How to Win After You Lost: Examining "Trados"
Perhaps the longest-running litigation in recent Delaware Court of Chancery history has been settled, after the plaintiff class lost at trial. The Jan. 20 settlement hearing in In re Trados Shareholder Litigation, Con. C.A. 1512-VCL, is interesting for several reasons, apart from finally concluding that long run. First, some background helps to understand why.
Trados involved the always-difficult task of sorting out the respective rights of preferred and common stockholders when they are cashed-out of a company in a merger. It began as an appraisal action filed by a former Trados Inc. employee who still owned a substantial amount of his stock. In the course of discovery in the appraisal action, the plaintiffs attorneys uncovered evidence that the insiders had breached their fiduciary duties by the way they had set up the merger. The attorneys then filed a class action to recover for those breaches of duty. After years of hard-fought litigation, the court agreed the defendants had violated their duties to the stockholder class. However, the court also concluded the merger price was fair. Hence, there were no damages to recover. Despite their loss, the plaintiffs attorneys were able to secure a $4.5 million settlement in post-verdict mediation, with the defendants thereby avoiding an appeal.
The Jan. 20 hearing dealing with the court's review of whether to approve the settlement was unusual if only because it involved whether the class representative, Marc Christen (the former Trados employee), should receive a fee for his work on the case. Christen submitted a 146-page affidavit that detailed all he had done over the 11 years the litigation was pending. Notwithstanding that any fee awarded to Christen was to come from the settlement fund alone and not out of their pockets, the defendants objected to any award to him for two reasons. First, they argued that because Christen was to receive 7 percent of the $4.5 million settlement fund as his share of the class, any award to him would reward him twice. Second, the defendants argued that his affidavit was not supported by contemporaneously kept time records and was therefore unreliable.
The court rejected both those arguments. Christen was awarded a fee for his time spent on the case, not because he was a class member. Hence, the court believed his status as a class member was irrelevant. Second, Christen's affidavit was tied to actual events, such as telephone calls, court hearings and other objectively verifiable facts, not just his own memory. As a result, the court awarded him $100,000. That amount was based on a past award to another class representative in another case, not on the time Christen spent or the results achieved.
Trados thus teaches what a class representative should do if he or she is to earn a fee for his or her work on the class' behalf. The work must be significant to a recovery and verifiable by reference to actual events the court can look to when considering the accuracy of the amount of time claimed to have been spent. It remains to be seen whether the Court of Chancery will ever push past the $100,000 level, however. Given the much larger fees awarded as costs incurred by plaintiff attorneys for expert witnesses, it does seem likely that a $100,000 award will be exceeded in the right case.
Trados is also interesting for the unusual devotion to the plaintiff's cause showed not just by him, but by his attorneys. As the Trados court pointed out at the hearing, there are serious concerns about the merits of recent litigation over almost every merger that is filed soon after the merger is announced. Trados, in contrast, is a demonstration of the integrity, seriousness and tenacity of the plaintiff's lawyers involved in representing Christen initially and then later a class of Trados stockholders on a contingent fee basis when they discovered wrongdoing. The court noted that while the class was not able to prove real damages despite the court's findings of breach of fiduciary duty, that did not detract from the efforts those attorneys made. After all, they knew early on that it was very questionable whether the merger price was unfair to the common stockholders.
Finally, if nothing else, Trados teaches us that a disgruntled employee can come back to haunt his old employer. Had Christen felt differently about his termination, he might never have sued for an appraisal. Good employee relations are always worth the effort.
Edward M. McNally (email@example.com) is a partner at Morris James in Wilmington and a member of its corporate and fiduciary litigation group. He practices primarily in the Delaware Superior Court and Court of Chancery, handling disputes involving contracts, business torts, and managers and stakeholders of Delaware business organizations.