WILMINGTON, Del. (Legal Newsline) - Securities class action lawyers are sure to be rejoicing at a recent ruling that gives them 26.7 % of the largest cash recovery in the history of the Delaware Court of Chancery.
Labaton Suchaow and Emanuel Urquhart & Sullivan led a shareholder class action against Dell Technologies after the company's purchase of EMC and its 82% stake in VMware created a pile of debt.
Litigation followed Dell's purchase of stock from holders (the full saga is outlined in the opinion). Five cases were consolidated and years later, ahead of a December 2022 trial, a mediator proposed a $1 billion settlement. The sides agreed.
Firms pushing the consolidated cases asked for 28.5%, which drew objections over the "sheer enormity of the fees sought." Chancery Court Vice Chancellor J. Travis Laster was tasked with deciding if, considering the amount recovered, the percentage taken by plaintiff attorneys should be lowered.
Much of his opinion refers to Americas Mining Corp. v. Theriault, a 2012 state Supreme Court decision that sets a framework for fee awards that includes the stage of the case when it was resolved.
"A court awards a higher percentage when plaintiff's counsel has pushed deeper into the case, which rewards plaintiff's counsel for taking more risk in pursuit of the best outcome," Laster wrote.
"The stage-of-case approach helps counteract the natural human tendency toward risk aversion and gives plaintiff's counsel an incentive to eschew an early, lower-valued settlement."
Laster criticized the strategy some shareholder firms employed in the past, in which they filed more cases and did less work.
"Delaware's experience during the M&A litigation epidemic demonstrated that entrepreneurial counsel can profit by filing weak cases on an industrial scale, putting in minimal work, and settling by offering defendants a global release in return for no-cost or low-cost relief plus an agreement not to oppose an attorneys fee award," he wrote.
"That business model worked for everyone directly involved: Entrepreneurial counsel got paid, defense counsel got paid, and the defendants got a release. It only harmed absent class members (who got bupkus), the courts (who had to process the non-litigation litigation), and society as a whole (Because real claims were not litigated, and transactional standards deteriorated when the cases always settled anyway)."
So it is important to let firms chase the gold at the end of a long rainbow, as those that sued Dell did, the opinion essentially says. The firms spent $4 million pursuing their "real case" and they obtained "a real and unprecedented result," Laster wrote.
For large settlements, objectors said the percentage of the fee award should be reduced from what is normally an appropriate percentage of recovery, like the 28.5% request in the Dell case.
Scholars say federal courts tend to award 10-12% in securities settlements of $1 billion or more. The objectors own 26.1% of the class' shares, which meant they'd receive $49 million if the fee award was lowered to 10%.
In the end, lawyers will take $266.7 million from their $4 million investment.
"The declining percentage method runs counter to Americas Mining and the incentive structure that the Delaware Supreme Court created," Laster wrote.