Remember when Delaware Chancery Court judges routinely handed out six-figure fee awards to shareholder lawyers whose contributions to the development of corporate law consisted of forcing companies engaged in M&A transactions to add a few disclosures to their proxy filings? As Vice-Chancellor Travis Laster wrote in 2011’s In re Sauer-Danfoss (65 A.3d 1116), Delaware judges often awarded $400,000 or $500,000 – and sometimes much more – in disclosure only settlements.
Those days ended, of course, with Chancellor Andre Bouchard’s 2016 ruling in In re Trulia (129 A.3d 884). The Chancellor, capping of a series of decisions in which Chancery judges looked askance at disclosure-only M&A settlements, refused to approve a deal that would have settled a shareholder class action challenging Zillow’s acquisition of Trulia. Bouchard rejected the deal’s proposed $350,000 fee award for plaintiffs lawyers – and warned that Chancery Court would no longer reflexively approve these settlements. Predictably, shareholder lawyers more or less stopped filing the cases in Delaware, moving M&A challenges to federal court and devising a strategy to make deals with defendants that don’t require court approval.
But it’s still possible for shareholder lawyers to win generous fee awards in Chancery Court: On Monday, Vice-Chancellor Laster awarded $3 million to shareholder lawyers from Block & Leviton and Heyman Enerio Gattuso & Hirzel in Sciabacucchi v. Salzberg (2019 WL 2913272). To be clear, the Sciabacucchi case was not an M&A class action alleging inadequate proxy disclosures. It was instead a challenge to a forum selection clause in corporate charters for three companies that went public in 2017, Blue Apron, Roku and Stitch Fix. But as I’ll explain, Chancery’s history of awarding generous fees during the peak years of the boom in M&A class actions turned out to be a boon for shareholder lawyers who prosecuted the forum selection clause challenge.
The contested clause would have required investors to bring federal Securities Act claims in federal court. (Under the U.S. Supreme Court’s 2018 ruling in Cyan v. Beaver County, Securities Act claims can also be filed in state court.) In a landmark decision last December (2018 WL 6719718), Vice-Chancellor Laster held that the clauses were invalid because federal securities claims are outside the scope of Delaware corporate contracts with shareholders.
His decision is widely regarded as a harbinger of Chancery Court’s thinking about any future attempt to mandate arbitration of shareholder claims by means of a corporate charter provision or bylaw. The Sciabacucchi case has already figured in a decision by the Securities and Exchange Commission to allow Johnson & Johnson to squelch a shareholder proposal to require mandatory arbitration. Vice-Chancellor Laster’s precedent is also prominently featured in briefs in the ensuing litigation in federal court in Trenton, New Jersey, over the J&J proposal.
The lawyers who won the Sciabacucchi case in Chancery Court argued (2019 WL 806487) that their victory was so significant that they deserved a $3 million fee – $1 million from each of the defendants whose charter provision was struck down – even though they’d spent fewer than 300 hours litigating the case. Their best precedent backing the request came from the fees earned by plaintiffs lawyers in 2012 litigation over forum selection clauses requiring shareholders to litigate breach-of-duty claims against corporate directors in Delaware.
In that litigation, plaintiffs lawyers sought to negotiate a mootness fee deal with nine companies that dropped forum selection bylaws after the clauses were challenged in lawsuits. When talks broke down, then-Chancellor Leo Strine, now Chief Justice of the Delaware Supreme Court, convened a conference to resolve the fee issue. (The record of that dispute is known as In re Exclusive Forum Provision Mootness Fee Petitions.) Strine said that plaintiffs’ demand for $400,000 from each of the nine companies seemed reasonable to him, in light of the fees defendants were then shelling out to shareholder lawyers in M&A disclosure-only settlements. The nine defendants ended up agreeing to pay $333,333 each. (Four other defendants who dropped forum selection charter provisions also paid mootness fees in the 2012 litigation but those fees are not known.)
In the Sciabacucchi case, shareholder lawyers said they’d achieved more consequential results that the lawyers in the earlier forum selection litigation, since the clause for corporate governance disputes ended up being upheld in Chancery Court. The Securities Act clause was deemed invalid after full-blown litigation, they said, so they should be awarded more money from each defendant than the lawyers in Exclusive Forum.
Defendants in the Sciabacucchi case – Wilson Sonsini Goodrich & Rosati for Roku and Stitch; Wilmer Cutler Pickering Hale and Dorr for Blue Apron – countered that Exclusive Forum took place in the bad old days, when defendants agreed to settlements that dished out money to undeserving plaintiffs lawyers. “Chancellor Strine was expressly reacting to hypocrisy he perceived between defense counsel’s willingness not to oppose ‘fees that go into even seven figures’ for disclosures of dubious value in other cases and their hardline stance against fees for what he perceived as concrete results in the cases before him,” they wrote. “But Trulia thoroughly shut down the abuses of disclosure-only settlements, and it is thus inappropriate to treat comments made then as if they applied now.”
The defendants urged Vice-Chancellor Laster to award a mere $365,000 to shareholder lawyers in the Sciabacucchi case, based on their scant hourly billings.
I’ve already told you where Vice-Chancellor Laster came out, but it’s worth noting that he explicitly based the $3 million fee award on Chancellor Strine’s comments in the Exclusive Forum case, concluding (as plaintiffs lawyers had argued), that the results in Sciabacucchi warranted even higher fees because it resulted in a judgment in shareholders’ favor.
Obviously, Block & Leviton and Heyman Enerio could still wind up with nothing at all if the Delaware Supreme Court reverses Vice-Chancellor Laster and deems the Securities Act forum selection provisions to be valid. But for now, the shareholder firms can thank their colleagues – and the defense lawyers – who made M&A challenges such a lucrative business for so many years.
Chief Justice Strine gave his own postmortem on those cases in a just-published interview with my Reuters colleague Tom Hals. As you’re doubtless aware, Strine announced this week that he will be stepping down from the bench this fall, after serving for 20 years as a Delaware judge. He told Hals that M&A challenges that resulted in disclosures immaterial to shareholders – but substantial fees for plaintiffs lawyers – were “an outrage against American stockholders and American workers.”
In the same interview, Strine provided a candid assessment of mandatory shareholder arbitration proposals. Delaware, Strine suggested, is not on board with shareholder arbitration instead of litigation. “To relegate those kinds of things to an arbitration proceeding, in my view, is fundamentally inconsistent with the historical promise of our corporate law,” he said. “It is not our brand.”
I reached out to shareholder lawyer Jason Block and defense counsel Boris Feldman of Wilson Sonsini and Timothy Perla of Wilmer for a response to Laster’s fee ruling. All declined to comment.