In re Sauer-Danfoss Inc. S’holders Litig., C.A. No. 5162-VCL (Del. Ch. Apr. 29, 2011) (Laster, V.C.)
In this opinion, the Court of Chancery determined the amount of a fee award that plaintiffs’ law firms should receive following supplemental disclosures made by Sauer-Danfoss Inc. (the “Company”) and Danfoss A/S (“Danfoss”), the Company’s controlling stockholder, in Danfoss’ unsuccessful bid for complete ownership of the Company. The plaintiffs’ law firms sought an award of $750,000 due to twelve supplemental disclosures they claimed were the product of their efforts. However, the Court found that one of the disclosures occurred before plaintiffs asserted a disclosure claim, and of the remaining eleven, only one disclosure was material and provided a real corporate benefit. Consequently, the Court awarded the law firms $75,000.
Danfoss, which controlled 75.7% of the Company’s outstanding common stock, announced its intention in December 2009 to launch a tender offer for all the outstanding shares of common stock that it did not already own. The contemplated offer price of $10.10 per share marked a 19.7% premium over the last full trading day price of $8.44. The day following the announcement, several “entrepreneurial law firms” filed complaints claiming inadequate price and breach of fiduciary duties by the Company’s directors and by Danfoss as controlling stockholder in connection with the yet-to-be made tender offer, but did not allege any disclosure violations. In response to Danfoss’ announcement, the Board of Directors of the Company formed a special committee of independent directors to consider any tender offer that Danfoss might make and determine how to respond. The special committee subsequently negotiated an increased offer price of $13.25 per share, conditioned on Danfoss receiving tenders from (i) a majority of the minority shares and (ii) a sufficient number of shares to give Danfoss at least 90% ownership of the Company. The majority-of-the-minority condition was non-waivable.
Despite plaintiffs’ omission of disclosure violations in their complaints, the parties engaged in settlement discussions regarding apparent disclosure violations that were identified for the first time in letters from Iowa plaintiffs’ counsel. The Company filed a supplemental disclosure with respect to one request for disclosure, but settlement discussions ultimately broke down on the remaining eleven disclosures. Delaware plaintiffs then amended their complaint to add a list of disclosure violations, including the eleven identified in the settlement discussions, but dropped their inadequate price claim. Following an announcement by the Company’s largest minority shareholder, Mason Capital, that it would not tender its shares, the defendants responded by disclosing the eleven items sought by plaintiffs, and Danfoss again raised its price to $14.00 per share. Additional projections by management revealed the Company’s value to be much higher and the special committee withdrew its recommendation in favor of the offer. Meanwhile, with their disclosure claims mooted, the Delaware plaintiffs again amended their complaint to resurrect the price-inadequacy claim. The tender offer closed with less than a majority of the minority tendered and Danfoss did not acquire any shares. The Court dismissed the Delaware action as moot but retained jurisdiction to consider potential fee applications.
The Court outlined the three requirements for a plaintiff to obtain a fee in a mooted case: “(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 stated that the “meritorious when filed” requirement did not preclude it from considering amended complaints that first raised the claims conferring the benefit, but, even with this leeway to plaintiffs, the Company’s initial supplemental disclosure occurred prior to the filing of any disclosure claim and thus there could be no fee award for that disclosure. Of the remaining eleven disclosures for which plaintiffs took credit, the Court considered only one to be material—a disclosure correcting the Company’s errant description of its 52-week high and related measuring period for the trading price of its common stock. Plaintiffs had attempted to circumvent this disclosure-by-disclosure approach by arguing that the information must have been material since the Company ultimately disclosed it, and because Mason Capital relied, in part, on the supplemental disclosures in deciding not to tender, but the Court rejected those arguments. The Court held that subsequent mooting as an indication of materiality would render the “meritorious when filed” inquiry redundant, and the rejection of the offer by Mason Capital, a profit-maximizing hedge fund, could not serve as an unbiased view on the materiality of the supplemental disclosures.
Finally, in valuing the one disclosure that was attributable to plaintiffs’ actions, the Court looked at similar cases involving “minimally beneficial disclosures” and began with a base range of $75,000 to $80,000. After applying various Sugarland factors, particularly the time and effort expended by counsel, the complexity of the litigation, the contingency risk, and the standing and ability of counsel, the Court found no reason to deviate from the precedent ranges. In particular, the Court noted that the law firms did not actually litigate the case, but rather, “filed fast, sat idle, then shifted into settlement mode,” bargaining only for insubstantial disclosures. This “absence of effort” in combination with the other factors did not merit a large fee and the Court awarded plaintiffs’ law firms $75,000.