Court of Chancery Slashes Fees to Plaintiffs' Counsel Where Complaint Was Filed on Negotiable Merger Proposal
In Re Cox Communications Inc. Shareholders Litigation, C.A. No. 613-N, 879 A.2d 604(Del. Ch. June 6, 2005)
Vice Chancellor Strine ruled on a fee request in a case arising out of a proposal by the Cox Family to take Cox Communications private. The Family proposed a merger on fully negotiable terms with an opening bid of $32. The proposal was immediately followed by a flurry of class action lawsuits, as well as the formation of a special committee to review and evaluate the terms of the offer. The Family tentatively agreed with a special committee of independent directors to a price of $34.75 per share subject to approval by a majority of the minority stockholders and conditioned on settlement of the outstanding lawsuits, a final fairness opinion, and agreement on the terms of a final merger agreement.
Counsel for the plaintiffs eventually agreed that the $34.75 price accepted by the special committee was fair, accepted the other terms of the transaction, and agreed to settle their claims. After settlement, the Cox family agreed not to oppose a request by plaintiffs' counsel for payment of attorneys' fees of up to $4.95 million. Certain Cox stockholders, however, did object to the fee request and the Court of Chancery heard their obections.
The Court slashed a $4.95 million fee request to an award of $1.275 million and advised the plaintiff's bar to consider that award "generous."
On August 1, 2004, the Cox family submitted a negotiable merger proposal to acquire, for $32 per share, the 26% of the voting power of Cox Communications, Inc. that it did not own. Before the board could even appoint a special committee to consider the family's proposal, several stockholder lawsuits were filed challenging the fairness of the deal under Delaware's entire fairness standard.
After a lengthy negotiating process with an independent special committee, the Cox family reached an agreement at $34.75 per share, contingent upon approval of a majority of the minority shares and settlement of all outstanding lawsuits. The plaintiffs' attorneys, had no involvement in the negotiation process with the special committee, but agreed to settle the litigation upon presentation of the family's final offer price and the Cox family's agreement not to oppose an award of attorneys' fees of up to $4.95 million. The Cox family agreed.
A group of stockholders led by University of Arizona Law School professor Elliott Weiss, however, filed an objection to the fee request. The objection claimed that the lawsuits were frivolous, and added little, if any, value to the final offer price. The objectors alleged that Delaware law was allowing "the plaintiffs' bar to reap
profits by filing cases that have no benefit to stockholders." The court in Cox was unwilling to conclude that the Cox lawsuits did not contribute marginally to the $2.75 per share price increase, and thus rejected the objectors' position that the laintiffs' lawyers should get nothing. However, the Court observed that in cases involving a a challenge to a fully negotiable merger proposal, plaintiffs' lawyers take no appreciable risk because it is fairly certain from the outset of the litigation that a special committee will negotiate the price upward. In such cases, the court held, plaintiffs' lawyers should not be rewarded with any risk premium.
Accordingly, the court cut the plaintiffs' lawyers' fee award from $4.95 million to $1.275 million and told the plaintiffs' lawyers to consider that generous.
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Liza Haley Sherman