Delaware Law Updates
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EMAK Worldwide, Inc. v. Kurz, et al., No. 512, 2011 (Del. Apr. 17, 2012)


April 17, 2012

In this appeal, the Delaware Supreme Court affirmed an interim fee award of $2.5 million to plaintiff’s attorneys, which the Court of Chancery granted following its decision in Kurz v. Holbrook, 989 A.2d 140 (Del. Ch. 2010), and the Delaware Supreme Court’s decision on appeal in Crown EMAK Partners, LLC v. Kurz, 992 A.2d 377 (Del. 2010).  The underlying dispute involved a battle between two competing factions for control of the board of directors of EMAK Worldwide, Inc.  In affirming the award, the Supreme Court held that plaintiff’s counsel produced corporate benefits by challenging a share exchange transaction and a shareholder consent that would have limited the shareholders’ voting rights, and by achieving fuller disclosure relating to the exchange transaction.  The Court declined to modify the amount of the award, noting in particular that the size of the fee award for a corporate benefit does not depend on the corporation’s monetary value.

In August 2010, shortly after the Court of Chancery granted plaintiff’s interim fee application, the Company filed for voluntary bankruptcy.  It reemerged in June 2011 with the obligation to pay intact.  The Company then appealed the award to the Supreme Court.   Operating under an abuse of discretion standard, the Supreme Court found that the Court of Chancery had utilized the appropriate factors in determining the award amount.  The Court noted that fee awards are frequently approved for non-monetary benefits, including the corrective disclosures and shareholder franchise protections obtained here.  The Company argued that an award should not be granted in this case, or should be limited, due to the Company’s low net value at the time of the award (pre-bankruptcy), and that such award had affected its viability.  The Court disagreed, holding that “[w]hen plaintiff’s counsel obtains a corporate benefit by protecting shareholder voting rights, the benefit’s size does not depend on the corporation’s monetary value.”  Limiting an award because a company is struggling financially would allow for improper “gamesmanship,” where shareholders might abandon claims due to a company’s threat that it would use defense costs to run the company into the ground.  In this particular case, the Court noted that the struggling Company had paid its defense counsel over $5 million but refused to pay even half that to plaintiff’s counsel.

The full opinion is available here