I have been complaining about  the fees approved by the NC Business Court for those lawyers obtaining disclosure only settlements since there was a Wachovia Bank.  Some of you may not be old enough to remember that venerable bank.

Now, at last, Judge Gale has found a disclosure only settlement to have yielded (almost) immaterial disclosures, and slashed the attorneys’ request for fees (by more than 50%) and expenses (to zero).  The Opinion, delivered last month, is In re Krispy Kreme Doughnuts, Inc. Shareholders Litig., 2018 NCBC 58.

Fee Request Slashed: From $350,000 Requested To $150,000 Awarded

Plaintiffs’ lawyers requested a fee award of $350,000.  They said that thirty lawyers from twelve different law firms had spent more than 800 hours in connection with the lawsuit.  Op. ¶26.  The lawyers said that the time spent would have yielded a lodestar fee of $533,038 based on their “normal hourly rates.”  Id.

Judge Gale, who scrutinized the bills carefully, said that he concluded:

that the total reasonable time spent on the litigation is significantly less than the total time sought to be compensated in the Motion.
Op. ¶37.
Judge Gale pointed out a few time entries which he found excessive (in Op. ¶37), and remarked particularly on class counsel spending more than fifteen hours of
research on North Carolina’s basic, easily-identified pleading requirements for shareholder derivative actions.
Op. ¶37.
Did The Class Need To Be Represented By Out-of-State Lawyers?
Were the issues in the class actions challenging the Krispy Kreme merger so complicated that heavy artillery from big (and non-North Carolina) class action sophisticates were needed?
Judge Gale didn’t think so:
The nature of this litigation required skilled counsel experienced in shareholder class actions.  See N.C. Rev. R. Prof. Conduct 1.5(a)(1) and 1.5(a)(7).  While Plaintiffs’ Counsel are certainly well-regarded, highly experienced counsel who have been involved in class actions that have generated significant results for shareholders in other litigation, the Court concludes that the litigation could have been competently handled by North Carolina counsel whose billing rates are significantly below the rates that Plaintiffs’ Counsel contend prevail in their home jurisdictions.
Op. ¶41.
North Carolina Rates, And The Quality Of The Result Achieved, Dictated A Reduction In Fees
After finding the services of non-North Carolina lawyers to be unnecessary, Judge Gale declared that a “typical and customary hourly rate” in North Carolina for complex commercial litigation” ranged from $250 to $550 per hour.  Op. ¶41.

Then he evaluated the quality of the supplemental disclosures that the class lawyers pried out of Krispy Kreme.  Those disclosures “included:

(1) the unlevered cash flows used in the financial advisor’s discounted cash flow (“DCF”) analysis; (2) Krispy Kreme’s management’s considerations regarding their potential post-merger employment; (3) the financial advisor’s potential conflict of interest; and (4) metrics used to evaluate comparable companies.”
Op. ¶43.
Judge Gale, in previously approving this settlement (in 2018 NCBC 1), had not ruled that these supplemental disclosures were material.  I wrote about that ruling in January 2018.  In the current case, he specifically observed that he had not found “that the materiality of the supplemental disclosures was plain or obvious.”  Op. ¶44.
This time, assessing the value of the obtained disclosures against the attorneys’ fees sought, Judge Gale rejected Plaintiffs’ counsel’s “argument that the value of the disclosures was so obvious as to justify a fee award based on a premium rate.”  Op. ¶46.  In other words, the disclosures achieved were not worth much.
I think that this is the first time that the NC Business Court has evaluated the materiality of disclosures in connection with a fee request and found them to be less than “material.”
If you think that was a pretty bad result for the lawyers applying for fees, it got worse.  They had run up nearly $20,00 in expenses in their vigorous pursuit of Krispy Kreme, and Judge Gale refused to allow them to collect a penny of those expenses.
Why did Judge Gale refuse to award any expenses, even though the Defendants had agreed to pay them as part of the settlement?  Because of an ethical defect in the lawyers’ fee agreements with their clients.
Their agreements with their clients said that their clients were “not liable to pay any of the expenses of the lawsuit” and that the law firm would “pay all costs and expenses in the litigation.”  Op. ¶60.
Lawyers frequently advance expenses for their clients, so why was there a problem with this fee agreement language?  Historically, lawyers could advance expenses  for their clients “provided the client remain[ed] ultimately liable for such expenses.”  Op. ¶57 .  The lawyer then had the option to forego recovering expenses from their client.
Rule 1.8 of the North Carolina Revised Rules of Professional Conduct, via Comment 10, “make clear that'[c]osts advanced for a client are the client’s financial responsibility.'”  Op. ¶58.
Although lawyers are free to waive their right to recover expenses, the applicable ethical Rule:
does not contemplate that clients can be absolved from any and all financial responsibility at the inception of the litigation and without regard to the litigation’s outcome. To the contrary,
RPC 1.8(e) ‘enable[s] a client to share the risk of losing with a lawyer,” thereby supporting one of the main functions of contingent fee arrangements.   Restatement (Third) of Law Governing Lawyers §35, cmt.b (Am. L. Inst. 2000).
Op. ¶59.

So what is the punishment for a violation of RPC 1.8?  As seen by Judge Gale, it is forfeiture of the right to recover the advanced expenses.  That’s based on the Restatement (Third) of Law Governing Lawyers.  It says that: “[a] lawyer engaging in a clear and serious violation of a duty to a client may be required to forfeit some or all of the lawyer’s compensation for the matter.”  Id. at §37.

What kind of message does this decision send to out-of-state lawyers thinking of filing a merger class action in North Carolina, hoping to settle on the basis of supplemental disclosures, and thinking that they will collect a big fat fee?  Well, they should be warned that the Business Court will closely scrutinize their bills. will likely apply what those lawyers think are penurious North Carolina rates,  scrutinize the value of the disclosures obtained, and may refuse to award any expenses, depending on the language of their engagement letters.  They may decide to look for greener pastures.

Judge Gale’s approval last week of a class action settlement, in In re Krispy Kreme Doughnuts, Inc. Shareholder Litigation, 2018 NCBC 1 gives me another opportunity to rail against disclosure only settlements.  You know that I don’t like them.  If you don’t know that, I’ve written on this subject several times. Like here, here, and here.

The Krispy Kreme shareholder class litigation followed what has become the inevitable path for almost every merger deal.  The transaction was announced on May 9, 2016.  Seven shareholder lawsuits alleging that the Krispy Kreme board members had breached their fiduciary duties in agreeing to the transaction (five in NC state courts and later consolidated in the NC Business Court) followed in the next month.

The plaintiff shareholders filed a motion for a preliminary injunction blocking any shareholder vote on the transaction until supplemental disclosures in Krispy Kreme’s proxy statement were made.  The very next day, in connection with a settlement agreement, Krispy Kreme filed a Form 8-K to supplement its proxy statement.  The shareholder vote went ahead on July 27th, with 95% of those voting approving the deal.

The value of those additional disclosures was assessed by Judge Gale in determining whether to approve the settlement.  As the Opinion didn’t consider the amount of attorneys’ fees to be awarded to Plaintiffs’ class counsel (there has not yet been an application for fees), Judge Gale assessed the "give and the get" of the "give" of the release by the class against the materiality of the additional disclosures (the "get").

North Carolina assesses materiality based on the U.S. Supreme Court’s definition of that term in TSC Industries, Inc. v. Northway, 4266 U.S. 48 (1976).  The holding in TSC Industries was:

[a]n omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. . . .It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be 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.

 Id. at 449.

 Okay.  Let’s assume that I am a reasonable investor looking at the Krispy Kreme supplemented proxy.  Would the supplemental disclosures obtained through the blood and sweat of Plaintiffs’ counsel have "significantly altered the ‘total mix of information made available" to me in the original proxy? 

I don’t think so.

First, "[t]he Supplemental Disclosures included the specific projected unlevered, after-tax free cash flows of Krispy Kreme for the remainder of 2017 and for the fiscal years 2018 through 2023,as derived from the financial projections provided to Wells Fargo by Krispy Kreme management."  This disclosure was designed to deal with the lack of disclosure of Krispy Kreme’s specific projected unlevered after-tax free cash flows Wells Fargo used in its DCF analysis."  Op.  

That would not change the mix of information before me because it is actually meaningless to me,  Unlevered?  Come on.  What?  I don’t have a clue what that supplemental disclosure means.  Maybe a hedge fund manager or an MBA student focusing on finance would.  But they would be too knowledgeable to be considered "reasonable investors". 

Class counsel argued that the differences between the discounted cash flow analyses, while "slight in any particular year" that "the differences over time have greater significance."  Op. ¶58.  Judge Gale accepted that as "a reasoned argument that some shareholders might have found" that the Supplemental Disclosure regarding the DCF analysis was material."  Op. ¶58. 

The next supplemental disclosure has a little more meaning to me.  It was in response to Plaintiffs complaining that the original Proxy did not disclose whether the Krispy Kreme board "had discussed post-Merger employment opportunities at the inception of merger negotiations."  Op. ¶52.

 

 In a less than stunning supplemental disclosure, the Defendants added this nugget of questionable value:

 

that Krispy Kreme board members, in preliminary discussions about a potential merger . . . discussed [the buyer’s] ‘history or managing its portfolio companies for long-term growth and relying on company management to run the business.’

Op. ¶52.

So board members also employed by Krispy Kreme might have been influenced to vote in favor of the transaction because they might keep their jobs?  That speculation makes no difference to me.  And how many board members served in company management?  Did they have excessively rich employment contracts being drafted with the buyer of Krispy Kreme’s assets?  Were their votes essential to the approval of the deal? 

Another supplemental disclosure concerned the previous relationship of Wells Fargo — the investment banker on the deal — to Krispy Kreme and its acquiror. 

The supplemental disclosures revealed that in the two years before the deal was struck, Krispy Kreme had paid Wells Fargo $300,000 for "investment banking services" and that an affiliate of the buyer had paid Wells Fargo $1 million "in connection with corporate loans."  Op. 52.

Would that have caused reasonable investor me to discount Wells Fargo’s analysis of the transaction because they were tainted by their previous receipt of fees?  No.  $1.3 million doesn’t carry the influence that it used to.

There’s at least one other Krispy Kreme ruling imminent from the Business Court.  That will be the ruling on the fee application from the Plaintiff class’ lawyers.  I will be watching for that.

I should probably disclose that I prefer Dunkin’ Donuts over Krispy Kreme.

 

It’s not very often that I see a fee application in a settled class action in the Business Court that doesn’t strike me as requesting approval of an overpayment for a less than successful result.  Those are most often in the settlement of merger class action in which the only benefit for the class was the extraction of additional disclosures in a proxy statement.

But last week, looking at the Order approving a class action settlement and a fee petition in Elliott v. KB Home North Carolina, Inc., 2017 NCBC 37, I had exactly the opposite reaction.  It was an excellent result for the class members, and the nearly $2 million in attorneys’ fees approved by the Business Court were well earned.

I’ve written about the Elliott case three times: The class was certified by Judge Jolly in 2012.  Judge Jolly ruled later that KB Home had waived its right to compel arbitration of the claims.  After Judge Jolly’s retirement, Judge McGuire ruled that he could modify the membership of the previously certified class due to a change in circumstances.  The class members are homeowners in North Carolina living in houses built by KB Home.  The houses were constructed with siding manufactured by HardiePlank that did not have a weather restrictive barrier (a WRB) behind the siding.  The houses were then damaged by water infiltration.

This is not a settlement where the class members receive something like coupons towards a future home purchase.  Instead, there is real and substantial money being paid to them.  Depending on the square footage of their homes, class members who are current homeowners can be paid between $6500 and $17,000.  In the alternative, these class members can have their existing siding and replaced with new HardiePlank, this time with the missing WRB.

There is also a subclass of class members who have already sold their homes.  These subclass members are entitled to receive either a lump sum payment of $3250 or to prove that the selling price of their home decreased due to the lack of a WRB.  This type of recovery is capped at $12,000.

There is no doubt that the lawyers worked hard to achieve this result, as detailed in the Affidavit of lead counsel in support of the fee petition.  They filed or responded to twenty-seven briefs in the trial court and eight briefs in the appellate courts.  They reviewed 46,000 pages of documents produced, and they took or defended or attended forty-four depositions in five states.  Fee Affidavit ¶41.

Judge McGuire wrote in glowing terms of the qualifications of class counsel.  He said that they had "decades of experience litigating construction product defect cases on an individual, multi-family, and class basis."  He called one of the lawyers "one of the nation’s most respected and experienced attorneys in these areas."  Order ¶37.

As a part of the settlement agreement, the Defendants agreed that they would not oppose a request for fees and expenses not to exceed $1,925,00.  That is exactly the amount requested by Plaintiffs’ counsel: including $148,493.61 in out-of-pocket expenses and $1,776,506.39 in attorneys’ fees.

That fee amounted yielded an "implied hourly rate" of $337.28 (based on 5,267 hours of work), which was approved as reasonable by Judge McGuire. Order ¶¶40-41.  That hourly rate is within the ranges previously approved as reasonable by the Business Court — like $325.04 per hour in Corwin v. British Am. Tobacco PLC, 2016 NCBC 14 at *15 and between $300 and $500 per hour in Nakatsukasa v. Furiex Pharms., Inc., 2015 NCBC 71 at *24.

I have a hard time reconciling this fee petition to the one from the lawyers representing the class in the Ehrenhaus case (which challenged the merger years ago between Wachovia and Wells Fargo).  The Ehrenhaus lawyers asked for $1,975,00, almost the same as the request by the Elliott lawyers ($1,925,000).  But the Ehrenhaus lawyers obtained nothing of value for that class.  Also, they did not bother to submit any records regarding the hours worked on the case, other than to claim having spent 2300 hours on the case (less than half of the 5267 hours spent by the Elliott lawyers).  They took four depositions (the Elliott lawyers took forty-four) and reviewed 9,500 pages of documents (far less than the 46,000 obtained by the Elliott lawyers).  The Ehrenhaus settlement, moreover, came just a couple of months after the lawsuit was filed.  The Elliott lawyers worked their case for eight years.

The Ehrenhaus fee petition of $1,975,000 ended up getting chopped down by Judge Diaz of the Business Court by nearly half (to $1 million).

If you’ve been reading this blog for any length of time, you know that I am very sour on substantial attorneys’ fees being awarded to the lawyers for class action plaintiffs who obtain nothing more for the class than valueless additional disclosures with regard to a merger transaction.  You can read some of those posts here and here.

The Business Court has routinely been awarding substantial fees for disclosure only settlements up until now, but the Business Court’s decision last week in In re Newbridge Bancorp Shareholder Litig., 2016 NCBC 87 sends the message that its relaxed examination of the value of such settlements is probably at an end.  That is partly based on the Delaware Court of Chancery’s decision in In re Trulia, Inc. Stockholder Litig., 129 A.3d 886 (Del. Ch. 2016), which was characterized as the "death knell" there for such settlements.

Judge Bledsoe said in the Newbridge Opinion:

the North Carolina Business Court has historically been guided in its consideration of motions to approve, and award attorneys’ fees in connection with, “disclosure-based” settlements of merger-based class action litigation by the body of persuasive case law developed by the Delaware courts over a period of many years. The Court is also aware that the Delaware courts have recently subjected such motions to much more exacting scrutiny than they have in the past.  See, e.g., In re Trulia, Inc. Stockholder Litig., 129 A.3d 886 (Del. Ch. 2016).

In the absence of contrary instructions from the North Carolina appellate courts, the Court finds the recent trend in the Delaware case law requiring enhanced scrutiny of disclosure-based settlements to merit careful consideration for potential application in this State.  The Court recognizes, however, that the application of Delaware’s recent case law to the Motions would represent a marked departure from this Court’s past practices in connection with the consideration of such motions. As a result, the Court declines to apply enhanced scrutiny to its consideration of the Motions in this case but expressly advises the practicing bar that judges of the North Carolina Business Court, including the undersigned, may be prepared to apply enhanced scrutiny of the sort exercised in Trulia to the approval of disclosure-based settlements and attendant motions for attorneys’ fees hereafter.

Op. Pars. 4 and 5.

Notwithstanding Judge Bledsoe’s decision that "enhanced scrutiny" would not be applied in the case before him, he did undertake a pretty close review of the value of the disclosures obtained for the class, and also the amount of the attorneys fees being awarded.

The Disclosures Obtained By Class Counsel Did Not Justify The Amount Of Fees Sought

He said that some of the disclosures touted as the basis for the fee award were "not material" or of "marginal benefit." Op. Pars. 64-65, 71 & n. 10.  He said that the Delaware Court of Chancery had "long rejected" the fallacy "that increasingly detailed disclosure is always material and beneficial disclosure."  Op. ¶64 (quoting Dent v. Ramtron Int’l Corp., No. 7950-VCP, 2014 Del. Ch. LEXIS 110, at *47  (Del. Ch. June 30, 2014)).

After that review, he sliced in half the amount of fees sought by class counsel, finding their fee request (of almost $275,000 based on an implied hourly rate of almost $525) was "not fair and reasonable, but rather excessive based on the circumstances of this case and the record before the Court."  Op. ¶69.

On the limited fee information provided by the class plaintiff’s counsel, Judge Gale said that the $135,000 fee award he made yielded an implied average hourly rate of $258.  That probably seemed pretty skimpy to those lawyers, who said that the "usual and customary rates" for  the senior lawyers for the Court-approved Co-Lead Counsel ranged from $650-$850 per hour.  Op. ¶50.

But the lawyers for the class did little to justify their fees.  They did not offer any affidavits of North Carolina attorneys attesting to “the fees customarily charged in the locality for similar legal services,”  as contemplated by the Revised Rule 1.5(a)(3) of Professional Conduct.  Instead, they premised their fee request on a 2015 survey of billing rates published in the National Law Journal.  Judge Bledsoe rejected that, saying that "the NLJ Survey does not report the specific range of hourly rates customarily charged in North Carolina for legal services of the sort Plaintiffs’ counsel provided here."  Op. ¶51.

The Business Court Said That "Typical Fees" In North Carolina For Complex Litigation Are $250-$450 Per Hour

Left without any benchmarks for what North Carolina lawyers charged as "customary rates" for complex commercial litigation, Judge Bledsoe looked to affidavits offered to the Business Court in other class action fee applications which stated that "typical fees charged in North Carolina for handling complex commercial litigation range from $250 to $450 per hour."  Op. ¶52.  He also relied on the hourly fees charged by lawyers appointed by the Business Court to serve as receivers or as counsel for receivers (which ranged from $225 to $475 per hour). Op. ¶54.

Another Important Caution For Future Fee Applications

Another deficiency in the fee application was the failure to supply detailed time records justifying the time spent.  The fee applicants instead presented only summary charts showing the total hours spent on the lawsuit.  In another caution for lawyers requesting approval of fee applications, Judge Bledsoe said:

the Court notes that attorneys’ fees’ petitions in this Court are typically supported by detailed attorney time records and advises that the Court will be reluctant to approve future petitions for attorneys’ fees lacking such evidentiary support.

Op. ¶45 & n. 8 (emphasis added).

Judge Bledsoe also said that there was nothing so special about the work done by class counsel to justify the higher hourly rate that they requested.  He said that: the nature of the work performed by Plaintiffs’ counsel "could have been performed fully by competent North Carolina counsel and that the demands of the [litigation] did not require Plaintiffs to retain counsel from outside North Carolina in order to prosecute the [litigation].  Op. ¶55.

If you think that I am being too hard on Plaintiffs’ counsel, I should point out that Judge Bledsoe said he found that:

Plaintiffs’ counsel are highly-regarded, highly-experienced class action counsel that have been involved in a number of significant class action matters including matters resulting in substantial monetary recovery for the class.

Op. ¶46.

Regardless of their qualifications, in the future these lawyers (who were undoubtedly disappointed in this ruling due to their success last year in getting a $550,000 fee award approved by a different Business Court Judge) and other lawyers for class action plaintiffs expecting big fees for anticipated disclosure only settlements of marginal value might need to find some other state in which to file those claims.

No more feeding at the trough in North Carolina.

A Couple Of Other Notes On This Opinion

One of the remarkable things about this Opinion is that there were no objections to the fees sought by the attorneys for the class.  Judge Bledsoe resolved, on his own accord, to closely review and reduce the fees sought.

Second, I recognize that even class actions leading to immaterial disclosure only settlements involve the need for North Carolina lawyers to defend those claims.  So it would be a shame if those out of state lawyers filing the suits leading to these settlements were to stay away from North Carolina altogether.

 

 

Continue Reading NC Business Court Sends Some Important Messages About Fees To Lawyers For Class Action Plaintiffs

Disclosure only settlements are in deep trouble in Delaware based on the Court of Chancery’s decision last month in In re Trulia Inc. Stockholder Litigation.  That decision is said to have sounded a "death knell" in Delaware for such settlements.

If you are not familiar with disclosure only settlements, David Wright provides a good explanation on Robinson Bradshaw’s Carolinas Class Action blog.

In the Trulia Opinion, Chancellor Bouchard concluded after an extended analysis (on pages 25-43) of each of the disclosures on which the settlement (and fee) were based that "none of the supplemental disclosures  were material or even helpful to Trulia’s stockholders" and declined to approve the settlement, which would have involved a fee to the lawyers obtaining the disclosures of up to $375,000.  The Chancellor said that the Chancery Court would be "increasingly vigilant in scrutinizing the ‘give’ and the ‘get’" of  disclosure only settlements.  Op. at 2.

How will this affect disclosure only settlements in North Carolina?  Hardly at all, at least based on how I read the recent Order by Judge Gale in Corwin v. British American Tobacco PLC, 2016 NCBC 14 which certified a class, approved a disclosure only settlement, and awarded Plaintiff’s counsel nearly $400,000 in fees.

The Objection To The Corwin Settlement

The Corwin case was brought by a Reynolds shareholder attacking the transaction by which Reynolds American, Inc. (formerly R.J. Reynolds Tobacco) acquired Lorillard Tobacco.  Mr. Corwin originally sought to enjoin the transaction from proceeding, but he dropped that Motion in exchange for a settlement involving a limited group of additional disclosures.

Only one objection to the settlement was filed.  It was by a Lorillard shareholder named James Snyder.  I read Mr. Snyder’s Objection at the time it was filed and thought it was well done, especially coming from a person who I assumed was not a lawyer, as he said in his Objection that he was "in the process of retaining counsel."

Later, I found out (from the Plaintiff’s response to the Objection) that Mr. Snyder was not only a lawyer, but that he had previously been General Counsel for Family Dollar Stores, and in-house counsel for Home Depot, Inc.  Before that, he was a partner at King and Spalding in Atlanta.

Mr. Snyder fired off his most potent attack on the settlement through an Affidavit from a law professor/expert witness he retained named Sean Griffith.  Professor Griffith’s CV is very impressive (he has just about everything in it but a Supreme Court clerkship). 

Professor Griffith’s Affidavit excoriates the value of the additional disclosures obtained by Corwin.  Say you were a Reynolds shareholder interested in reviewing the Reynolds proxy statement and the additional disclosures obtained via the class action.  Here’s what you got:

  • The "unlevered free cash flow projections" for Reynolds and Lorillard.  Given the wealth of financial data in the original proxy statement, this probably was useless additional information for a "reasonable investor."
  • A statement that Reynolds had not, at the time the transaction was announced, entered into a "technology-sharing initiative" with British American Tobacco.  You knew that there was no agreement in place even before the additional disclosures, as Reynolds referred in its original proxy statement only to "an agreement in principle" with BAT.  That was a pointless additional disclosure.
  • A statement that Reynolds "could not predict future regulatory action with regard to menthol" cigarettes.  Well, duh, who can predict future regulatory action?

The Business Court Said That It Had Carefully Assessed The "Give" And The "Get" of The Settlement

I was looking forward to Judge Gale weighing the value of these seemingly worthless disclosures, and dealing with Professor Griffith’s Affidavit, but he didn’t.  He covered the disclosures in a mere 15 words, saying that "[t]he Court has carefully balanced the ”give’ and the ‘get” of the proposed Partial Settlement," and he overruled the Objection. Order 11(f).  There wasn’t any discussion of whether the "give" (the $379,389.65 in fees) was an appropriate exchange for the "get" (the additional disclosures and a release by the class).

The applicability of the Trulia decision in North Carolina as a basis for disapproving disclosure only settlements was dealt with in this way:

the Court noted that there are differences between Delaware law and North Carolina law that may be relevant to Chancellor Bouchard’s favored approach of reviewing fee requests based on supplemental disclosures. . . . That approach is possible because Delaware courts employ the common-benefit doctrine when approving attorneys’-fee requests.  North Carolina does not.

Order 11(f).  I have puzzled over the significance of the lack of recognition of the common-benefit doctrine in NC, and I just don’t get it.  Even though our state doesn’t recognize the "common-benefit doctrine" — which means that when a shareholder obtains a substantial benefit (though nonmonetary) for other shareholders, a fee can be awarded —  it still is settled in NC that a court certifying a class action and approving a settlement is bound to assess the reasonableness of fees to be awarded to class counsel.  See, e.g., Ehrenhaus v. Baker (N.C. App. 2015)(a trial court considering a class action settlement "must ascertain whether the proposed settlement is fair, reasonable and adequate.").

Judge Gale did take steps towards assessing the reasonableness of the fee.  He said that the hourly rate yielded by the fee was $325.00 per hour, which he said was "reasonable, and clearly not an excessive rate."   Order  ¶11(n).  And he also said that the fee award was "consistent with, and in fact less than, the amount of fees awarded in connection with other disclosure-based settlements that have come before this Court for approval" and that the amount of the fee was also in line with "what a Delaware court would award in similar litigation," Order ¶11(o),  Whether that statement regarding what the Delaware Court of Chancery would have done if this settlement had been before it is open to debate, given the Trulia decision.

But there is absolutely nothing contained in this Order about whether the additional disclosures provided any meaningful new information to the Reynolds shareholders.  Maybe, in North Carolina, the Business Court is not going to bother to consider whether additional disclosures traded in exchange for a at fee award are really worth anything.

What Would Judge Tennille Have Done With This "Stinky Fee"?

I”m disappointed by the lack of analysis of these disclosures.  I think that Judge Tennille, the first Judge to serve on the Business Court, would have handled this differently.  Five years ago, in an unpublished Order, he railed against what he referred to as the "stinky fees" paid to the lawyers challenging merger transactions and settling for getting the disclosure of "additional information."

But if the result of the Business Court’s decision in Corwin is that it is seen as a welcome mat for lawyers to bring more class actions in North Carolina courts challenging merger transactions, that’s probably at least good for the North Carolina lawyers defending those actions.

It is worthwhile to point out that this blog does not represent the views of Brooks Pierce.  These views are only my own and they shouldn’t be interpreted as a criticism of Judge Gale.  Only . . .  disappointment in the Corwin decision.

Last week (well, two weeks ago, I’m kind of behind) seemed like class action week at the Business Court.  Judge Gale issued three rulings in class action cases.

Two of the rulings were in consolidated class actions that had been settled.  Those were in In re Pike S’holders Litig., 2015 NCBC 89 and  90.  The third decision was in a case just at its commencement: Raul v. Burke, 2015 NCBC 91, about whether the plaintiff challenging a merger transaction was entitled to expedited discovery on her claims. 

In The Pike Order, The Court Awarded Twice The Amount Of Fees Which The Defendants Had Agreed To Pay

There”s not much worthy of note in the first Pike "decision."  It is merely an Order approving the settlement cut in the four separate class action lawsuits attacking Pike’s merger.

The decision in the second Pike case, In re Pike S’holders Litig., 2015 NCBC 90, concerned an award of attorneys” fees to the lawyers for the class.  The case is notable since the class’ lawyers were awarded double the amount of fees ($550,000) than the amount which the Defendants’ lawyers had agreed not to oppose ($275,000).

How did the Plaintiffs’ lawyers pull that off?  They had to first get past the Defendants’ argument that the Court did not have the authority to award fees in excess of the amount that they had agreed not to contest.  That argument was pretty much foreclosed by the language of the Memorandum of Understanding which led to the settlement.  It said:

[i]f the parties are unable to reach agreement with respect to the amount of such attorneys’ fees, costs, and expenses to which Plaintiffs’ counsel are entitled, then Plaintiffs reserve the right to submit an application for an award of attorneys’ fees, costs, and expenses to be paid to Plaintiffs’ counsel (the "Contested Fee Application"). . . . In the event of a Contested Fee Application, Defendants agree to pay whatever award of attorneys’ fees, costs, and expenses that the Court awards.

Op. ¶17.

Judge Gale, relying on the COA’s recent decision in Ehrenhaus v. Baker, held that:

when the parties agree to fee shifting but do not agree on the amount of fees to be awarded, the Court may award the amount that it determines to be fair and reasonable.

Op. ¶29.

The Court assessed the reasonableness of the half million dollar plus fee by breaking the fee down to an hourly rate (for the 1394.60 hours of time) of $550 per hour for lead counsel, $375 per hour for partner hours of non-lead counsel, and $250 per hour for associate time. Op. ¶37.  Judge Gale said that those rates were "within, but at the higher end of, the range that this Court has found to be reasonable for complex business litigation in North Carolina."  Id.

The Court Awarded Fees Based On "North Carolina Rates"

Out of state lawyers looking to take on class action cases in the Business Court might want to take caution from this part of Judge Gale’s ruling:

the affidavit of Lead Counsel [who was from Pennsylvania] reflects billing rates that exceed those typically charged in North Carolina.  The Court believes that there are North Carolina lawyers who are fully capable of pursuing similar litigation and, thus, that it would be unnecessary and inappropriate to apply billing rates higher than those typically charged by skilled counsel in North Carolina.

Op. ¶36 (relying on GE Betz, Inc. v. Conrad, ____ N.C. App. __, 752 S.E.2d 634, 657 (2013).

This Was A "Disclosure-Only" Settlement

Also significant was that this doubling of attorneys’ fees came in a disclosure only settlement.  Judge Gale expressed this view regarding this type of settlement :

[t]he Cpurt is mindful of substantial commentary that disclosure settlements might often reflect more of a tax cost of a merger transaction rather than a meaningful substantive benefit to the settlement class, particularly when the accompanying release is the broadest possible.  Those considerations perhaps underlie the Delaware Court of Chancery’s recent caution that fee requests in disclosure-only settlements may now face more searching scrutiny, particularly when accompanied by the broadest possible releases.  See In re Riverbed Tech., Inc. S’holders Litig., C.A. No, 10484-VCG, 2015 Del. Ch. LEXIS 241, at *21-22 (Del. Ch. Sept. 17, 2015).

Op. ¶39.

The Court found that the supplemental disclosures obtained by the class plaintiffs could not "be fairly characterized as ‘routine’" and that they "were clearly required to correct prior material disclosures that erroneously described circumstances related to negotiations between the corporation, its CEO, and its suitor."  Op. ¶41.

Expedited Discovery Denied In Class Action Attacking Ecolab’s Acquisition Of Swisher Hygiene

It is common in litigation involving merger transactions for the plaintiff to ask for expedited discovery.  Often, there is a rapidly approaching date for a shareholder vote to approve or disapprove of the transaction, and the class representative seeks to develop evidence which will warrant an injunction preventing the vote.

In Raul v. Burke, 2015 NCBC 91, the Plaintiff was attacking the sale of Swisher’s assets to Ecolab for $40 million in cash.  With a shareholder vote only a week away (set for October 15th), The Business Court denied a Motion for Expedited Discovery (on October 8th).

Plaintiff”s argument was that the disclosure of the transaction did not disclose how much of the $40 million sale price would be distributed to Swisher shareholders. The proxy statement stated repeatedly that the management and directors of Swisher could not reliably estimate any shareholder distribution.  Op. ¶12. In fact, it said that "[w]e can provide no assurance as to if or when such distribution will be made." Op. ¶11.

Where is all of that $40 million going?  Well, Swisher is in financial trouble, facing "continuing recurrent losses."  Op. ¶13.  Its accountants have issued an opinion with a "going concern" qualification.  Op. Par. 13.  Moreover, there is a criminal proceeding ongoing in the Western District of North Carolina regarding accounting irregularities.  Op. ¶9.

The Proxy Statement says that:

[t]he balance of the proceeds will be retained to pay ongoing corporate and administrative costs and expenses associated with winding down the Company, liabilities and potential liabilities relating to or arising out of our outstanding litigation matters, any fines or penalties and other costs and expenses relating to or arising out of the USAO/SEC inquiries, and potential liabilities relating to our indemnification obligations, if any, to Ecolab or to current and former officers and directors.

Op. ¶11.

The Court said that it had to balance the substantiality of the Plaintiff’s claim against the harm or burden that might be imposed on the Defendant if it had to go through the expense and "potential business delay" that would result from expedited discovery.  Op. ¶7.

Continue Reading Two Cases From NC Business Court: Class Action Fees Doubled And Expedited Discovery Denied

Is the certification of a class by an NC state court set in stone or can it be modified during the course of the litigation?

The federal rule vs. the state rule

There is a difference between the federal rule governing class actions (FRCP 23) and the North Carolina equivalent (NCRCP 23).  The length and precision of the federal rule is overwhelming when measured against the short and simple state rule.

The Federal rule contains a specific provision allowing the presiding judge to alter or amend a class certification order: It says that "[a]n order that grants or denies class certification may be altered or amended before final judgment."  FRCP 23(c)(1)(C).

The NC Rule, by contrast, is silent on this subject.

The Original Class Certification

The ability of a Business Court to alter or amend a previously entered class certification order was at issue last week in an unpublished Order in  Elliott v. KB Home North Carolina, Inc.  Judge Jolly had certified a class in the case three years ago, in 2012.  I wrote about that case at the time the class was certified.The class members had in common the issue whether Defendant KB Home should have installed a weather resistant barrier (a "WRB") behind the HardiePlank® siding on homes which they had purchased from KB Homes in two developments in Cary, North Carolina.  

Judge Jolly certified a class of "all persons who own a home that was constructed by Defendant KB Home without a weather restrictive barrier" behind the HardiePlank.  Class notice went out in March 2012.

Three and a half years later, the case is now before Judge McGuire after a couple of trips to the Court of Appeals and Judge Jolly’s retirement.

Change In Ownership Of The Homes Owned By The Class Memberrs

Here was the issue for Judge McGuire: Even before the class notice was sent, 38 of the members of the potential class sold their homes ("Pre-Notice Sellers") to others.  And following the mailing of the class notice, 79 of the class members sold their homes ("Post-Notice Sellers") to others. Who are proper class members? Are all of the homeowners who owned the homes without a WRB on the date of class notice members of the class, even if they had sold their homes?  Or should membership in the class be confined to homeowners who originally bought their homes from KB Homes and continued to own them through the date of final judgment in the case (who knows how long it will be before that happens?).  

A request for modification to the class definition was made by the Plaintiff.

There are multiple issues regarding those potential class members who sold their homes after receiving the class notice.  They either did or did not disclose the existence of this litigation or the absence of a WRB to their buyer.  If they did not, there might have been no impact on the sales price and they therefore might have no damages.  And they certainly did not have a continuing interest in the installation of a WRB, no longer being owner of the house.

Did Judge McGuire have the power to modify Judge Jolly’s order certifying the class?  If Judge McGuire were a federal judge, yes.  But as a state court judge, maybe not.  The NC Court of Appeals held ten years ago that:

Clearly, the federal rule contemplates continuing review of the class certification status of an action. See 3B Moore’s Federal Practice ¶ 23.50 at 23-410. Rule 23 of the North Carolina Rules of Civil Procedure contains no such provision, Nobles v. First Carolina Communications, 108 N.C.App. 127, 423 S.E.2d 312 (1992), rev. denied 333 N.C. 463, 427 S.E.2d 623 (1993), and we will not judicially legislate one.

Dublin v. UCR, Inc., 115 N.C. App. 209, 444 S.E.2d 455, 461 (1994).

But given that a class certification order is an interlocutory order, Judge McGuire held that Judge Jolly’s order was:

‘subject to change at any time to meet the justice and equity of the case’ and [was] ‘modifiable for changed circumstances.’

Order ¶9 (quoting Dublin, supra, 115 N.C. App. at 220). 

He said, however,  that there would have to be "a change in circumstances since [the date of the certification order] that has altered the legal foundation upon which Judge Jolly based his decision to certify the class." Op. ¶10.

As to the homeowners who had purchased from the Pre-Notice Sellers, Judge McGuire ruled that Judge Jolly had "at least impliedly" considered the existence of persons buying the homes before the class was certified, and that he had not intended to limit the class to those who had purchased their homes directly from KB Homes.  The existence of the homeowners buying their homes from the Pre-Notice Sellers was therefore not a "changed circumstance warranting modification of the class definition. Op. ¶16.

The Home Owners Who Had Sold Their Homes After The Class Was Certified Became Members Of A Subclass

Judge McGuire rejected the argument that the potential that the Post-Notice Sellers might have different damages from other class members (in that they would not need the benefit of an WRB being installed or that they might not have suffered damage upon the sale of their home) was a "changed circumstance warranting modification of the class.  He said that:

such individual differences in damages, by themselves, are not sufficient to defeat class certification where they do not predominate over common questions of law or fact affecting an entire class.

Op. ¶22.

But the Post-Notice Sellers nevertheless did represent a "changed circumstance."  That was due to the reason that the Post-Notice Sellers would need to individually establish that they had suffered any injury at all.

The overarching common question in the case remains whether KB Homes complied with the building code and the manufacturer’s recommendations regarding the need for a WRB.  (Judge McGuire recently denied KB Home’s motion for summary judgment on this issue in another unpublished Order).

borrowing from the U.S. Supreme Court”s recent Wal–Mart decision on class certification, Judge McGuire held that:

‘[w]hat matters to class certification . . . is not the raising of common "questions" — even in droves — but, rather the capacity of a class-wide proceeding to generate common answers apt to drive the resolution of the litigation.  Here, the answer to the question of whether the failure to install a WRB violated the then-existing building code will ”drive the resolution’ of Plaintiff’s claims.

Op. ¶26 (quoting Wal-Mart Stores v. Dukes, 131 S.Ct. 2541, 2550-511 (2011)).

The "changed circumstances" allowed a modification of the class definition to create a sub-class of the Post-Notice Sellers.  Counsel for the class were directed to add a named Plaintiff who was a Post-Notice Seller to represent the interests of the class. Op. ¶29.

Are you confused about which homeowners are in this class and which are not?  Here’s my take on that:

Time of Transaction In Or Out Of Class?
Sold before class notice Out (neither party sought their inclusion (Op. ¶14 & n.18)
Bought before class notice In
Sold after class notice In
Bought after class notice Out

II haven”t written about a class action issue for a while given the entry of the Robinson Bradshaw firm into the elite class of law firms with blogs.  Lawyers there write an excellent blog devoted entirely to the subject of class actions in North Carolina: the Carolinas Class Action blog.

 

Continue Reading Can An NC Superior Court Judge Modify Another Judge’s Class Certification Order?

It seems like forever ago that the then venerable North Carolina institution, Wachovia Bank, failed and was acquired by Wells Fargo.  (This was actually seven years ago).  But just last week came what might be the final closure in the battle by the lawyers representing the class which challenged that acquisition to be paid their "well-deserved fees."  If you don’t detect the sarcasm in that last sentence, you can read what I’ve previously written about that fee application here and here.  I’m not a fan.

But putting aside my venom, last week the NC Court of Appeals, in Ehrenhaus v. Baker, affirmed Judge Murphy’s March 2014 Order awarding class counsel slightly over $1 million in fees and expenses.  The COA didn’t assess the reasonableness of that fat fee, it said that Judge Murphy had properly assessed it in his 2014 Order.

The value in the decision from the Court of Appeals is for lawyers representing class plaintiffs in future class action settlements.  North Carolina, in this ruling, has embraced the concept that class action settlements can include an agreement for the defendant to pay attorneys’ fees.

Perhaps you are thinking that there is nothing unusual about a settling party agreeing to pay the opposing party’s legal fees.  Defendants often agree to pay the plaintiff’s attorneys’ fees as a part of a settlement.  But in the class action context, the creation of a common fund was the only exception previously recognized in North Carolina to the "American Rule."  The American Rule provides that "a successful litigant may not recover attorneys’ fees . . . unless such a recovery is expressly authorized by statute."  Op. at 17.

Some other jurisdictions recognize the "common benefit" doctrine as a second exception to the American Rule when a class action is involved.  North Carolina rejected that basis for fees — which allows an award when the class plaintiff "confers a common monetary benefit on the class" — in In re Wachovia Shareholders Litig., 168 N.C. App. 135, 139, 607 S.E.2d 48, 50-51, disc. rev. denied, 359 N.C. 411, 613 S.E.2d 25 (2005).

The COA approved the award of fees to the Ehrenhaus class’  lawyers by recognizing a third exception to the American Rule.  Judge Davis wrote:

we hold that the parties to a class action may agree to a fee-shifting provision in a negotiated settlement that is — like all other aspects of the settlement — subject to the trial court’s approval in a fairness hearing.  During the fairness hearing, the trial court must carefully assess the award of attorneys’ fees to ensure that it is fair and reasonable.

Op. at 22 (emphasis added).

This decision isn’t big news to the Business Court.  The Court has been assessing the reasonableness of fees paid to class counsel via a negotiated settlement for a long time, at least since its decision in In re Harris-Teeter Merger Litig., 2014 NCBC 44, in which Chief Judge Gale thoroughly examined the Court’s power to award fees as the result of a class action settlement (in ¶¶51-57).

I’m not sure if this is the final chapter in the effort by the class’ attorneys to obtain the fees that they requested.  You might remember that Judge Murphy denied any award of fees to the North Carolina attorney co–lawyering with Mr. Ehrenhaus’ New York counsel.  The Business Court awarded nothing to him even though there was a valid fee sharing agreement between him and Ehrenhaus’ out of state counsel which specified that local counsel would receive five percent of the total fee.  Since local counsel offered no evidence of the time expended or his hourly rate the Court could not determine whether the five percent (which would have been more than $50,000) was reasonable.

Judge Davis dropped a footnote in the COA decision saying that "[w]hile we express no opinion on this issue, we note that Judge Murphy’s Order does not contain language foreclosing the possibility of [NC counsel] ultimately being deemed entitled to receive some portion of the attorneys’ fees at issue."  Op. at 26 & n.3.

Even so, it’s probably a little bit late in the day for Mr. Ehrenhaus’ local counsel to apply to the Business Court for fees.

 

Judge Gale’s decision earlier this month in Corwin v. British American Tobacco PLC, 2015 NCBC  74 dismissed all of the claims of the Plaintiff class.  If the name Corwin is ringing a bell with you, his case is the shareholder class action over the now completed transaction among Reynolds American, Inc. (RAI), Lorillard, Inc., British American Tobacco (BAT), and Imperial Tobacco Group.  RAI (which you probably still think of as RJ Reynolds Tobacco Company) is the second largest tobacco company in the United States.  Defendant BAT  is RAI’s largest shareholder, holding 42% of its stock.  RAI acquired Lorillard (then the third largest tobacco company in the U.S.) in the transaction.

BAT helped fund RAI’s purchase of Lorillard (for $27.4 billion) by buying approximately $4.7 billion in RAI stock in order to maintain its 42% ownership of RAI.  RAI funded the remainder by selling of several of its popular cigarette brands to Imperial Tobacco Company, a tobacco holding company headquartered in Bristol, England.

Corwin’s action asserted that BAT and RAI’s  board of directors had breached their fiduciary duty of candor to him and other BAT shareholders by making inadequate disclosures regarding the transaction.  The claim that the disclosures were inadequate were resolved by a settlement in January 2015.  You can read that settlement agreement here.

Did BAT, RAI’s 42% Shareholder, Owe A Fiduciary Duty To RAI’s Minority Shareholders?

The issue before Judge Gale was whether BAT, which held only 42% of RAI’s shares and was therefore not a majority shareholder of RAI’s stock, owed any fiduciary duty at all to Corwin and the class of minority shareholders which he was seeking to represent.

North Carolina Law

If you are thinking that in North Carolina only majority shareholders owe a fiduciary duty to minority shareholders, and are skilled enough at math to know that 42% is not a majority, then you are dead on target.  Judge Gale wrote that "North Carolina courts have never squarely addressed whether a minority shareholder can exercise control adequate to impose such a fiduciary duty."  Op. ¶46.

Corwin argued that a fiduciary duty should be imposed because North Carolina precedent turned on whether the shareholder exercised "dominance and control, which can exist without majority ownership or voting control."  Op. ¶46.

To be fair to Mr. Corwin, loose language (you might say dicta) in North Carolina appellate decisions can be read to support the position that a minority shareholder’s control (absent majority ownership) of a corporation can result in that shareholder owing a fiduciary duty to its fellow shareholders.  Judge Gale cited the following cases for that proposition:

See, e.g., Hill v. Erwin Mills, 239 N.C. 437, 444, 80 S.E.2d at 358, 363 (1954)("It is the general rule that when the fairness of transactions between a corporation and one dominating its policies is challenged, the burden is upon those who would maintain such transactions to show their inherent fairness to all parties concerned."); T-WOL Acquisition Co. v. ECDG S, LLC, 220 N.C. App. 189, 208 n.8, 725 S.E.2d 607, 617 n.8 (2012) ("[C]ontrolling or majority shareholders owe a fiduciary duty to minority shareholders in a closely held corporation." (emphasis added)); Freese v. Smith, 110 N.C. App. 28, 37, 428 S.E.2d 841, 847 (1993) ("In North Carolina, it is well established that a controlling shareholder owes a fiduciary duty to minority shareholders."); . . . .  Fulton v. Talbert, 255 N.C. 183, 185, 120 S.E.2d 410, 412 (1961) ("[W]here the corporation is so dominated and controlled by a wrongdoer as to be powerless to act, minority stockholders may bring the action, making the corporation a party.").

Op. ¶53.  Judge Gale, upon reviewing those cases, concluded that none of these North Carolina cases held that a "controlling shareholder must be a majority owner" but that in each case imposing a fiduciary duty, "the shareholder subject to that duty either owned or had control over a majority interest."  Op. ¶51.  He said that North Carolina precedent:

leaves open the specific question of whether a minority shareholder can exercise the degree of control . . . adequate to impose a fiduciary duty on that shareholder.

Op. ¶53.

The argument that North Carolina would impose a fiduciary duty on a non-majority shareholder therefore failed, Judge Gale then turned to Plaintiff’s argument that Delaware law placed a fiduciary duty on a "controlling" — even if minority — shareholder.

Delaware Law Says That A Minority Shareholder Can Owe A Fiduciary Duty Under Certain Circumstances

The Delaware cases on which Corwin relied in support of his fiduciary duty argument were distinguished by Judge Gale as requiring "actual, rather than theoretical control" before imposing that duty.  Op. ¶56.

There is a presumption in Delaware "that a shareholder who owns less than fifty percent of the outstanding stock of a corporation is not a controlling shareholder.  Op. ¶56.

Getting past that presumption requires detailed allegations of actual control.  Judge Gale said that:

Delaware courts impose a significant pleading burden to allow a fiduciary claim against a minority shareholder and will dismiss such a claim under Delaware’s Rule 12(b)(6) in the absence of sufficient allegations.

Op. ¶56.

Corwin’s Complaint contained "significant detail," (Op. ¶62), which Corwin said demonstrated BAT’s control over RAI (summarized in ¶62 of the Opinion), including a "Governance Agreement," between RAI and BAT which gave BAT veto power over whether certain intellectual property of RAI could be sold to complete the deal and a variety of other factors.

Judge Gale said, after reviewing Corwin’s argument, that BAT had influence over the transaction but that "[i]nfluence does not equate to control and the potential imposition of a fiduciary duty turns on evidence of actual control."  Op. ¶63.

The conclusion of the Court was that even if North Carolina were to follow the Delaware standard, that the Complaint’s allegations did not:

adequately allege that BAT’s control over the Transaction was considerable enough to be the voting and managerial equivalent of a majority shareholder’s control, or so potent that the independent Other Directors were unable to exercise their judgment freely with[out] fearing BAT’s retribution.

Op. ¶65 (citation omitted).

The Court went on to dismiss fiduciary claims against the RAI directors.  That dismissal involved a discussion of whether a shareholder has standing to bring a direct claim against a member of a board of directors. That sort of claim is generally brought on a derivative basis.  Judge Gale sidestepped the standing issue, ruling that the attempted claim against the RAI directors failed on the merits..Op. ¶74..

What’s Next

Given Corwin’s marked lack of success on his claims regarding the RAI Transaction,  I’m wondering how much Corwin’s counsel will dare to ask for in fees for getting the "disclosure only" settlement which they obtained in January of this year.  My views on the value of such settlements are that they often bring little value to the members of the shareholder class obtaining them and that the fees awarded should take that into account.

Judge Gale directed Corwin’s counsel to file a motion for approval of their settlement before the end of August.  We will soon see if this settlement will spin off a sizeable fee.

 

 

The Business Court last week knocked down a fee request of Plaintiffs’ class action counsel to $500,000, from the $660,000 requested, in an Order in Nakatsukasa v. Furiex Pharmaceuticals, Inc., 2015 NCBC 68.

The Settlement Of The Class Action

The ruling was entered in conjunction with the approval of a settlement of four class actions (two filed in North Carolina and two filed in Delaware).  The lawsuits concerned a challenge to Defendant Furiex’s merger with Defendants Royal Empress, Inc. and Royal’s affiliate Forest Laboratories, Inc.

As a part of the settlement, Plaintiffs’ counsel reserved the right to apply to the Court for approval of fees not to exceed $695,000.  Given that the Defendants had waived their right to challenge the fee application, it fell to Judge McGuire to determine whether the fees requested were reasonable.

If the first question in your mind is "how much money did the Plaintiff obtain for the class?", the answer is none.  The claimed value to the class came in the waiver of "DADW provisions" in Confidentiality Agreements executed by the Defendants Royal Empress and Forest Laboratories as well as other potential buyers of Furiex.  There were also some additional disclosures obtained via the settlement.  (If you don’t know my feelings about the value contained in disclosure only settlements, you haven’t been reading this blog.)

DADW Provisions?

The NC Business Court hasn’t had the opportunity to consider the viability of DADW — don’t ask, don’t waive — provisions,  but the Delaware Court of Chancery has ruled that they are not presumptively impermissible. If you are wondering what a DADW provision does, it prohibits the entity signing it from making an offer for the target corporation’s shares without an express invitation from the target’s Board of Directors. The "don’t ask" aspect prevents the signing party from asking the target’s Board to waive that restriction.

Since the Court didn’t discuss the validity of the DADW provision at all, except to say that the waiver of it procured by the litigation was "a significant benefit to shareholders," (Order  ¶41), the validity of this type of deal protection device in North Carolina remains untested.  Given that the Court accepted Plaintiffs’ counsel’s argument that they had obtained value for the class  in the waiver of the DADW restriction (meriting fees of half a million dollars), lawyers in North Carolina should be cautious about including DADW’s in their merger related documents . 

The lawyers for the class (two New York class action firms) had a pretty high opinion of the value that they had obtained for the class.  The requested that the Court allow $660,000 in fees for 700 hours of work. 

You don’t need to do the math to figure the hourly rate that those figures yield. Judge McGuire calculated it at a staggering $941.72 per hour (Order ¶35), which was triple the hourly fee the Business Court had approved in a previous class action (In re Harris Teeter Merger Litig., 2014 NCBC 44) and seven times the hourly fee awarded in another class action approval (In re Progress Energy Shareholder Litig., 2011 NCBC 44).

The Business Court Refused To Apply A Multiplier To Plaintiffs’ Counsel’s Lodestar

The $660,000 sought was based on a request for a multiplier of 1.7 to be applied to the lodestar amount established by  Plaintiffs’ counsel’s regular billing rates (that was $388,465).  A "lodestar," if you are not familiar with the term, Wikipedia defines it as "a method of computing attorney’s fees whereby a trial court must multiply the number of hours reasonably spent by trial counsel by a reasonable hourly rate."

Judge McGuire observed that no reported North Carolina appellate decision had ever applied a multiplier to increase a lodestar amount (Order ¶35), so he decided that the "best course is to assess the requested fees as if Plaintiffs were seeking an award of $941.72 per hour, and to consider such request based on whether special legal skills  and experience were involved that are not available in North Carolina, the rates charged by attorneys for comparable work in the local area, and in light of the result obtained for the amount of work expended."  Order ¶35.

Were North Carolina attorneys capable of handling this litigation?  The Plaintiffs’ local counsel represented to the Court that "he did not believe there were a substantial number of attorneys in North Carolina prosecuting this type of shareholder action."  Order ¶36.  Judge McGuire said that the lack of specific information whether there were North Carolina attorneys qualified to handle the case warranted in favor of a "premium rate."  Id.

The Court Said That A Fee Award Of $941.72 Per Hour Would Be "Extraordinary"

Looking at the electronic docket sheet in the case, Plaintiffs’ counsel did little more than filing a Complaint, a Motion for Expedited Discovery, and a Motion for approval of the settlement that they brokered.  On top of that, they took two depositions and reviewed only a thousand pages of documents.  Order ¶39. Maybe the case did require supremely qualified counsel not available in NC.

The rates "generally charged for sophisticated business litigation in North Carolina" were deemed to be $321.91 per hour (found to be "reasonable in In re Harris Teeter, 2014 NCBC 44 at ¶63), although Judge McGuire said that "his own experience is that rates of approximately $300 – $550 per hour are typical of the fees charged for this type of work in Wake County, North Carolina.  Order ¶37.

Looking at the substantially higher hourly fee of $941.72 sought by Plaintiffs’ counsel, Judge McGuire deemed it to be an "extraordinary amount" (Order ¶41).

The Judge exercised his discretion and awarded $500,000 in fees.  Order ¶42.  That yielded an hourly rate of $712.96, still a pretty impressive award.  And notwithstanding Judge McGuire’s rejection of the application of a multiplier, I calculate that as a multiplier of 1.28711724 on the lodestar of $388,465.