the irreducible minimum essential facts.

Key Facts

The defendants in this case had hired Duff & Phelps to provide a solvency analysis and render an opinion concerning the issuance of a dividend. Duff & Phelps hired the Firm for the limited purpose of advising Duff & Phelps regarding Delaware issues.  The total amount of time billed on the engagement was little more than 12 hours and the Firm’s engagement was limited to advising Duff & Phelps and providing the opinion letter for them regarding the solvency analysis.  Importantly, the Firm represented Duff & Phelps and not the defendant in this action, Dollar Express.

Shortly afterwards, the Firm represented the plaintiff in the instant matter alleging fraudulent transfer claims and illegal distribution claims under 6 Del. C. § 18-607.

Several months after the suit was filed, counsel for the defendant discovered that the Firm had represented Duff & Phelps regarding the solvency analysis and rendered an opinion in connection with the dividend that was being challenged in the instant lawsuit. On the same day that the Firm was asked to withdraw, the Firm implemented an internal ethical wall between those who represented Duff & Phelps and those who were involved in the instant matter — none of whom had been engaged in both representations.

The opinion includes a detailed discussion of the steps that the Firm took to prevent any confidential information from being shared. Through an investigation by its internal IT personnel, the Firm confirmed that none of the Firm’s attorneys who worked on the Duff & Phelps matter accessed information involving the instant litigation matter.

Reasons the Firm Refused to Withdraw:

The reasons the Firm refused to withdraw included the fact that the two matters were not substantially related and that no confidential information from the prior representation was shared with the attorneys involved in the instant matter. The Firm also advised Duff & Phelps that it would not be involved in any examination of Duff & Phelps’ representatives in connection with the current litigation.  Rather, any such examination would be conducted by other counsel.  The Firm also emphasized that it denied the existence of any implied attorney-client relationship between the Firm and the defendants in the instant matter.  Duff & Phelps intervened in the current action to join in a motion to disqualify the Firm.

Applicable Law

Rule 1.9(a) of the Delaware Lawyers’ Rules of Professional Conduct provides that a lawyer who has:  (i) formally represented a client in a matter; (ii) shall not thereafter represent a new client in the same or a substantially related matter; (iii) in which that new client’s interests are materially adverse to the interests of the former client; (iv) unless the former client gives informed consent in writing. There are also impermissible conflicts that cannot be waived.  Conflicts are generally imputed to a lawyer’s entire firm under Rule 1.10(a).

The basis of the unsuccessful motion to disqualify included the following allegations: (1) There was an implied attorney-client relationship between the Firm and the defendants because the Firm received confidential information from Duff & Phelps about the defendants; (2) It would be improper for the Firm to have implicitly advised the defendants on the validity of a transaction that is challenged in the current litigation; (3) The Firm’s participation in this litigation would violate the duty of loyalty owed to Duff & Phelps; and (4) The representation of the plaintiffs in this action by the Firm would require the Firm to discredit the same work it did when it advised Duff & Phelps.

Determination of the Existence of an Implied Attorney-Client Relationship:

The basic test for determining whether contacts between a potential client and a potential lawyer create an attorney-client relationship is whether it would have been reasonable for the client to believe that the attorney was acting on its behalf as counsel. See case cited at footnote 23.  For reasons explained in the opinion, the court concluded that it would not have been reasonable for the defendants to believe that the Firm was acting as their counsel in connection with the Duff & Phelps representation.

For example, the engagement agreement between the Firm and Duff & Phelps limited the representation to Duff & Phelps. In addition, the engagement between Duff & Phelps and the defendants specified that Duff & Phelps would engage their own separate counsel.

Controlling Standard Applied by the Court in Motions to Disqualify:

The controlling factor in a motion to disqualify in Delaware is whether the “challenged conduct prejudices the fairness of the proceedings.” The Delaware Supreme Court in the case styled In Re Appeal of Infotechnology, Inc., made it clear that it is not sufficient for the trial court to find a violation of the Delaware Lawyers’ Rules of Professional Conduct.  By itself that is not sufficient to warrant disqualification of counsel from an action.

Rather, disqualification is appropriate only when the challenged conduct prejudices the fairness of the proceedings. Infotechnology, 582 A.2d 215, 216-17 (Del. 1990).  In Infotechnology, the Supreme Court held that “absent conduct that prejudicially disrupts the proceeding, trial judges have no independent jurisdiction to enforce the Rules of Professional Conduct.” See cases at footnote 33 recognizing that the high threshold for succeeding in such a motion is based in part on the concern that such motions are used as procedural weapons and are often filed for tactical reasons rather than for bona fide concerns.

The Infotechnology decision also explained that the burden of proof on a non-client litigant is to prove by clear and convincing evidence:  (1) the existence of a conflict of interest, and (2) how the conflict will prejudice the fairness of the proceedings.  In this case the court did not need to determine whether a standard less than clear and convincing would apply where the moving party is a former client as opposed to a non-client that moved for disqualification.  The court found it unnecessary to decide that issue because of its conclusion that the prejudice that would be caused to the Firm if it were disqualified outweighed any concerns of Duff & Phelps.

Additional Reasoning of the Court:

The court also based its ruling on the following additional reasoning:

  • The Firm implemented an internal ethical screen on the same day that it learned of an issue being raised about its prior representation.
  • The Firm represented to the court in an affidavit that no attorney who has entered his appearance, in this action has ever accessed information about the Duff & Phelps prior representation, and the attorneys involved in that prior representation have no involvement in the present litigation.
  • The Firm represented that it will not examine Duff & Phelps in this matter.
  • Based on the foregoing, the court was comfortable that the fairness of the proceedings has not been prejudiced and that appropriate measures are in place to insure that they will not be prejudiced in the future, citing Rohm & Haas Co. v. Dow Chem. Co., 2009 WL 445609, at *3 (Del. Ch. Feb. 12, 2009) (highlighted on these pages).
  • There was no need to determine whether Rule 1.9(a) was violated, in part because based on Supreme Court authority, the trial court did not have independent power to enforce disciplinary rules regarding attorney conduct when the challenged conduct did not prejudice the fairness of the proceedings.

Takeaway: In addition to providing the applicable standards and criteria for deciding a motion to disqualify counsel, this decision provides a useful and practical reminder of the very high bar that must be satisfied before such a “disfavored” motion will be granted.

In my latest ethics column for The Bencher, the national publication of the American Inns of Court, I highlighted a recent decision by a federal district court in which a law firm was disqualified based on its representation of two adverse subsidiaries of a parent company. The court’s useful application of Rule 1.7 and Rule 1.9 should be of interest to those engaged in corporate and commercial litigation for subsidiaries of large companies, whether in Delaware or elsewhere.

 In the Matter of the Rehabilitation of Indemnity Insurance Corp., C.A. No 8601-VCL (Del. Ch. Feb. 19, 2014). Takeaway: This succinct letter ruling from the Court of Chancery provides one of many examples of why a motion to disqualify counsel based on alleged violations of the Delaware Lawyers’ Rules of Professional Conduct, such as for an alleged conflict of interest based on Rule 1.9, is often a fool’s errand–at least in state court.  Other examples abound. See, e.g., prior examples here and here.

In sum, this decision made quick work of dueling motions based on the high threshold that was not met for such motions. Namely, violation of the rules of professional conduct applicable to lawyers is usually not sufficient, ipso facto, to disqualify a lawyer from representing a party in a pending matter. The same approach does not apply in other courts in other states. The reasoning in Delaware is that the agency of the Delaware Supreme Court known as the Office of Disciplinary Counsel is the proper forum where issues of violations by lawyers of the rules of legal ethics are investigated and enforced–not in the courtroom. In addition, the Court of Chancery is often skeptical of the tactical motives for filing such motions.

Stated another way, a motion to disqualify counsel based on an alleged violation of legal ethics will not prevail in Delaware unless the following standard is satisfied:

“Absent misconduct which taints the proceedings, thereby obstructing the orderly administration of justice, there is no independent right of counsel to challenge another lawyer’s alleged breach of the Rules [of legal ethics] outside of a disciplinary proceeding.” Slip op. at 3 (citation omitted). That is, a violation of the rules of professional conduct does not suffice to disqualify an attorney. Rather, the litigant “must show that the conflict prejudiced the fairness of the proceeding, not merely a violation of the Rules had occurred.” Id. (citation omitted). Clear enough?

Bottom line: Motions to disqualify counsel from representing a client in a pending matter, based on an alleged ethical violation, usually fail in Delaware state courts.

A prior Chancery decision in this case was highlighted on these pages.

Martin v. AtlantiCare, 2011 U.S. Dist. LEXIS 122987 (Oct. 25, 2011 D.N.J.). Read opinion here .

Although this overview is not highlighting a Delaware decision, because the issue addressed is an important one and the Court’s reasoning may be applicable generally in Delaware, we thought this case summary was noteworthy.

Issue
Whether a law firm that employs a disqualified “side-switching” attorney should be disqualified by imputation. “A side-switching attorney is one who formerly represented a client in a matter and subsequently undertakes representation or affiliates herself with a firm that has undertaken representation, of an adversary in a related matter.” (Citation omitted).

A former associate of Eckert Seamans prepared this summary.

Background
The facts of this case focus on an attorney with almost 25 years of experience in litigating employment matters in New Jersey (“Attorney”). Attorney worked for the Morgan Lewis & Bockius firm from November through March of 2010, during which time she dedicated a significant number of hours to representing AtlantiCare – the defendant in a NJ Superior Court matter (that Attorney ultimately had transferred to Federal court). When Attorney left Morgan Lewis, she started working for Costello & Mains, the law firm that was representing the plaintiff in the AtlantiCare matter.

Morgan Lewis and Costello & Mains agreed that Attorney was disqualified from representing the plaintiffs pursuant to Rule of Professional Conduct 1.9; but Defendant AtlantiCare moved to disqualify Attorney’s new firm, Costello & Mains, as well.

Legal Analysis
The District Court spent a great deal of time discussing the facts presented in the parties’ papers, and explained that “[t]he decision whether to disqualify a law firm by imputation is best undertaken on a case-by-case basis, weighing the facts as they exist at the time the motion to disqualify is made.” Since the parties agreed that Attorney was disqualified under Rule 1.9, the Court turned to the issue at hand: whether the disqualification should be imputed to Attorney’s firm under Rule 1.10(c).

To make this determination the Court must assess the three elements of RPC 1.10(c). First, whether LG had primary responsibility for the case while she worked at Morgan [Lewis]. Second, whether [Attorney] was adequately screened upon joining CM. Third, whether timely notice was provided to defendants of LG’s side switching. The Court must conduct a “painstaking analysis of the facts” as to each of these elements.

At the outset, the Court found that Attorney had “primary responsibility” for the AtlantiCare case while she worked at Morgan Lewis, meaning she had “actual participation in the management and direction of the matter at the policy-making level or responsibility at the operational level as manifested by the continuous day-to-day responsibility for litigation or transaction decisions.” See RPC 1.0(h). AtlantiCare argued that Attorney was an integral member of the litigation defense team at Morgan Lewis; that she billed more than the other attorneys on the team combined; and that she was privy to confidential work product during her representation of AtlantiCare. Plaintiffs argued that Attorney’s role in AtlantiCare’s defense was “limited,” and that Attorney was not the “supervising attorney” or “partner in charge” of the matter.

After reviewing the arguments and Attorney’s billing records, the Court held that it was not necessary that Attorney be the “supervising attorney” or “partner in charge” to be the attorney with “primary responsibility” for the matter; it was necessary that Attorney “had a ‘direct,’ ‘substantial’ and ‘meaningful’ role in AtlantiCare’s defense.”

The Court ruminated on the significance of Attorney’s access to AtlantiCare’s privileged documents and communications, and determined that disqualification should not be imputed based solely on Attorney’s review of discovery materials; rather, the Court would consider all the facts surrounding Attorney’s representation of AtlantiCare. Additionally, the Court noted that since NJ requires a law firm’s screening procedures to be in writing. Costello & Mains did not have a written screening procedure, so even if the Court found that Attorney did not have “primary responsibility” for the matter, the disqualification still would have been imputed. Further, the procedures that Costello & Mains implemented were inadequate under NJ law, and the firm would have been disqualified by imputation even if Attorney did not have “primary responsibility” and the screening procedure was in writing.

Lastly, the District Court noted that Attorney’s departure from Costello & Mains did not cure the firm’s imputed disqualification.

Delaware Implications
Both Delaware’s and New Jersey’s Rules of Professional Conduct are based on the ABA’s Model Rules of Professional Conduct. Presumably, the analysis of an imputed disqualification in Delaware would be similar to the analysis in New Jersey: the Court would first consider whether the individual attorney was disqualified under Rule 1.9, and then consider whether the disqualification should be imputed to the firm under Rule 1.10. Disqualification of an attorney is serious business and is not taken lightly in Delaware courts or any other court.

Unlike New Jersey, Delaware does not require screening procedures to be in writing but strongly recommends it. See comments 9 and 10 to Del. Prof. Cond. R. 1.10. For articles on disqualification that cite to Delaware cases, see, e.g., here, here and here.

Express Scripts, Inc. v. Crawford, (Del. Ch., Jan. 25, 2007), read opinion here. This Chancery Court letter opinion denies a Motion to Disqualify that was filed based on Rule 1.9  of the Delaware Lawyers’ Rules of Professional Conduct. The court explains the policy reasons behind the rule and the need to compare: (i)  what confidential information was disclosed by the former client, with  (ii) the potential prejudice to the opposing party in the current case due to disqualification of his counsel. Weighing against the movant here was its delay in bringing the motion (in the context of expedited litigation) and the prejudice that would befall the party whose counsel would be disqualified–although the court cited to other Delaware cases that disqualified attorneys on the eve of trial.

In Hendry v. Hendry, download file, Vice Chancellor Parsons denied a motion by the defendant to disqualify plaintiff’s counsel in light of a claim that the law firm for the plaintiff had represented the defendant in the past, and thus, it was alleged, Rule 1.9 of the Delaware Lawyers’ Rules of Professional Conduct regarding the duty of loyalty to former clients was violated.
Relying on prior decisions of the court, and a case styled Sanchez-Caza v. Estate of Whetstone, 2002 WL 2087922 (Del. Super.), the court reasoned that even assuming, without deciding, that Rule 1.9 was violated, based on the facts presented, there was no impact on the fairness or integrity of the pending legal proceedings. In addition, this case had been pending for several years, and the court also found that disqualification at this stage would unfairly prejudice the plaintiff. Although it was not necessary for its decision, the court noted that a Rule 1.9 analysis requires that the former representation be “substantially related” to the current matter, and that the former attorney would have likely received confidential data from the former client that could be used against the former client in the current proceeding.
In closing, the court also ruled on an unrelated motion to quash a supboena under Chancery Court Rule 45, and found that technical defects in the form of the subpoena were not sufficient to quash a subpoena, but that in any event, motions to quash must be filed on a timely basis.

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.