I hadn’t written anything yet about the multiple shareholder actions challenging the merger of PokerTek — a developer and distributor of electronic table (gambling) games — with Multimedia Games — another developer and distributor of gambling technology.
The transaction was valued at $12.6 million, making it one of the lowest value mergers ever attacked in the Business Court. But the transaction generated five cases filed last year, shortly after the announcement of the transaction, by six shareholders named Simmer, Weber, Dabord, Lobo, Stephens, and Sandler (Weber and Dabord paired up as co-plaintiffs in their case).
Each case asserted various claimed violations of fiduciary duty by the PokerTek board, and alleged that PokerTek had made inadequate disclosures in its description of the transaction. PokerTek and Multimedia were alleged to have aided and abetted the directors’ claimed breaches of fiduciary duty. The case was settled in July of 2014. The settlement focused on the disclosure-based claims, and PokerTek made supplemental disclosures in a Form 8-K filing per the settlement.
PokerTek’s shareholders voted overwhelmingly (96% to 4%) to approve the merger ten days after the supplemental disclosures were filed.
The Plaintiffs Had No Viable Claims, Except Perhaps Their Disclosure Claims
The decision of counsel for the class (which was certified by Judge Bledsoe in the Order and Final Judgment, 2015 NCBC 8), to settle the case for the additional disclosures was deemed by the Court to be "prudent and reasonable." Order ¶42. That was kind, and the Judge was equally kind in not saying outright that the other claims brought by the shareholders were likely to be losers.
Even so, he expressed serious uncertainty whether they had any chance of succeeding. He said that "there is nothing in the record to suggest that Plaintiffs’ claims are strong enough to justify further litigation." Order ¶38.
He then ticked through the relatively valueless claims. He said that if the Plaintiffs’ claims were deemed to be derivative, that the Plaintiffs "faced a significant standing hurdle in light of [their] failure to make statutory demand on PokerTek." Order ¶39. He also expressed doubt over whether the claims against PokerTek’s directors "could overcome the evidentiary presumption afforded by the business judgment rule." Order Par. 40. And to the extent that the Plaintiffs took a run at holding the corporate defendants liable on an aiding and abetting breach of fiduciary duty theory, Judge Bledsoe said that those claims faced "substantial risk . . . because it is unclear whether North Carolina recognizes this cause of action." Order ¶41. I’ve written at least a couple of times on this blog about the questionable viability of such a claim. See here, and here.
When Are Disclosures "Material"?
So, the only claim with any value on which to base a settlement was the disclosure claims. And all the preamble in this post leads up to whether Plaintiffs’ counsel were entitled to any fees for obtaining this settlement.
Well, were the disclosures obtained by the Plaintiffs "material" to the transaction? The standard for this is that "a disclosed fact is material if there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available." Order ¶43.
Judge Bledsoe, relying on precedent from the Delaware Court of Chancery, found the supplemental disclosures to fall into "the sort of information that the Delaware Chancery Court has recognized may be material." Order ¶44. This included:
- information necessary for discounted cash flow analyses;
- comparative financial information, including enterprise value/EBITDA and enterprise/revenue multiples for companies selected as comparable by PokerTek’s financial advisor; and
- information regarding PokerTek’s engagement of a financial advisor and of the business relationship between PokerTek, Multimedia, and the financial advisor.
Would this type of information be significant to a "reasonable investor"? Well, you might have read about the recent hoopla surrounding Jonathan Gruber’s statements with regard to the Affordable Care Act, when he said that the ACA passed due to the "stupidity of the American voter." I don’t think that the mythical "reasonable investor" is stupid, but I doubt that he or she cares very much about the matters that Judge Bledsoe referenced. Of course, there is the possibility that the "reasonable investor" is an institutional investor which might attach more importance to matters like a discounted cash flow analysis and enterprise/revenue multiples. But even so, the supplemental disclosure about the relationship between PokerTek, Multimedia, and the financial advisor which was obtained as a price of the settlement was that the financial advisor had never previously performed services for either company.
The Award Of Attorneys’ Fees
So, if you are with me on the lack of value of these disclosures, how much were Plaintiffs’ counsel entitled to for their arduous efforts in obtaining them? The Court awarded $140,000 in fees and expenses, the amount which the Defendants agreed to pay in the settlement agreement.
How did the parties arrive at that figure? Plaintiffs’ counsel collectively devoted about 500 hours to the case. What did they do in that time? They "retained an expert, reviewed and analyzed approximately 3,100 documents, prepared a motion for preliminary injunction with supporting briefs, and undertook confirmatory discovery after" entering into a Memorandum of Understanding regarding the settlement. Order ¶57.
The hourly fee awarded counsel broke down to $226.83 per hour, which the Court found to be in line for rates for North Carolina counsel. Judge Bledsoe noted that Plaintiffs’ counsel, several of whom were from major metropolitan centers, usually charged substantially more for similar work and were taking a sizeable haircut off their usual attorney rate of $553.26 per hour.
That really wasn’t a very rich recovery for the six law firms representing the Plaintiffs. If the $140,000 is divided equally, that’s only about $23,000 per firm. It seems hardly worth the effort. An agreement reflecting the division of the fees among the law firms is buried in the filing for the fee award (the percentages range from 45% to 5%). That makes the work even less lucrative.
This award of $140,000 is in line with — and actually a fair amount less than — other fee awards by the Business Court in disclosure-only class action settlements. See, e.g. In re Progress Energy S’holder Litig., 2011 NCBC 45 ($550,000); In re PPDI Litigation, 2012 NCBC 33 ($450,000); In re Harris Teeter Merger Litig., 2014 NCBC 44 ($325,000).
The glaring outlier in the history of these fee awards in the Business Court is the $1 million plus awarded by the Court in the litigation over the Wachovia/Wells Fargo merger litigation, which is now before the NC Court of Appeals. Perhaps the COA will undertake the analysis of the materiality of the disclosures obtained by the Plaintiff in that case. I’ve previously written about my dismal opinion of the quality of those disclosures, and my disappointment at the Court’s approval of a more than a million dollar fee.
I’m not the only one complaining about the fees obtained by the lawyers for the class plaintiffs in these merger related actions. Judge Tennille, before he retired, wrote about what he condemned as "stinky fees."
Still, these types of lawsuits are certainly good for the legal economy and for the North Carolina lawyers called upon to defend them.
And there will be one more merger class action fee decision coming down this year from the Business Court in which there will undoubtedly be a large application for a fee award. That’s the merger of R.J. Reynolds and Lorillard, in which a disclosure only settlement was recently announced.
If deal value is a factor in a fee award in a disclosure-only settlement, which it appears to be, then the Reynolds/Lorillard deal, valued at $25 billion, will spin off substantially larger fees than the PokerTek class actions (in which the deal was worth, by comparison, a paltry 12.5 million).
But should deal value be a factor? Shouldn’t it be the value of the disclosures?