Stockholder litigation challenging a merger transaction before it is consummated often has two phases. First, plaintiffs seek to enjoin the transaction. Second, if that fails, plaintiffs proceed with claims that the transaction was unfair because of a flawed process and an inadequate price.
When plaintiffs succeed in causing the corporation to issue corrective disclosure prior to a stockholder vote, they generally will be found to have conferred a benefit upon the corporation and its stockholders. Having done so, they are then entitled to an award of attorney fees. But can they get fees before the case is finally resolved?
Two recent decisions, Frank v. Elgamal and In re Del Monte Foods Company Shareholders Litigation, illustrate that the question is one for the discretion of the court and that that discretion may be exercised differently depending upon the chancellor or vice chancellor deciding the case and the underlying facts and circumstances.
Although the Frank court declined to entertain an application for interim fees while the Del Monte court did and awarded $2.75 million in interim fees, the court in each opinion agreed that "interim fee awards may be appropriate where a plaintiff has achieved the benefit sought by the claim that has been mooted or settled and that benefit is not subject to reversal or alteration as the remaining portion of the litigation proceeds," quoted from the 2001 decision in Louisiana State Employees Retirement System v. Citrix Systems Inc.
The court in each opinion also recognized that a trial court is never required to consider an interim fee application and that a trial court may well prefer to have applications determined at the end, when a single fee can be awarded. Vice Chancellor John W. Noble in Frank noted that "judicial economy and the orderly conduct of litigation are usually better served if interim awards of attorneys' fees are avoided."
Vice Chancellor J. Travis Laster in Del Monte, while mindful of the case law that discourages piecemeal litigation, nonetheless stated a personal preference for awarding interim fees in part because the record of plaintiffs' efforts is fresher:
"When I have expended judicial resources ruling on a preliminary injunction application and a plaintiff can meet the Citrix requirements, I generally prefer to address a fee petition relating to the injunction application promptly on an interim basis. I personally find that I can address the fee issue more efficiently while the fee-generating proceeding remains fresh in my mind. This does not mean that I invariably will entertain post-injunction fee applications, or that any of my colleagues need share my preference. As noted, the decision to entertain an interim fee application rests in the discretion of the trial court."
In re Lear Corp. Shareholder Litigation, in which Chancellor Leo Strine awarded $800,000 in interim fees for injunction requiring corrective disclosures, is also relevant. While Vice Chancellor Noble expressed a contrary preference in Frank — "Thus, absent exigent circumstances, the court generally will only consider an application for attorneys' fees when a lawsuit has concluded," citing Emulex — each vice chancellor made clear that the decision to grant or deny interim attorney fees rests in the sound discretion of the trial court.
The underlying factual circumstances may also explain the different outcomes. Although the exact amount of time and effort spent by plaintiffs' counsel is not reflected in the Frank opinion, the court noted that the Frank plaintiffs filed their action sometime after the defendant company filed its preliminary proxy statement on Jan. 4, 2011. Plaintiffs moved for expedited proceedings and a preliminary injunction on Jan. 14. Defendants on Jan. 21 filed amended disclosures that mooted plaintiffs' claims. Plaintiffs therefore withdrew their motions for expedited proceedings and for an injunction and the stockholders approved the transaction on Feb. 23. There is no recitation of extensive discovery undertaken by plaintiffs or of an extraordinary result. Plaintiffs sought $450,000 in interim fees.
In contrast, the Del Monte plaintiffs sought discovery from nine third-party witnesses, conducted seven depositions and reviewed approximately 250,000 pages of documents between the filing of the verified class action complaint on Jan. 10, and their opening brief on Feb. 2. Their fee application reflected more than 4,000 hours of work.
Moreover, the result achieved was exceptional. In particular, plaintiffs' efforts resulted in disclosures of information previously not known by the Del Monte board or by the Del Monte stockholders. Also the court enjoined the transaction for 20 days to permit a go-shop without the $120 million termination fee. The significance of the disclosures and the extraordinary effort to achieve them were not present in Frank.
As Vice Chancellor Laster cautioned, notwithstanding his announced preference, the fact that he awarded interim fees for supplemental disclosure in Del Monte should not be taken to mean that he invariably will award interim fees.
The Del Monte court did decline to award interim fees for the benefit conferred by the injunction and the go-shop without the $120 million termination fee. The go-shop did not result in any topping bids. Nonetheless, the court held, "The injunction provided the opportunity for a topping bid, and this benefit existed whether or not a competing bidder materialized." The court's concern was that the calculation of the benefit conferred by the injunction would benefit from a fuller record and perhaps expert testimony as to whether the "likely incremental value of a topping bid was more than $120 million or that a topping bid for Del Monte was relatively more or less likely."
The lesson from these two cases is that whether to award interim fees remains in the discretion of the trial court. Vice Chancellor Laster has expressed his personal preference to award fees for disclosure claims when he has conducted an injunction hearing and where plaintiffs can satisfy the Citrix factors, i.e., the claims have been mooted or settled, and the benefit achieved cannot be altered or reversed as the litigation proceeds. He identified the freshness of his knowledge of plaintiffs' efforts and the benefit achieved as a factor that might incline him to exercise that discretion while cautioning that he will not do so in all cases. Vice Chancellor Noble has asserted his preference that interim fee awards should be discouraged in favor of determining fees at the end of the litigation even if the plaintiffs can satisfy the Citrix factors. Of course he so held in a case where the plaintiffs neither conducted discovery or briefing nor argued a preliminary injunction nor obtained a particularly noteworthy result.
In handicapping the likelihood of obtaining interim fees, practitioners should consider not only the preferences of the chancellor or vice chancellor, but also the nature of the underlying proceedings, the efforts of plaintiffs' counsel and the result achieved.