I've previously opined on the problem of extortionate shareholder derivative suits that are entirely fee-driven with no benefit to shareholders. Professor Michael Perino (St. John's) points me to a recent Delaware decision, In re Emerson Radio Shareholder Deriv. Lit. (via Pileggi), that attempts to clarify the issue, but may only confuse it further. He's generously given me permission to repeat his analysis:
The opinion restates the traditional rule courts in Delaware about fee awards. Courts award fees based on the following factors: (i) the amount of time and effort applied to the case by counsel for the plaintiffs; (ii) the relative complexities of the litigation; (iii) the standing and ability of petitioning counsel; (iv) the contingent nature of the litigation; (v) the stage at which the litigation ended; (vi) whether the plaintiff can rightly receive all the credit for the benefit conferred or only a portion thereof; and (vii) the size of the benefit conferred.
The decision is odd on a number of levels. The standard is, of course, so vague that you can use it to justify any fee. The fee levels the court suggests (10% - 15% in cases that settle early in the pre-trial process; 15% to 25% for those that settle after significant discovery or motion practice) seem high and create a disincentive to early settlement. True, this approach might deter the attorney from settling the case too early and too cheaply, but perhaps at the cost of make-work.
Awarding fees for the non-monetary gains to the corporation seems completely inappropriate. To be sure, the court criticizes counsel who try to inflate their own recovery by claiming the value of these therapeutic benefits, but it uses some pretty suspect math to come up with its own valuation. Giving the lawyers 25% of this "value" leads to a fee award of 29% of the monetary benefits in the case.
The notion that we consider the "standing and ability of counsel" seems to be an invitation to award greater fees to established firms (thus helping to maintain a concentrated plaintiffs' bar).
The court also makes an interesting observation about risk by contrasting this case from the run-of-the-mill M&A action: "[u]nlike when entrepreneurial plaintiffs' firms routinely file representative actions against mergers, knowing that the defendants' ability to issue supplemental disclosures and the hydraulic pressure of deal closure will combine to create a ready-made settlement opportunity, plaintiffs' counsel here did not get into the case with an obvious and well-marked exit in sight." That might be true to a degree, but I think the court is still suggesting more risk than there actually was. The case involved related party transactions by a CEO and majority shareholder. An outside law firm had already determined that there had been irregular transactions. Was there really that much risk of non-recovery?
To this excellent analysis I would add that (1) the suggested fee levels guarantees make-work unless a court considers whether the additional litigation added any benefit to the shareholders at the margin by virtue of a higher settlement offer than the early offer, and the make-work is especially problematic given that it is a double-cost to shareholders, who are paying both for their "own" attorneys and those of the corporation; and (2) considering the "standing and ability" of counsel is double-counting: the ability of counsel can (and should) be measured entirely by the results achieved by counsel.
The Center for Class Action Fairness (which is not affiliated with the Manhattan Institute) is looking for institutional investors interested in challenging attorney-fee awards in shareholder litigation whom we could represent pro bono.