|November 28, 2013|
Previously published on November 12, 2013
In this letter opinion, the Court of Chancery addressed plaintiffs’ application for attorneys’ fees under the corporate benefit doctrine in the context of a mooted litigation. Plaintiffs sought a $2.8 million fee award. The primary issue considered by the Court was whether there was a causal connection between plaintiffs’ litigation and the director defendants’ decision to enter into a different transaction, which ultimately mooted plaintiffs’ claims. Because the Court found there was a causal connection, a secondary issue was the amount of the corporate benefit that could be attributed to the litigation. The Court found that plaintiffs’ litigation contributed 5% of the benefit and awarded plaintiffs’ attorneys 7.5% of that benefit, or a $1 million fee award.
The matter involved the merger of Quest Software, Inc. (“Quest”) into Dell, Inc. (“Dell”) and the process leading up to that transaction. Before the Dell merger, the Quest board of directors (the “Board”) entered into a merger agreement with Insight Holdings Group, LLC (the “Insight”), an entity in which a Quest director, executive and substantial minority stockholder, Vincent Smith, held an interest. The merger agreement between Quest and Insight (the “Insight Merger Agreement”) provided for a 60-day go-shop period, a negligible termination fee, and a fiduciary out provision which permitted the special committee of the Board (the “Special Committee”) to solicit and consider potential superior proposals.
The go-shop period commenced before any stockholder filed a complaint challenging the Insight transaction. The Special Committee reviewed several proposals during the go-shop period. To appease potential purchasers’ apprehension due to Mr. Smith’s ownership interest and interest in acquiring Quest, the Special Committee discussed offering a 19.9% option to certain bidders. Under this mechanism, the company would issue “an option to acquire newly issued Quest shares constituting up to 19.9% of [Quest’s] issued and outstanding shares of common stock ... to an acquirer that made a superior proposal-if Mr. Smith declined to support that proposal.” The Special Committee also permitted bidders to form partnership arrangements. Dell submitted a bid to acquire Quest before the go-shop period concluded.
Also during the go-shop period, stockholder plaintiffs filed five separate actions (subsequently consolidated) seeking to enjoin the Insight merger and asserting a claim for damages. The plaintiffs made several allegations attacking the Insight merger, including allegations that the merger process with Insight was flawed, that Mr. Smith, the Special Committee and the Board breached their fiduciary duties, that the defendants were improperly motivated to sell Quest to Insight because of Mr. Smith’s relationships, and that the preliminary proxy for the Insight merger contained incomplete disclosures.
Over the course of the litigation, the Court held five teleconferences addressing, among other issues, plaintiffs’ motion to expedite their litigation. As the litigation was filed during the pendency of the 60-day go-shop period, the Court denied plaintiffs’ motion to expedite so as not to interfere unduly with the go-shop process, but allowed limited pre-go-shop discovery to proceed. Ultimately, the Board withdrew from the Insight Merger Agreement and entered into a merger agreement with Dell (the “Dell Merger Agreement”), which provided $283 million in additional consideration to Quest’s stockholders. In light of the Dell Merger Agreement, plaintiffs’ litigation was dismissed without prejudice as moot. Plaintiffs then filed a petition for attorneys’ fees and expenses, seeking $2.8 million.
In considering plaintiffs’ fee request, the Court first addressed the standard for applying the corporate benefit doctrine to a fee award in a mooted case: the plaintiff must demonstrate that “(1) the suit was meritorious when filed; (2) the action producing benefit to the corporation was taken by the defendants before a judicial resolution was achieved; and (3) the resulting corporate benefit was causally related to the lawsuit.”
The Court found that plaintiffs’ litigation was meritorious when filed because the operative complaint would have survived a motion to dismiss. Drawing all reasonable inferences in plaintiffs’ favor, the Court found the complaint alleged a merger process with potential pitfalls as a result of management insiders. The Court rejected defendants’ argument that plaintiffs’ complaint was premature because it was filed during the pendency of the go-shop period. The Court emphasized the applicable standard is whether the complaint was meritorious when filed, regardless of the eventual outcome of the go-shop process.
As to the timing of the corporate benefit, the Court easily found that plaintiffs’ claims were mooted before judicial resolution by the Boards’ withdrawal from the Insight Merger Agreement to enter into the Dell Merger Agreement.
In determining whether a causal relationship existed between the mooted lawsuit and the Dell transaction, the Court recognized that under Delaware law a presumed causal relationship exists. A defendant must rebut the presumption of causation by demonstrating the lawsuit “did not in any way cause [its] action.” The presumption exists because the defendant is the party who “is in a position to know the reasons, events and decisions leading up to defendant’s action.”
Defendants denied that plaintiffs’ suit influenced the go-shop process, arguing that provisions within the Insight Merger Agreement, such as the go-shop, low termination fee, and fiduciary out, demonstrated that the Dell Merger Agreement would have been entered into regardless of plaintiffs’ suit. But relying on an email from counsel to the Special Committee discussing the litigation risk associated with certain Dell merger agreement provisions, the Court found defendants failed to rebut the presumption of causation.
The Court thus determined the corporate benefit doctrine warranted a fee award for plaintiffs. Where the Court determines that fees are warranted under the corporate benefit doctrine, it uses its discretion, guided by the factors identified by the Delaware Supreme Court in Sugarland Industries, Inc. v. Thomas, to set an appropriate amount for the fee award.
The Court found that the Dell merger resulted in a corporate benefit of an additional $283 million in consideration for Quest’s stockholders. Plaintiffs claimed the entire corporate benefit should be attributed to their litigation. The Court disagreed, noting that certain mechanisms, such as the 19.9% option, were considered by the Special Committee before the first complaint was filed. The Court also found evidence that the Special Committee was aware of, and actively pursued, its fiduciary duties to get the best price possible for Quest’s stockholders. As a result, the Court found that plaintiffs’ lawsuit contributed 5% of the corporate benefit, or $14.15 million. In light of that benefit, the Court awarded to plaintiffs fees and expenses of $1 million, or roughly 7.5% of the benefit attributable to their litigation.
In closing, the Court applied the remaining Sugarland factors as a cross-check on the amount of the fee award, specifically considering the time invested by plaintiffs’ counsel. The Court noted the amount of the fee award was generous, but not unreasonably so, given the substantial overlap among the work performed by the numerous plaintiff firms involved in the case.