February 15, 2021
A recent Law 360 story by Jeff Montgomery, “Del. Justices Unsure $12M Deal ‘Mootness Fee’ Is Off-Base”, reports that a Delaware Supreme Court justice questioned calls for the reversal of a supposedly unsupported, $12 million Chancery Court "mootness fee" to stockholder attorneys whose successful challenge to a Versum Materials Inc. merger poison pill begat a deal that was $1.2 billion higher.
During arguments on an appeal filed by Versum and its directors, Justice Karen L. Valihura told the company's counsel William Lafferty of Morris Nichols Arsht & Tunnell LLP that Vice Chancellor J. Travis Laster acknowledged concerns about both the size of the fee — amounting to about $10,700 per hour for a mooted claim — and the semiconductor industry supplier's call to pay either nothing or $680,000 based on standard rates. "So he said you started out with a non-starter, extreme position" on the fee, "but you didn't engage with the evidence and the precedents meaningfully" to back up the position, Justice Valihura said. "What are we supposed to do with that?" she asked Lafferty during arguments before the full five-member court.
And earlier Justice Valihura had asked Lafferty, "Isn't part of the problem here, clearly, that the vice chancellor had some misgivings about the [fee] number," but also that, if he had "meaningful help from the defendant in engaging on the matter, he might have reached a different conclusion?" The fee approved by the Chancery Court followed relatively brief stockholder litigation in early 2019 over Versum's consideration of a $3.8 billion all-stock merger with Entegris Inc. worth about $43 per share, and the adoption of a poison pill shield for the deal after Merck KGaA offered $48 per share.
The "pill" would have given all shareholders the right to buy additional, potentially deal-blocking shares at a steep discount if another party or potential buyer acquired 12.5% or more of the company's equity. Days after the stockholders sued, Versum dropped what the vice chancellor described as a related, "truly expansive" provision that would trigger the poison pill if individual stockholders were deemed to be "acting in concert" in discussions about the deal, regardless of their intent. Soon afterward, the poison pill itself was withdrawn, with Merck soon winning the deal with a higher, $53 per share offer.
In approving the fee last year, the vice chancellor noted it would have been reasonably conceivable in a motion to dismiss proceeding to conclude Versum fielded the deal protections "to block a high-value cash deal and protect its merger of equals" with Entegris. Lafferty said the vice chancellor erred by conflating the better, company-secured price with the "monetary, corporate, therapeutic benefit" resulting from removal of the pill and acting-in-concert provisions.
"Plaintiff played no role in the bidding dynamic and bidding process that led to the increased merger consideration," Lafferty said, adding that the vice chancellor's fee award "effectively rewards counsel as if they had created a monetary fund" and benefit, "which they didn't."
Michael Hanrahan of Prickett Jones & Elliott PA, counsel to the stockholders, told the justices that Lafferty was asking the court to second-guess the vice chancellor's factual findings, and said that the award amounted to about 1% of the benefit. "The defendant basically just disagreed with the court of chancery's finding of a causal connection between the litigation and the increased merger price," Hanrahan said. "They said no fee at all should be awarded, because the litigation did not cause Merck's offer. The question is, what the board did" on the issues. "They didn't put in any evidence on that."
Hanrahan said that Versum conceded on appeal that the litigation caused the removal of the acting-in-concert provision. "That's fatal to their causation argument," he said. "The vice chancellor found those were obstacles to the Merck offer, and the removal of those obstacles caused the success of the Merck offer." Lafferty said Versum's decision to accept Merck's offer came weeks after the stockholder suit had been mooted, while the court's fee decision was made without an assessment of the stockholder suit's likelihood of success or merit when it was filed.
"So what you're suggesting is, the process the Court of Chancery should have followed here, if your standard is likelihood of success, do they have to relitigate this case as part of the fee application?" Chief Justice Collins J. Seitz Jr. asked. "I think what you're advocating has practical consequences for the court." Lafferty said the case implicated important public policy considerations regarding the institutional role of shareholder suits, and the fact that past court cases have found that "generosity plays no role" in determining benefit amounts.
"If the court below wanted to exercise its discretion, if it thought there was a strong correlation between pulling the pill and the outcome, it could have awarded a multiple of plaintiff's attorney fees, not 17 times, but something reasonable," Lafferty said. "The bottom line here is, the court of chancery had a duty to use its discretion to set a reasonable fee, and it didn't do that, we believe."