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Alaska Electrical Pension Fund v. Brown, No. 240, 2009 (Del. Jan. 14, 2010)

January 14, 2010

In this en banc decision written by Justice Ridgely, the Delaware Supreme Court affirmed the Court of Chancery’s denial of an application for attorneys’ fees and costs by plaintiff intervenor-appellant Alaska Electrical Pension Fund (“Alaska”), as well as the Court of Chancery’s determinations with respect to the “at-issue” exception to the attorney-client privilege.

The action arose as a result of a tender offer by General William Lyon (“Lyon”), the CEO and 48% stockholder of Lyon Homes, Inc. (“Lyon Homes”), for the outstanding shares of Lyon Homes that he did not own at a price of $93 per share. Alaska filed a class action suit in the Superior Court of the State of California the same day the tender offer was announced, and two separate class action suits were filed by individual stockholders in the Delaware Court of Chancery two days later. All three suits alleged similar breaches of fiduciary duty and disclosure claims relating to the tender offer. The defendants reached an initial settlement with the Delaware plaintiffs to (i)  increase the tender offer to $100 per share, (ii) provide additional disclosures, and (iii) pay $1.2 million in attorneys’ fees and costs to the Delaware plaintiffs. Alaska did not join the settlement. Thereafter, Lyon increased his tender offer to a final price of $109 per share after Alaska told Chesapeake Partners Limited Partnership (“Chesapeake”), a major stockholder of Lyon Homes, that a fair price would be between $108 and $126 per share.

After the completion of the tender offer, the parties to the Delaware action filed a stipulation of settlement and the Delaware plaintiffs requested an award of attorneys’ fees and costs based on the disclosures obtained and the price increase from $93 to $100. Alaska moved to intervene to present its own fee application for 66% of attorneys’ fees, claiming that it was 50% responsible for the price increase to $100 per share, 50% responsible for the additional disclosures, and 100% responsible for the price increase from $100 to $109. Although the Court of Chancery initially held that Alaska was not entitled to a share of attorneys’ fees, Alaska appealed that decision arguing that it was entitled to a rebuttable presumption that its litigation contributed to the beneficial outcome achieved for the class. On appeal, the Delaware Supreme Court remanded the case to the Court of Chancery, finding that Alaska was entitled to a rebuttable presumption of causation related to the subsequent increase from $100 per share to $109 per share. On remand, the Court of Chancery again found that Alaska was not entitled to share in the award of attorneys’ fees, holding that the presumption of causation had been rebutted. The current appeal to the Delaware Supreme Court followed.

The Delaware Supreme Court reviewed the denial of Alaska’s application for attorneys’ fees under an abuse of discretion standard, but reviewed de novo the legal principles applied by the Court of Chancery in reaching that decision. The Court noted that Delaware law had long-recognized the “common corporate benefit” doctrine as an exception to the American Rule, under which litigants are responsible for their own attorneys’ fees. Under the common corporate benefit doctrine, an applicant is entitled to payment of its attorneys’ fees upon a showing that: “(i) the suit was meritorious when filed; (ii) the action producing benefit to the corporation was taken by the defendants before a judicial resolution was achieved; and (iii) the resulting corporate benefit was causally related to the lawsuit.” Where a defendant takes actions subsequent to the complaint that renders the asserted claims moot, the defendant has the burden of showing that “no causal connection existed between the initiation of the suit and any later benefit to the shareholders.” The Court held that the Court of Chancery had applied the proper legal principles in finding that Alaska was not entitled to a share of attorneys’ fees because Lyon testified that Alaska’s lawsuit had no effect on his decision to increase the price of the tender offer to $109 per share. Because the Court of Chancery’s factual findings were supported by the record and entitled to deference, the Court of Chancery had not abused its discretion.

In addition, the Delaware Supreme Court held that the Court of Chancery had not abused its discretion in denying discovery of certain privileged emails under the “at issue” exception to the attorney-client privilege. Under the at-issue exception, the attorney-client privilege is deemed waived where a party either: (i) injects a privileged communication into the litigation, or (ii) injects an issue into the litigation, the truthful resolution of which requires an examination of confidential communications. The Court of Chancery held that defendants had not implicated the first prong of the test because they relied exclusively on “objective, non-privileged facts” in rebutting Alaska’s presumption of causation. The second prong of the test was also not met because the privileged emails may have been helpful, but were not required to achieve a truthful resolution of the factors motivating Lyon to increase his offer because Alaska had the opportunity to depose Lyon. Accordingly, the judgment of the Chancery Court was affirmed.

The full opinion is available here