Baker v Sadiq C.A. No. 9464-VCL (Del. Ch. Aug. 16, 2016) (Laster, V.C.)
In this letter opinion, the Court of Chancery awarded $650,000 in attorney’s fees to counsel for the minority stockholders of NavSeeker, Inc. (“NavSeeker”), resolving a dispute regarding how a fee award should be determined in connection with a derivative action that was settled with a recovery directed to the minority stockholders. In so ruling, the Court declined to base the fee award on the implied derivative recovery value of $25 million and also refused to hold the defendants jointly and severally liable for the fee amount awarded.
In July 2013, an acquirer purchased 19% of HIMEX Limited (“HIMEX”), the controlling stockholder of NavSeeker. In February 2014, the acquirer increased its stake in HIMEX to 85%, and the minority stockholders of NavSeeker (“Plaintiffs”) brought suit alleging that, through its acquisition, the controlling stockholder misappropriated technology assets from NavSeeker worth approximately $25 million. The parties ultimately agreed to settle the action with a $2,750,000 buyout of the minority stockholders along with the discharge of $500,000 in NavSeeker debt.
Plaintiffs’ counsel agreed to the settlement, with all parties stipulating that Plaintiffs’ counsel conferred a benefit on NavSeeker of at least $2,750,000, but reserved the right to litigate the aggregate amount of the benefit conferred, the amount of the fee award and who would pay it. Plaintiffs’ counsel then filed a fee petition, seeking an award of $6 million plus expenses, based on the implied derivative recovery value of $25 million, which is the amount that the underlying derivative claim sought in damages. The minority stockholders who were not affiliated with the defendants owned 10.75% of NavSeeker’s equity. Had the minority stockholders prevailed at trial, their 10.75% of stock would have accounted for $2,687,500 of a corporate-level recovery. Further, Plaintiffs’ counsel argued that, because NavSeeker lacked the cash to pay the award, the defendants should be held jointly and severally liable for the amount awarded.
The Court first held that it could not impose liability for a fee award on any party other than NavSeeker. In so holding, the Court noted that, although it could envision some type of post-settlement proceeding to determine whether grounds existed to impose fee liability on NavSeeker’s controllers, it would be unprecedented and would embroil the parties in the type of litigation the settlement was intended to avoid.
The Court then held that it was not able to value the benefit conferred at any amount greater than $3.25 million (consisting of $2.75 million to fund the buyout plus $500,000 in debt forgiveness). The Court noted that “[i]t is true that the equivalent derivative recovery would be an order of magnitude greater, but the parties used the transitive property [of ‘entity litigation’] to achieve a stockholder-level settlement, not a derivative settlement.” The Court then noted, citing an earlier decision in In re S. Peru Copper Corp., that “in the converse situation, where a plaintiff [ ] achieved a full-blown derivative recovery, th[e] court [did] not reduce the size of the benefit conferred to account for the controller’s ownership stake and the much smaller benefit that inure[d] indirectly to the minority [stockholders].”
The Court applied the factors articulated by the Delaware Supreme Court in Sugarland Industries, Inc. v. Thomas to determine that Plaintiffs’ counsel was entitled to an award of 20% of the $3.25 million benefit conferred on Plaintiffs. In making its determination, the Court found that the structure of the settlement precluded Plaintiffs’ counsel from claiming to have conferred a benefit greater than $3.25 million. The Court also found that the case involved meaningful litigation efforts; the case was relatively complex; Plaintiffs’ counsel pursued the litigation on contingency; and the counsel involved were experienced in Delaware corporate litigation and well-known to the Court. After applying the Sugarland factors, the Court rejected the request for an award of $6 million in fees and instead awarded a fee of $650,000.