In re Emerson Radio S’holders Derivative Litig., C.A. No. 3392-VCL (Del. Ch. March 28, 2011) (Laster, V.C.)
In this memorandum opinion, the Court of Chancery reviewed the relevant factors Delaware courts should consider in determining the proper amount of a fee award, and then concluded that plaintiffs’ counsel in this matter was entitled to an award of $875,000 for the monetary and therapeutic benefits obtained through a previously negotiated settlement between the parties. The litigation in this matter centered around certain related-party transactions that nominal defendant Emerson Radio Corporation (“Emerson”) allegedly engaged in at the behest of its controlling shareholder, The Grande Holdings Limited (“Grande”). Emerson’s Audit Committee began receiving reports of Emerson’s related-party transactions with Grande and its affiliates in August 2007 and promptly hired the law firm of Pinnisi & Anderson, LLP (“Pinnisi”) to investigate. In its initial report in October 2007, Pinnisi concluded that irregular transactions had occurred. Pinnisi subsequently concluded in its final written report in April 2008 that Emerson senior management had ignored Emerson’s internal controls and caused Emerson to engage in the related-party transactions without proper authorization or documentation. Pinnisi further concluded that these transactions exposed Emerson to great risk, caused Emerson to suffer significant losses, and conferred disproportionate benefits on Grande and its affiliates.
The first stockholder derivative complaint was filed in December 2007, with a second similar complaint being filed in May 2008. After consolidating the two matters, the plaintiffs engaged in extensive discovery, obtaining document productions from Emerson’s public accountant and additional third parties. The plaintiffs also deposed 11 fact witnesses at locations in Hong Kong and the United States, and prevailed on two motions to compel as well as a request for clarification. After concluding discovery, the parties agreed to a settlement in October 2010, pursuant to which Grande would pay three million dollars to Emerson, and Emerson would adopt enhanced corporate governance procedures for related party transactions. The Court of Chancery approved the settlement in January 2011, but reserved decision on the proper amount of plaintiffs’ fee award until this opinion.
At the outset of his analysis, Vice Chancellor Laster observed that, in determining the proper amount of an award for attorneys’ fees and expenses, Delaware courts should apply the factors set forth in Sugarland Industries, Inc. v. Thomas, 420 A.2d 142 (Del. 1980), and consider: (i) the amount of time and effort applied to the case by plaintiffs’ counsel; (ii) the relative complexities of the litigation; (iii) the standing and ability of petitioning counsel; (iv) the contingent nature of the litigation; (v) the stage at which the litigation ended; (vi) whether the plaintiff can rightly receive all the credit for the benefit conferred or only a portion thereof; and (vii) the size of the benefit conferred (the “Sugarland Factors”). Focusing much of its analysis on the size of the benefit conferred, the Court noted that while plaintiffs have traditionally received an award of 10-15% of the monetary benefit conferred when a case settles early, those plaintiffs that first engage in meaningful litigation efforts, including the taking of multiple depositions and engaging in some level of motion practice, typically receive a higher fee award in the range of 15-25% of the monetary benefits conferred. The Court justified these incremental percentages by noting that “a relatively quick and small settlement may well produce an allowance [to plaintiffs’ attorneys] bearing a higher ratio to the cost of the work than a much larger recovery obtained only after extensive discovery, a long trial and an appeal.” Thus, “[a]warding increasing percentages helps offset representative counsel’s natural incentive to shirk.” In this matter, plaintiffs’ counsel gained a tangible recovery in the amount of $3 million by obtaining and reviewing a large document production from the defendants and various third parties, taking 11 fact depositions, and pursuing two discovery motions and a request for clarification. The Court concluded that such extensive discovery efforts justified the top end of a mid-range recovery and, therefore, started plaintiffs’ fee award at 25% of the tangible recovery, or $750,000.
The Court next turned its attention to the therapeutic benefits plaintiffs had obtained through the various enhanced corporate governance procedures that Emerson agreed to adopt. Noting the difficulty in pricing these benefits, the Court nevertheless attempted to link an award for these therapeutic benefits to a real-world metric by assuming that without the measures in place, Emerson would face a 25% risk of additional related-party transactions taking place. Thus, with the challenged related-party transactions having caused approximately $3.9 million of harm to Emerson, the enhanced corporate governance procedures conferred a benefit of approximately $1 million. Because Pinnisi and Emerson’s Audit Committee paved the road for these reforms, however, the Court gave plaintiffs’ counsel only 50% of the credit for obtaining this benefit. Applying the same 25% used for plaintiffs’ monetary benefits, the Court awarded plaintiffs’ counsel an additional $125,000 for the therapeutic benefits achieved. The Court also briefly touched on the remaining Sugarland factors, noting that the complexity of the case did not merit any adjustment in the fee award, that the defendants did not contest the standing and ability of plaintiffs’ counsel, and that an aggregate award of $875,000 worked out to an effective hourly rate of $410 per hour. In the Court’s mind, such a level of compensation did not confer an unwarranted windfall on plaintiffs’ counsel.