Search krispy kreme

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.