Delaware Court of Chancery Chancellor Leo Strine has a reputation for scrutinizing fee awards more closely than most. So it was a surprise when, last month, he approved a $285 million fee award—amounting to $35,000/hour for 8000 hours of work—to attorneys who successfully prosecuted a case against Grupo Mexico over the terms of a transaction with a related entity that eventually resulted in a $2 billion judgment. (The attorneys had sought $428 million; the fee award will be augmented with another $15 million in interest.) [WSJ; Reuters; WSJ Law Blog] As Bainbridge and Frankel note, the opinion seems to be sending a message to attorneys afraid of Delaware's scrutiny of fee awards: stop jurisdiction-shopping elsewhere, as we'll take care of you if you bring a legitimate case here. (Of course that promise isn't going to stop forum-shopping for the frivolous "disclosure" cases that provide no benefit to shareholders in exchange for a quick million-dollar payment to the derivative shareholder counsel.)
Thing is, the fee award isn't just outrageous because of the mismatch between risk and reward: over 50 times lodestar means that these lawyers could earn a very comfortable living bringing cases with a 2% chance of success, which is why a lodestar cross-check is of some relevance. If class counsel can average single lodestar, they'll be millionaires: lodestar means that $80,000/year paralegals and $150,000/year associates are generating hundreds of dollars an hour, the majority of which go to the partners—in addition to the partners' fee awards of $600/hour-plus. If class counsel get multiples of lodestar every time they win (or even obtain partial recovery), then they'll average well over lodestar even if they lose the majority of their cases: losses usually require less time commitments than victories. (I once had a class counsel show me spreadsheets of cases where they got less than lodestar to justify a fee award where they got several times lodestar; the five cases where they got zero still meant they were averaging well over double lodestar.) Given that the Supreme Court has said that lodestar is a reasonable fee even in a contingent case with risk of non-payment, the windfalls of several times lodestar in cases that just happen to be huge are not providing good protection to shareholders and class members.
But this fee request is particularly outrageous because, as very few have noted, and no one has fully explored the ramifications of, the defendant Grupo Mexico is on both sides of the transaction. Thus, Grupo was ordered to repay Southern Peru $2 billion. But Grupo owns 80% of Southern Peru stock, so is paying $1.6 billion to itself—of which the plaintiffs' attorneys will be taking a $240 million cut. The real loss to outside shareholders is $400 million, but attorneys are now going to sweep up over 70% of that for themselves.