In re PAETEC Holding Corp. S'holders Litig., C.A. No. 6761-VCG (Del. Ch. Mar. 19, 2013) (Glasscock, V.C.)

In this letter opinion, the Court of Chancery awarded attorneys’ fees and costs to plaintiffs’ counsel of $500,000 after analyzing plaintiffs’ unopposed fee request under the relevant Sugarland factors, and determining that certain supplemental disclosures secured by plaintiffs justified an award of attorneys’ fees under the corporate benefit doctrine.

The award of plaintiffs’ attorney fees related to a stock-for-stock merger between PAETEC Holdings Corp. (“PAETEC” or the “Company”) and Windstream Corporation (“Windstream”), announced in August 2011, which valued PAETEC at approximately $2.3 billion or $5.52 per share.  Shortly after the announcement of the proposed transaction, plaintiffs filed suit claiming that defendant directors breached their fiduciary duties by selling the Company for an inadequate price, and seeking injunctive relief and damages.  Following the filing of a motion by plaintiffs for a preliminary injunction, but before the motion was heard by the Court, the parties agreed in October 2011 to settle the plaintiffs’ claims.  As the Court noted, by the time the parties agreed to settle, plaintiffs had focused their breach of fiduciary duty claims on allegedly inadequate and misleading disclosures contained in Windstream’s proxy materials.  On December 13, 2012, the Court approved the settlement but reserved judgment on plaintiffs’ request for attorneys’ fees.

In awarding attorneys’ fees of $500,000 to plaintiffs, the Court first disposed of plaintiffs’ argument that judicial scrutiny of an “agreed-to” fee award is generally unwarranted.  Plaintiffs claimed that the Court’s role in approving an uncontested fee award should be limited to “ferreting out collusion,” and it was therefore unnecessary for the Court to engage in a fulsome analysis of the factors articulated in Sugarland Industries, Inc. v. Thomas, 420 A.2d 142, 149-50 (Del. 1980) (“Sugarland”).  The Court disagreed, noting first that in their brief supporting the final agreed-upon settlement, plaintiffs “argued at some length” that the requested attorneys’ fees were appropriate under Sugarland, thereby waiving the argument that limited judicial scrutiny was warranted.  Second, the Court found that, even if plaintiffs had reserved the argument, the defendants in the case had not agreed to the $500,000 fee requested by plaintiffs’ counsel.  Rather, the defendants had merely agreed not to oppose a fee request at or below $500,000, and had not intended that this stipulation “substitute for this Court’s independent evaluation of the fee requested.”  Finally, and, according to the Court, “most fundamentally,“ the Court reaffirmed its ability to scrutinize an uncontested fee award, stating that “in the approval of a class-action settlement, close judicial scrutiny of the settlement can be warranted, notwithstanding an uncontested fee request.”   Citing the risk that plaintiffs and defendants would agree to “trivial disclosures as the path of least resistance to a desired end,” the Court further emphasized “[i]t is proper … for this Court to scrutinize disclosure-only settlements, both substantively and to determine whether the plaintiffs’ efforts have conferred a benefit on the class.”

Turning to an analysis of the monetary benefit provided to the defendants’ stockholders, the Court determined that a $500,000 fee award was appropriate under Sugarland in light of supplemental disclosures regarding a possible conflict involving Windstream’s financial advisor, which the Court determined was material to Windstream’s stockholders.  Noting that the Sugarland factors permit the Court to take into account the magnitude of the benefit conferred upon the defendants’ stockholders, the Court stated that a reasonable stockholder would find it material that “one of Windstream’s financial advisors had access to PAETEC’s nonpublic financial information mere months before the announcement of the Windstream-PAETEC merger.”  Finding that this disclosure alone warranted the proposed $500,000 fee award, the Court nonetheless emphasized that other disclosures cited by plaintiffs were “of marginal utility, let alone materiality, to stockholders.”  Citing the time and effort expended by plaintiffs’ counsel as a second Sugarland factor justifying the fee award, the Court concluded that none of the other Sugarland factors were relevant to the Court’s analysis, and awarded plaintiffs $500,000 in fees and costs.

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