Huge paydays for the attorneys who pursue high-risk cases in the country’s premier venue for corporate litigation is a Delaware precedent that must be upheld, the Delaware Supreme Court ruled Wednesday.
A $267 million fee award for the attorneys who negotiated a historic $1 billion settlement with Dell Technologies Inc. makes sense because the trial court that approved the award acted within its discretion, Chief Justice Collins J. Seitz Jr. said in an opinion for the court’s full five-member panel.
“In Delaware, we are used to big numbers,” Seitz said. “We agree with the court’s observations that it was a highly contentious litigation, spanning two and a half years, with nearly 100 lawyers entering appearance for the defense.”
The ruling may be a concern for Tesla Inc., which faces unusually large fee applications in two separate lawsuits involving CEO Elon Musk’s pay package and compensation for the electric vehicle maker’s board.
While the fee requests in the Dell and Tesla cases have made headlines over the last year, nine-figure awards for plaintiffs’ attorneys are rare in Delaware. The high court’s full five-member panel appeared skeptical of disturbing the state’s precedents for determining fee awards during oral arguments in May.
$267 Million
Pentwater Capital Management LP challenged the Dell fee award, arguing the Chancery Court abused its discretion in approving “a windfall” amounting to 27% of the settlement that resolved claims over a 2018 stock conversion. Reached 19 days before trial, it set a Chancery Court record for stockholder settlements.
The $267 million fee award was the second-highest fee award in the court’s history. The largest came in a 2011 case involving the takeover of a Mexican mining company, amounting to $304 million—15% of the $2 billion in damages awarded after trial.
Pentwater wanted the Chancery Court to follow federal court methodology that constricts payouts in cases involving big settlements. The Chancery Court had rejected the federal method, saying it conflicted with Delaware’s multi-factor test to ensure legal fees are fair. Those factors include a case’s complexity and the stage it reaches, the attorneys’ experience and ability, and any contingency arrangement that leaves them vulnerable to not being paid at all.
“Consistent with the cases preceding it, in Americas Mining we refused to adopt rigid rules in fee award cases,” Seitz said. The high court agrees with the Chancery Court that, following that 2011 case, the factors Delaware considers for determining fee awards “control a megafund fee award, rather than any per se rule, whether declining percentage or any other rule,” he said.
“After Americas Mining, we follow the consensus in the federal courts that it is within the discretion of the court to reduce a fee percentage to account for the size of the award. On appeal, this Court will not usually disturb the Court of Chancery’s ruling if the court adequately explains its reasons and properly exercises its discretion” when applying those determining factors, Seitz said.
While the high court found that the Chancery Court had “more than adequately justified its fee award,” Vice Chancellor J. Travis Laster had been wrong to say that Pentwater’s objection had “come with ill grace,” Seitz said. Laster had chided the hedge fund for seeking a declining-percentage methodology when they don’t use such models themselves.
Pentwater “did not make unreasonable or frivolous arguments,” Seitz said. “In our view, the court should not deter meritorious objections from stockholders who have been harmed by subjecting their business practices to scrutiny as part of fee award proceedings. Their non-frivolous objections, when appropriate, act as another check on the reasonableness of the fees sought by counsel from a common fund.”
The Dell appeal came amid two huge fee award requests in the Tesla lawsuits in Chancery Court. In one case, lawyers want a $230 million payout for representing a pension fund that pushed Tesla to a pending $919 million settlement over board compensation. Tesla contends $63.5 million for attorneys’ fees would be reasonable.
Chancellor Kathaleen St. Jude McCormick has said whether she approves that settlement and fee award depends on how she decides what fees are reasonable for the lawyers representing an investor who successfully challenged Musk’s CEO pay. She heard arguments July 8 about their request to be paid in 29 million Tesla shares worth about $7 billion.
The Delaware Supreme Court opinion includes cautionary language about the public perception of huge fees.
It’s fair to ask “outside our somewhat insular legal universe, whether the public would ever believe that lawyers must be awarded many hundreds of millions of dollars in any given case to motivate them to pursue representative litigation or to discourage counsel from settling cases for less than they are worth,” Seitz said. “At some point, the percentage of fees awarded in a megafund case exceed their value as an incentive to take representative cases and turn into a windfall.”
Pentwater is represented by Bayard PA. The pension fund that brought the Dell case is represented by Labaton Keller Sucharow, Quinn Emanuel, Andrews & Springer, Robbins Geller, and Friedman Oster & Tejtel.
The case is In re Dell Tech. Inc. Class V S’holders Litig., Del., No. 349,2023, opinion 8/14/24.
