Smith, Katzenstein & Jenkins LLP v. Fidelity Mgmt. & Research Co., C.A. No. 8066-VCL (Del. Ch. April 16, 2014) (Laster, V.C.)
The Court of Chancery awarded plaintiffs attorneys’ fees and expenses under Delaware’s common fund and common benefit doctrines, concluding that defendants—who settled their potential claims against Revlon, Inc. (“Revlon”)—benefited from plaintiffs’ prosecution of its underlying lawsuit against Revlon.
In 2009, Revlon’s controlling stockholder proposed that Revlon effectuate a merger pursuant to which Revlon’s publicly traded low-vote common stock would be converted into unlisted preferred stock. Although no definitive agreements had been entered into, four purported class actions challenging the merger proposal were filed on behalf of Revlon’s stockholders by certain law firms (“Old Counsel”). Old Counsel agreed to consolidate their cases under a leadership structure where everyone had a role. Shortly after the leadership structure was established, all litigation activity ceased and Old Counsel informed the Court that the parties had entered into a settlement agreement.
Revlon’s controlling stockholder subsequently withdrew its merger proposal and launched a tender offer (the “Exchange Offer”) that included a non-waivable majority-of-the-minority tender condition. The Exchange Offer closed and Revlon showed positive third quarter earnings. This positive earnings report, among other things, prompted Smith Katzenstein & Furlow LLP (and with their co-counsel, “New Counsel”) to file two new putative class actions challenging the Exchange Offer, which claimed the Exchange Offer was substantively unfair (the “New Counsel Action”). Old Counsel moved to consolidate the two new actions with the prior consolidated action and requested that the Court confirm the original leadership structure. Revlon also sought to enforce its settlement agreement with Old Counsel, which would have extinguished all claims relating to the Exchange Offer because it contained a broad, global release of claims. At a hearing on the leadership structure in the New Counsel Action, the Court found that Old Counsel failed to provide adequate representation for the class and replaced them with New Counsel. Shortly after this hearing, Revlon relinquished efforts to enforce the global release entered into with Old Counsel.
With the New Counsel Action pending, Revlon sought to settle potential claims with other significant Revlon shareholders: investment funds and entities affiliated with the Fidelity financial services group (“Fidelity”). Fidelity, the defendant in this action, held or controlled Revlon shares constituting roughly 75% of the class of shareholder–plaintiffs. Revlon initially offered Fidelity $2.00 per share to settle its potential claims. Fidelity ultimately settled its potential claims for $3.25 per share plus a contingent payment based on any additional amount procured for the rest of the Revlon stockholders as a result of the pending New Counsel Action. The stockholder–plaintiffs in the New Counsel Action subsequently settled their claims in exchange for an increase in the Exchange Offer price to $5.50 per share. As a result of this settlement, Fidelity received an additional $0.575 per share. In the New Counsel Action, the Court awarded New Counsel $2 million in fees and expenses for the benefits they conferred on the Revlon stockholders other than Fidelity. New Counsel then brought this action seeking to recover an award of attorneys’ fees and expenses from Fidelity for the benefits that New Counsel’s efforts conferred.
In order to receive a fee award, New Counsel had the burden of showing that (1) the claims in the New Counsel Action were meritorious when the lawsuit was filed, (2) the New Counsel Action created a common fund for, or conferred an identifiable benefit on, Fidelity, and (3) a causal connection existed between the litigation and the benefit. The first element was not disputed.
As for the second element, the Court held that New Counsel conferred a common benefit on Fidelity by filing the New Counsel Action, eliminating the preclusive effect of Old Counsel’s settlement agreement (which included a broadly worded global release), and intervening and taking over the litigation. The Court noted that Fidelity had no intention of challenging Old Counsel’s original settlement, under which the Revlon stockholders would have received no monetary relief and would have released all claims against Revlon’s board and its controlling stockholder, including any challenge to the Exchange Offer.
Concerning the third element for a fee award, the Court indicated that New Counsel was the sole cause of the common fund of $5.50 per share, but noted that the critical question was the degree to which New Counsel’s efforts contributed to Fidelity’s benefit. Before analyzing this issue, the Court dispensed with Fidelity’s “own counsel” defense: that any party who retains its own counsel cannot be liable to another party’s counsel or to class counsel for a fee. The Court rejected Fidelity’s proposed bright line rule as contrary to longstanding Delaware precedent. According to the Court, this case raises issues of shared causation (or “shared-credit”)—the concept that more than one legal counsel can contribute to the resulting benefit to a group of plaintiffs or an individual plaintiff—a principal well established under Delaware law.
In making the determination regarding New Counsel’s causation of a benefit to Fidelity, the Court broke Fidelity’s settlement with Revlon into three components: (i) Revlon’s initial offer to Fidelity to settle its potential claims for $2.00 per share; (ii) the increase from $2.00 per share to $3.25 per share in the settlement offer; and (iii) the contingent payment that the Fidelity ultimately received in its settlement. As for the first component, the Court found that New Counsel was solely responsible for Fidelity ever being offered that amount to settle its claims. The Court reasoned that New Counsel prevented Old Counsel’s settlement from being approved (which would have resulted in no monetary compensation to the putative class, including Fidelity) and pushed the New Counsel Action forward. With respect to the $1.25 increase in the settlement offer price, the Court, relying upon Delaware’s “shared-credit” precedents, found that New Counsel was entitled to 20% of the value of the increase. The Court recognized that although New Counsel was not responsible for negotiating the settlement price increase, and that Fidelity had potentially viable claims against Revlon, New Counsel’s continuing prosecution of the New Counsel Action provided Fidelity bargaining power to exact a greater benefit from Revlon in the settlement. Concerning the contingent payment that Fidelity Defendants received, the Court found that this benefit was solely attributable to New Counsel’s efforts because the contingent payment, on its face, was directly tied to the result of the New Counsel Action, including the resulting settlement. The Court awarded New Counsel $3,986,777 plus pre-judgment interest and costs for the benefits that their efforts conferred on Fidelity.