The Delaware Court of Chancery in a recent opinion allocates the precise amount of fees payable, as a result of a prior indemnification ruling, in light of the total amount of fees incurred by various parties and proceedings that were not all subject to indemnification obligations. The decision in Meyers v Quiz-Dia LLC, et al., C.A. No 9878-VCL (Del. Ch., Mar. 16, 2018), needs to be read by anyone who wants to know how, according to Delaware law, the exact of amount of fees will be allocated when indemnification is owed to less than all the parties, and for fewer than all of the underlying lawsuits, for which fees have been incurred and that may not be easily separated for purposes of determining what amounts are covered by an indemnification obligation. Several of the many prior Chancery decisions in this case have been highlighted on these pages and should be referred to for detailed background facts and procedural history.

After 13 years of highlighting Delaware decisions on indemnification and advancement rights of officers and directors, and publishing an annual book chapter on those cases for several years, this is the most helpful decision that I recall for its analysis of how to determine the allocation and exact amount of fees incurred and payable among multiple parties and different lawsuits, when not all the parties and not all the underlying litigations are covered by indemnification.

Noteworthy Aspects of Indemnification Law from This Decision

  • The court addresses the rare issue of a subrogation right to indemnification pursued by one of the companies involved that paid the fees for the officers and directors based on secondary liability for indemnification. [The company with the primary indemnification obligation initially refused to pay.] This opinion explains the prerequisites that need to be satisfied for one seeking reimbursement via subrogation of fees paid pursuant to a secondary obligation to indemnify. One of the requirements for subrogation in this context is that the payor not be a “volunteer” though that term in this context is not strictly defined and may be satisfied by the desire of a company to support its management.
  • Chancery Rule 88 was the procedural mechanism that the parties resorted to, in connection with the motion to quantify the exact amount of fees, because the prior opinion in June 2017 establishing the right to indemnification, highlighted on these pages, did not determine the amount of fees due–and the parties could not agree on the amount or allocation. A total of about $552,000 (out of a total of about $785,000) was sought for the underlying litigations, and about $820,000 for “fees on fees” out of a total of about $1.9 million was sought in this latest ruling. [Yes, the “fees on fees” amount exceeded the total of fees incurred, and now sought, for the underlying lawsuits.]
  • Allocation of fees payable for the two indemnitees in this matter was  determined by the court to be controlled by a prior agreement among the parties to share the fees for the underlying litigations. See footnotes 56 to 59. The court reasoned that the two persons entitled to indemnification pursuant to the prior ruling of the court, Smythe and MacDonald, had previously agreed that they would be allocated 20% of the fees in the underlying lawsuits. The company seeking subrogation on their behalf in this instant decision, therefore, was not entitled to seek reimbursement for more than the 20% that Smythe and MacDonald had previously agreed to be apportioned to them in a separate allocation agreement. The net amount awarded in this decision was about $145, 00o, therefore, instead of the more than $700,000 sought.
  • The allocation of “fees on fees” was based on a slightly different analysis. Citing to prior decisions that applied the principle of “reasonably proportionate to the level of success” to an award of “fees on fees”, and in light of the request in this matter for about $820,000 out of the $1.9 million in “fees on fees” incurred for both covered and uncovered parties, or 39% of the total, the court explained that based on the total number of initial claims and the amount of work on the successful claims, 50% success was the appropriate starting point for allocation of fees on fees in this case. The court then used the 20% allocation explained above for the underlying litigation and: “Multiplying the two percentages results in a fees-on-fees percentage of 10%.” Applying that percentage to the “base amount”, results in a fee award of $125,000.
  • The court compared that award with what the court described as “its experience” that briefing on summary judgment in this case “likely would have cost between $100,000 and $200,000”, and because the success achieved in this case could have been achieved via summary judgment motion, the court determined that the amount awarded was reasonable.
  • Pre-judgment interest was also awarded and the discussion about the date when that interest starts is worth reading verbatim. See footnotes 67 to 70 and accompanying text.

Activision Blizzard Inc. v. Hayes et al., No. 497-2013, order issued (Del. Oct. 10, 2013). In a rare ruling from the bench, after oral argument, the Delaware Supreme Court reversed an injunction granted by the Court of Chancery in  Hayes v. Activision Blizzard Inc., No. 8885, 2013 WL 5293536 (Del. Ch. Sept. 18, 2013).  The formal written Supreme Court opinion was issued on Nov. 15, 2013.

The issue addressed was whether the structure of the deal qualified as the type of business combination that required a vote by public shareholders. In a unanimous ruling, Delaware’s high court ruled that no vote was required. A formal opinion followed.

Overview

In 2007, Vivendi had purchased a majority interest in Activision and the right to designate approximately half of Activision’s board in connection with a stock purchase agreement. Fast forward to 2013. Both Vivendi and Activision want to unwind their business combination and go their separate ways.

Activision offered to pay $5.8 billion for the majority of Vivendi’s ownership in Activision, which Vivendi would place in a non-operating shell company for Activision to acquire. Those shares re-acquired by Activision would be treasury shares, and would thereby reduce the number of Activision’s outstanding shares. Additionally, Vivendi would sell a portion of its Activision interest to a limited partnership owned by the two Activision-designated board members (who also served as Activision’s President/CEO and Chairman of the Board).

These proposed transactions would leave Vivendi with 11.9% of Activision, the limited partnership with 24.7%, and the public stockholders with 63.4%.

Despite the outcome, which would ultimately benefit the public stockholders, the public stockholders sought to temporarily restrain the transaction and put the transaction to a stockholder vote. According to the stockholders, Section 9.1(b) of Activision’s charter, which provides for a shareholder vote on a “merger, business combination or similar transaction,” mandated that Activision put the transaction to a vote. The Court of Chancery converted the motion for TRO into a motion for preliminary injunction, and enjoined the proposed transaction between Activision and Vivendi, because generally, the transaction looked like a business combination and smelled like a business combination. Therefore, the Court of Chancery ruled, the transaction is subject to a stockholder vote under the charter.

Activision appealed the injunctive order, arguing that (i) the Court of Chancery improperly converted the motion for TRO into a motion for a preliminary injunction; (ii) laches should bar the stockholders from trying to enjoin a transaction at the last minute given their prior knowledge of the deal; and (iii) no stockholder vote is required pursuant to Section 9.1(b) because the transaction is not a merger, business combination, or similar transaction.

The Delaware Supreme Court tackled the merits argument and agreed with Activision that “[t]his transaction does not involve any combination or intermingling of Vivendi’s and Activision’s businesses. Indeed, it is the opposite of a business combination. Two companies will be separating their business connection….” Further, the Court noted that calling Activision’s acquisition of a holding company formed exclusively for the purpose of consummating this transaction a “merger or business combination” would be an inappropriate glorification of form over substance. Importantly, the Court acknowledged that Activision’s charter would have provided for additional protection at the stockholder level if the transaction increased (as opposed to decreased) Vivendi’s interest in Activision.

In a unanimous ruling issued just hours after oral argument on October 10, 2013, Delaware’s high court ruled that no vote was required for the transaction to disentwine the businesses of Activision and Vivendi. A formal opinion followed on November 15, 2013. This is an example of how quickly the Delaware courts can decide cases. This final appellate ruling came about a mere month after the complaint was filed in the trial court.

Frank Reynolds of ThomsonReuters, who edits Westlaw’s Delaware Corporate Journal, provides a helpful overview of the case.

We have written frequently on these pages about decisions that have addressed potential conflicts of interest in the litigation context, both real and imagined, in the state and federal courts. See, e.g., cases and articles on these pages here. The U.S. District Court for the District of Delaware recently disqualified counsel based on a finding of a conflict of interest, in connection with a client representation that ended over 15 years earlier. The motion was filed by plaintiff’s counsel a year after the case had commenced. See Eon Corp. IP Holdings LLC v. Flo TV Inc. Compare: recent prior U.S. District Court decision in Delaware that found a conflict of interest based on Rule 1.7 but still denied a motion to disqualify counsel.

The court’s analysis, and the recitation of applicable cases and rules, is “must reading” for anyone who needs to know the latest Delaware law on conflicts of interest in litigation.

Importantly, the U.S. District Court for the District of Delaware has adopted the Model Rules of Professional Conduct, pursuant to Local Rule 83.6(d)(2), which differ in some respects from the version of the ABA model rules adopted by the Delaware Supreme Court and applicable to Delaware lawyers in state courts in Delaware.

Air Products and Chemicals, Inc. v. Airgas, Inc., No. 5249 (Del. Ch., March 5, 2010), transcript of ruling from the bench available here. For anyone who wants to know the latest iteration of law from the Delaware Court of Chancery on motions seeking to disqualify litigation counsel based on alleged conflicts of interest, this short ruling is required reading. In Delaware, such rulings from the bench can still be cited in briefs, by reference to the transcript.

We previously wrote about this high-stakes litigation concerning an unwelcomed takeover attempt and the ability of the target to "just say no". A sideshow of sorts has developed regarding the effort of the target to disqualify the distinguished counsel of the suitor, who is using the Cravath firm.

 Yesterday, Chancellor Chandler ruled from the bench that he would not disqualify the Cravath firm from serving as counsel for Air Products despite allegations by Airgas that Cravath had represented Airgas in related matters just before, allegedly, Cravath dropped Airgas in order to represent Air Products. Students of Delaware law in this area know that efforts to disqualify counsel in Delaware have not had a high success rate in the recent past. See, e.g., here (involving battle between Rohm and Haas v. Dow), here , here, here (despite possible violation of rule, no impact on the integrity of the legal proceeding), and here, for recent Delaware decisions in which the court has denied motions to disqualify counsel. For comparison purposes, see here  for a decision by a federal court in California based on different facts.

The denials of these motions should not be viewed as indicating that the Delaware courts do not take the rules of professional responsibility seriously. Rather, it should be seen as a manifestation of the concern that the courts have that litigators may try to use the Rules of Professional Conduct as a litigation tool. The argument is that transgressions of the ethics rules applicable to lawyers generally should be handled by the arm of the Supreme Court, which in Delaware is called Disciplinary Counsel, which is primarily responsible for the enforcement of those rules when alleged violations of those rules do not meet the high threshold of interfering with the administration of justice in a particular lawsuit.

Despite four separate ethics experts opining in this case, on behalf of each of the parties, on the requirements of Rules 1.7 and 1.9 of the Rules of Professional Conduct, the Court did not need to decide that issue.

Though the ruling from the bench is in the form of a transcript, which in Delaware can still be cited in briefs, it reads as if it is a carefully reasoned opinion (which it is). One should read the whole thing to appreciate it fully at the above link, but a few money quotes follow:

Before this Court may enter the Draconian order of disqualification, a moving party seeking that drastic relief must come forward with clear and convincing evidence establishing a violation of the Delaware Rules of Professional Conduct so extreme that it calls into question the fairness or the efficiency of the administration of justice. That is the holding of our Supreme Court in a case styled In Re: Dunlap.

Like Dow Chemical and the Rohm & Haas case, Airgas here has not demonstrated even simply persuasively, let alone clearly and convincingly, that it would be disadvantaged by the presence of its former counsel as advocate for its opponent, Air Products.

The Court found that Cravath did not have access to confidential information that it could use against Airgas in this case. Moreover, the Court observed that ethical walls had been established within the Cravath firm to separate those lawyers that had worked on the prior corporate matters from the lawyers working on the litigation. The Chancellor reasoned further that:

Given the absence of any credible threat of prejudice to Airgas from Cravath’s continued participation in this lawsuit, I think the threat of harm to Air Products from disqualification far outweighs the threat of harm to Airgas from a failure to disqualify.

Postscript. The New York Times’ DealBook blog wrote about yesterday’s decision here.

For my regular ethics column in the current issue of The Bencher, the national publication of the American Inns of Court, I summarized a Florida appellate court decision that discussed the issues of legal ethics involved in the same lawyer representing a majority shareholder and the corporation. In allowing the same lawyer to represent the shareholder but not the corporation, the court discussed the principles involved under Rules 1.7, 1.9 and 1.13. Also included are cites to a few other cases that discuss related issues. For a copy of the article download file.