Settlements of multi-jurisdictional stockholder litigation challenging corporate transactions raise logistical and other issues for reviewing courts including the proper allocation of fees between and among competing plaintiffs. Chancellor William B. Chandler III in In re Allion Healthcare Inc. Shareholders Litigation recently addressed this problem and his opinion provides important guidance to practitioners. Here, the problem was not the specter of a collusive settlement, as it was in the litigation arising out of the merger of Nighthawk Radiology Holdings Inc. (Nighthawk), previously reviewed in this space.
This time, the settlement was approved, but the counsel for plaintiffs in two different jurisdictions could not agree how to allocate the award of attorney fees between them, and required the intervention of the chancellor to resolve the dispute. Not only is the chancellor’s analysis illuminating, he also used the opinion as an opportunity to suggest his preferred mechanism to address certain of the problems caused by multi-jurisdictional litigation.
On Oct. 18, 2009, Allion Healthcare Inc. (Allion) announced it had entered into an agreement contemplating a going-private merger transaction whereby Allion would merge with affiliates of private investment firm H.I.G. Capital LLC (HIG) and a group of Allion stockholders who together owned about 41 percent of Allion’s common stock. As a result of the merger, Allion’s unaffiliated stockholders would be cashed out for $6.60 per share. In response to this announcement, lawsuits were filed in Delaware and other jurisdictions, including New York, alleging that the price to be paid in the merger was unfair and asserting claims of breach of fiduciary duty against Allion, its directors and HIG in connection with the merger. The first lawsuit was filed in New York on Oct. 20, 2009. A week later, a lawsuit was filed in Delaware, followed by another lawsuit in Delaware filed by Steamfitters Local Union 449.
Defendants moved to stay the New York action in favor of the Delaware proceeding. That motion was ultimately denied, but not before counsel for the plaintiffs in the Delaware action notified the Court of Chancery that the Delaware plaintiffs, New York plaintiffs and the defendants had reached an agreement for the defendants to supplement their proxy statement in exchange for the withdrawal of the motion for a preliminary injunction.
After the merger closed, the plaintiffs in New York and Delaware filed amended complaints. Defendants filed motions to dismiss in both jurisdictions. The motion to dismiss in New York was largely denied on Aug. 13, 2010, by which time the motion to dismiss in Delaware was fully briefed but not decided.
The parties to the Delaware proceeding began discussing settlement in August 2010, and informed the Court of Chancery in September that they had reached an agreement in principle to resolve the Delaware action. The New York plaintiffs learned of the settlement of the Delaware action on the same day. On Nov. 12, 2010, the parties to the Delaware action filed a stipulation of settlement providing for an additional $4 million to be paid to the unaffiliated stockholders of Allion. The New York plaintiffs filed an emergency motion to intervene in the Delaware proceeding to either: (1) stay the action, (2) reject the proposed settlement, or (3) allow the New York plaintiffs to take discovery on the merits of the action and the proposed settlement. The court denied that motion, finding that the New York plaintiffs were well aware of the settlement, and permitted the New York plaintiffs to object to the settlement at the hearing to approve the settlement.
At the hearing, the court approved the settlement and awarded attorney fees and expenses of $1 million: $250,000 for the improved disclosures and $750,000 for the improved merger consideration. The court allowed counsel for the plaintiffs the opportunity to create a fee-splitting solution. They were unable to do so, and the court was required to resolve the issue.
Suggesting an Approach
Before addressing the merits of the issue before it, the court noted that the issue of fee-splitting is another practical problem caused by multi-jurisdictional litigation. While discussing generally the other issues created by multi-forum litigation, in footnote 12 to the March 29 opinion in In re Allion Healthcare Inc. Shareholders Litigation, the chancellor suggested his solution:
"My personal preference, for what it’s worth," the chancellor wrote, "is for defense counsel to file motions in both (or however many) jurisdictions where plaintiffs have filed suit, explicitly asking the judges in each jurisdiction to confer with one another and agree upon where the case should go forward. In other words … my preference would be for defendants to ‘go into all the courts in which the matters are pending and file a common motion that would be in front of all of the judges that are implicated, asking those judges to please confer and agree upon, in the interest of comity and judicial efficiency, if nothing else, what jurisdiction is going to proceed and go forward and which jurisdictions are going to stand down and allow on jurisdiction to handle the matter….’ Judges in different jurisdictions might not always find common ground on how to move the litigation forward. Nevertheless, this would be, I think, one (if not the most) efficient and pragmatic method to deal with this increasing problem. It is a method that has worked for me in every instance when it was tried."
This pragmatic solution is typical of the Court of Chancery’s approach to many issues, both procedural and substantive. Indeed, the notion that the judges hearing related matters should collectively determine where the matter should go forward is similar in concept to the suggestion by the special counsel in Nighthawk that all courts hearing a related matter should be made aware of events in the other proceedings. While some momentum appears to be building toward this type of disclosure, counsel representing defendants in a similar position would be wise to heed the suggestions in Allion and Nighthawk even before more definitive guidance emerges.
Turning to the merits of the fee dispute, the court found the analysis straightforward. The court found that the disclosure portion of the fee was appropriately split equally between the New York and Delaware plaintiffs. Although the New York plaintiffs may have argued later that the disclosures were inadequate to support a settlement, they still contributed to the benefit achieved by the disclosures by independently negotiating for them.
Unlike the disclosure portion of the fee, the court found that the efforts of the New York plaintiffs did not contribute to the benefit achieved by the increased merger consideration, and awarded all of the $750,000 increased consideration fee to the Delaware plaintiffs.
In Delaware, the filing of a meritorious action followed by a benefit conferred to a class creates a rebuttable presumption that the benefit was caused by the litigation. When similar lawsuits are litigated in multiple fora, the presumption of a causal relationship between the litigation and the benefit achieved applies only to the Delaware litigation. Affording the presumption to all actions would encourage placeholder filings in other jurisdictions, wasting judicial resources and making it more difficult to reach a settlement.
Here, the New York plaintiffs did not sign on to the settlement or otherwise support it. Thus, the only way the New York plaintiffs could merit a fee is if the New York litigation somehow caused the Delaware settlement. Here, counsel for the New York plaintiffs argued that even though it played no direct role in negotiation of the increase of the merger consideration, it created an "atmosphere" where the Delaware plaintiffs were able to negotiate a resolution. The court rejected that argument for many of the same reasons it has been rejected before — the impact on the Delaware litigation was purely conjecture and in the absence of sufficient evidence to the contrary, a settlement achieved by counsel for Delaware plaintiffs should be attributed to them. The court also rejected the New York plaintiff’s argument that the denial of the motion to dismiss in the New York action "moved" the case along to encourage settlement, finding that the evidence presented at the settlement hearing refuted this argument.
The chancellor’s decision in Allion, along with the report of the special counsel in Nighthawk, provide invaluable guidance to attorneys counseling directors and corporations involved in multi-jurisdictional litigation with a Delaware component. Those who counsel these groups would be wise to review these issues carefully when advising them.
Peter B. Ladig ( firstname.lastname@example.org) is a partner at Morris James in Wilmington and a member of its corporate and fiduciary litigation group. He represents both stockholders and directors in corporate litigation. The majority of his practice is in the Delaware Court of Chancery, although he has extensive experience in the other state and federal courts in Delaware and has been involved in over 50 published decisions. The views expressed herein are his alone and not those of his firm or any of the firm's clients.