A recent Law 360 story by Jeff Montgomery, “Chancery’s Fee Ruling In Dell Is On The Money, Experts Say”, reports that the $266.7 million fee award Delaware's Chancery Court granted shareholder attorneys in the $1 billion Dell settlement represents a win for those seeking incentives for class counsel doggedness and a setback for corporate and institutional investors hoping to prune attorney fees after mega awards, experts told Law360.
In a 92-page decision, Vice Chancellor J. Travis Laster approved one of the largest fee awards of its type in Chancery Court history even though it was trimmed from the original request of $285 million. His decision held to the Chancery Court's history of notching up fees for the plaintiffs' side when it's successful after pushing deep into the litigation and piling up risk. The defense bar has routinely pushed the other way, arguing for adoption of approaches taken in federal securities actions that grant declining fee percentages as total awards grow.
Vice Chancellor Laster's opinion relied heavily on the Delaware Supreme Court's 2012 decision upholding a $304 million legal fee from a $2 billion Chancery award in Americas Mining Corp. v. Theriault, a case that went to trial. The opinion "doubled down on that Americas Mining decision" and examined it extensively in the order, said Brian T. Fitzpatrick, the Milton R. Underwood chair in Free Enterprise at Vanderbilt Law School. "And it doubles down on the notion that judges in Delaware are going to do what is best for class members," Fitzpatrick said.
In Americas Mining, stockholders sought damages after a 2004 deal that saw the company and its parent, Southern Copper Corp., agree to an overpriced, $3 billion acquisition of a Mexican mining company owned by Southern Copper's controller. Then-Chancellor Leo E. Strine Jr. found in 2011 that the plaintiffs "indisputably prosecuted this action through trial and secured an immense economic benefit" for Southern Copper, while working on an entirely contingent basis for six years, facing "major league, first-rate legal talent" and grappling with complex financial and valuation issues.
In his decision this week after the Dell settlement, Vice Chancellor Laster said that the best scheme for compensating class attorneys working on a contingent fee remains the current standard, first paying out-of-pocket costs, then providing a fee based on a percentage of the net award and how far the case had progressed. "This case involved true contingency risk. Plaintiff's counsel did not enter the case with a ready-made exit or obvious settlement opportunity. There was a serious possibility that plaintiff's counsel would lose and receive nothing," the vice chancellor wrote. That risk, the vice chancellor said, "supports a results-based award using the Americas Mining percentages. No downward reduction is warranted under this factor."
At issue was Dell Technologies decision to issue a "tracking" stock after it went private in order to finance its acquisition of EMC Technologies. The "Class V" shares were meant to follow the value of VMware Inc., in which Dell acquired a majority as a result of the EMC deal. In practice, the Class V shares traded at a steep discount, with shareholders alleging in Chancery that the 2018 swap short-changed them by about $34 per share. The Dell settlement recovered 9.34% of the estimated potential $10.7 billion in damages that attorneys for the stockholders identified, the vice chancellor found, making it the 11th largest among cases studied as a percentage of maximum damages.
Minor Myers, a University of Connecticut School of Law professor, said the settlement was "garden variety" in every respect but its size and the opposition from some of Dell's big private investment funds. "Presumably that's why these objecting funds are paying attention (most don't)," Myers said in an email to Law360. "The fee request in this case was, if anything, modest in percentage terms, but of course it's gotten a lot of attention because it's a big number in the aggregate.
Myers said the opinion is in "the best tradition of Delaware's extraordinary sensitivity to incentives in confronting settlements in stockholder litigation. When people do bad things out in the world, we rely, for better or worse, on plaintiffs' attorneys to do something about it. They're the ones who generate results in class actions, on behalf of people who aren't usually paying attention."
Definitely paying attention were some private fund investors in Dell, who argued that the court would make a wrong turn if the award went forward as proposed. "The enormity of plaintiff's counsel's $285 million fee application, both in absolute terms and as a proportion of the settlement fund, risks creating a dangerous precedent for Delaware courts," Pentwater Capital Management LP, holder of 1.6% of the Dell Class V tracking stock at issue in the case, said in a brief. Pentwater was joined in its objection by other fund investors representing 24.6% of the stock. Vice Chancellor Laster acknowledged their arguments in his decision, but also pointed out their potential multimillion-dollar gain should the court prune the fee award and leave more in the settlement pool.
Jacqueline S. Vinaccia, a California attorney and member of the National Association of Legal Fee Analysis, said in a telephone interview that Vice Chancellor Laster supported his decision with an "incredibly detailed" analysis that addressed each of the objectors' points. "All of the theories and different approaches to attorney fees that I have seen seem to have been referred to and analyzed in this case. It's a really extensive and well-thought-out and supported opinion, which we don't often see in fee cases. But then again, this is a billion-dollar settlement with a 26 and ⅔ percent fee award." A group of law professors also backed a declining scale, saying a $150 million fee would be defensible while keeping $135 million more for stockholders.
Anthony A. Rickey of Margrave Law LLC, counsel to the five law professors who filed a friend of the court brief opposing the settlement and suggesting bringing Chancery Court litigation fees more in line with relatively lower payouts for large cases in U.S. District Court securities actions. Rickey said a 15% fee would be more appropriate, providing a still-large $150 million fee while earmarking another $135 million for shareholders. "There is a considerable amount of decreased risk after motions to dismiss," Rickey said in court papers, "even in Chancery practice."
In Dell, Vice Chancellor Laster rejected motions to toss the case in June 2020, but the battle and risks continued for another three-plus years before the settlement. "Even where a plaintiffs' attorney has been dealt an especially strong hand, sometimes the cards aren't worth a dime if you don't lay them down on the settlement table," said Myers, the Connecticut professor. "This opinion ensures that the incentives will be well-calibrated in the future to push attorneys to take good settlements but still make it worth it to decline bad settlements and push forward with the case."
Lawrence A. Hamermesh, professor emeritus at Widener University Delaware Law School, said the court was wrestling with the question of "What's a good approximation of what people bargaining at arm's length would do if one of them had a claim, went to a lawyer and said, 'I want you to prosecute this for us. I don't want to put up the money. You're going to take all the risk.'" The issue becomes one of deciding when the recoveries are large, as in Dell, and whether throttling back on fees as the total rises discourages class attorneys from risking dismissal if they push past a $500 million offer and go for $1 billion.
"The government cannot do everything, and sometimes the government doesn't do anything. If we didn't have private attorneys looking out for us, there would be more corporate misconduct in the world," Vanderbilt's Fitzpatrick said. "This is not icing on the cake. Private enforcement is the cake," Fitzpatrick said. "And we need to make sure those lawyers have the right incentive. Cutting their fee because they get more for you is not the right incentive."