GLASSCOCK, Vice Chancellor.
As a bench judge in a court of equity, much of what I do involves problems of, in a general sense, agency: insuring that those acting for the benefit of others perform with fidelity, rather than doing what comes naturally to men and women— pursuing their own interests, sometimes in ways that conflict with the interests of their principals. In this task, I am generally aided by advocates in an adversarial system, each representing the interest of his client. Of course, these counsel are themselves agents, but their actions are generally aligned with that of their principals in a way that does not require Court involvement. The area of class litigation involving the actions of fiduciaries stands apart from this general rule, however, especially in litigation like the instant case, involving the termination of ownership rights of corporate stockholders via merger. Such cases are particularly fraught with questions of agency: among others, the basic questions regarding the behavior of the fiduciaries that are the subject of the litigation; questions of meta-agency involving the adequacy of the actions of the class representative—the plaintiff—on behalf of the class; and what might be termed meta-meta-agency questions involving the motivations of counsel for the class representative in prosecuting the litigation. At each remove, there may be interests of the agent that diverge from that of the principals. This matter, involving the deceptively straightforward review of a proposed settlement, bears a full load of such freight.
This matter is before me to approve a settlement on behalf of a class consisting of the common stockholders (the "Class")
A. Class Certification
I first address the certification of the Class. This is a stockholder action that alleges breaches of fiduciary duties, raising identical issues with respect to each member of the very numerous Class. For the reasons set out in multiple decisions of this Court, this Class and its representation by experienced Plaintiffs' counsel meets the requirements of Rule 23(a).
B. Objectors' Standing
Before turning to the substantive analysis of the agency considerations at issue, both in the class action context generally and in the specific Settlement here, I note that no stockholder owning stock on or before the date the Merger was announced made a timely objection.
The Plaintiffs urge me to find that a party taking exception to a potential settlement must be a stockholder before the underlying transaction is announced. This argument is made despite the fact that Mr. Griffith is clearly a member of the Class who will be affected by the Settlement, and that it is the Settlement itself that is the "transaction" he seeks to challenge. The Plaintiffs opine that if objectors in Mr. Griffith's position are permitted to be heard, "professional" objectors with nefarious strike-suit motives will pop up like mushrooms after a two-day rain. This Court has tools, however, including application of the doctrine of unclean hands, to deal with that problem, should it occur. At any rate, given that Mr. Griffith is a member of the Class and thus interested in the Settlement, I find that he is entitled to oppose the Settlement.
B. Consideration of the Proposed Settlement
In light of the agency problems inherent in representative litigation, mentioned above and discussed in more detail below, it falls to this Court to determine whether a proposed class action settlement is fair to the Class. This Court and our Supreme Court have recognized that the evaluation of fairness involves consideration of the "balance [of] the value of all the claims being compromised against the value of the benefit to be conferred on the Class by the settlement."
The Agency Problems
a. The Interests of the Class Representative and Counsel
Settlements in class actions present a well-known agency problem: A plaintiff's attorney may favor a quick settlement where the additional effort required to fully develop valuable claims on behalf of the class may not generate an additional fee as lucrative to the plaintiff's attorney as accepting a quick and moderate fee, then pursuing other interests. The interest of the principal—the individual plaintiff/stockholder—is often so small that it serves as scant check on the perverse incentive described above, notwithstanding that the aggregate interest of the class in pursuing litigation may be great—the very problem that makes class litigation appropriate in the first instance.
This agency problem is, in part, ameliorated—but not entirely eliminated— by requiring counsel for both sides to refrain from negotiating fees until a settlement of the underlying matter is reached. I am assured that this hygienic procedure was followed scrupulously here. Nonetheless, the agency problem remains, as both sides are necessarily aware that the common benefit doctrine will permit the plaintiffs to seek an award of fees.
Nothing in this discussion should be read as a criticism of plaintiffs' counsel in class actions, either collectively or with reference to the individuals here. In fact, the proper functioning of our system of common-law review of corporate actions could not occur absent an active plaintiffs' bar, and much conduct by corporate fiduciaries inimical to the interests of the stockholders—the core agency problem—would never see the light of day if not for the efforts of counsel and the risks they take in the prosecution of cases for a contingency fee, on behalf of the stockholders.
b. The Incentives of the Defendants
The adversarial system provides little comfort that mal-alignments between the interests of the class and its counsel resulting from perverse incentives will be revealed and addressed, because the defendants' interest is largely subsumed within that of the successor entities' interest, which is commonly in the consummation of the deal and the termination of any further litigation threat. Where the defendants' interest may be captured via a broad release, inexpensive disclosures and a modest—in light of the value of the merger—fee award, there is little incentive for the defendants to engage in further litigation even if the claims are weak; and every reason to go forward to obtain via settlement what one member of this Court has termed "deal insurance," the broadest release possible.
In combination, the incentives of the litigants may be inimical to the class: the individual plaintiff may have little actual stake in the outcome, her counsel may rationally believe a quick settlement and modest fee is in his best financial interest, and the defendants may be happy to "purchase," at the bargain price of disclosures of marginal benefit to the class and payment of the plaintiffs' attorney fees, a broad release from liability.
c. The Lack of an Adversary
It is the agency problem just described (among other factors) that, despite this Court's general encouragement of settlement rather than litigation, mandates scrutiny of settlements by this Court in class actions.
The interests of the individual litigants and their counsel may not be fully aligned with the class, as I have described. Moreover, members of the class, who are the potential losers if the settlement is improvidently approved, may, like the class representative, have but a small stake in the outcome; they may not have sufficient incentive to make appearance and objection worthwhile.
d. Considerations in this Matter
This case, like many stockholder actions settled in this Court, was resolved by the Defendants agreeing to make additional disclosures to the stockholders, which in theory enable the plaintiff Class to exercise its franchise in a better-informed manner. While such disclosures are in some instances material to the class members in exercising their voting franchise, and are thus valuable,
Fairness of this Settlement
The Plaintiffs and the Defendants agree that settlement is appropriate here. The Plaintiffs first point to the Supplemental Disclosures it obtained for the Class.
While the disclosures involving Goldman are negative disclosures of the type this Court has in the past found of value to the Class, I note that, of the shares voting, 99.48% voted in favor of the Merger despite the disclosures. This demonstrates to me, even without resort to the academic literature that questions the value of disclosures to the Class, that the disclosure here was not of great importance. To use the expression first made in this context by Chancellor Allen, the Plaintiffs have achieved for the Class a peppercorn,
The Plaintiffs, through counsel at oral argument and in the briefing, argue strenuously that although the fiduciary duty claims in the complaint were robust, their expert informed the Plaintiffs that he could not opine that the Merger price was unfair to the Class. In light of that representation, therefore, while viable (according to the Plaintiffs) fiduciary duty claims are being released, they are not claims that could have resulted, if pursued, in a benefit to the Class. Further, Plaintiffs' counsel testified that he is expert in the area of Federal securities litigation, that he examined the record with an eye toward potential Federal claims, and that none appeared viable. In light of that, according to the Plaintiffs, the "give" from the Class in connection with the Settlement is basically nil.
The Objector made two arguments against acceptance of the Settlement. First, he argued that the Supplemental Disclosures are essentially valueless. I have already found, however, that the Supplemental Disclosures had tangible, although minor, value to the Class. At oral argument, the Objector pursued a second course: arguing that there may be valuable unknown claims extinguished by the release and that the lack of a full record should cause me to reject the Settlement, leaving the parties to pursue further litigation or attempt to reach a settlement with a much narrower release. This, in light of the rather meager benefit achieved by the Settlement for the Class, as well as the broad release bargained for, is a serious objection. In another factual scenario it might well carry the day. However, under the specific facts here, I find the Settlement appropriate, in light of the following.
I note first that, given the past practice of this Court in examining settlements of this type, the parties in good faith negotiated a remedy—additional disclosures—that has been consummated, with the reasonable expectation that the very broad, but hardly unprecedented, release
In light of the unique circumstances described above, if I may describe what has been achieved for the Class as a peppercorn, what has been released looks more like a mustard seed. That fact notwithstanding, the breadth of the release is troubling. It is hubristic to believe that upon this record I can properly evaluate, and dismiss as insubstantial, all potential Federal and State claims. If it were not for the reasonable reliance of the parties on formerly settled practice in this Court, which I have found above, the interests of the Class might merit rejection of a settlement encompassing a release that goes far beyond the claims asserted and the results achieved. However, in the specific circumstances presented, I find the Settlement fair to the Class, and approve it.
D. Attorney's Fees
Finally I turn to attorney's fees. This Court follows the American Rule on fees, under which each party bears its own. Exceptions exist, however, and to the extent that the Plaintiffs have achieved a benefit, via prosecution of litigation meritorious when filed, shared by the owners of the company—the class of common stockholders
The Plaintiffs also contend that the Mooted Disclosures, that is, those disclosures in the definitive proxy that were made after the seven individual complaints alleged deficiencies in the preliminary proxy, should be considered in my award of attorney's fees. The most significant of the Mooted Disclosures included inputs to the free cash flow projections for 2014-2019 derived by management and relied upon by the financial advisors; management's capital expenditure projections for 2014-2019; and the financial advisors' treatment of stock-based compensation in their fairness opinions. To the extent those disclosures were of value to the Class, they can support a fee award, but only if the litigation itself was both meritorious when filed
Under Delaware law, a presumption of causation arises by chronology; that is, where claims against a defendant are mooted while litigation is pending, the actions mooting the claims are presumed to have resulted from the litigation.
I evaluate the Plaintiffs' fee request—$500,000—under the well-known Sugarland factors.
Here, the benefit achieved via the Supplemental Disclosures (involving banker conflicts) was minor but tangible. While the litigation settled before trial, it was not insubstantial, and clearly produced the benefits discussed. A brief overview of the progress of the litigation follows.
The Merger was announced on December 15, 2014 and the preliminary proxy was filed on January 7, 2015. On January 20, the definitive proxy was filed. Following competing motions and argument, lead counsel was appointed on January 27. On February 5, the Plaintiffs filed their Motion to Expedite; that Motion designated the January 15 Amended Complaint as its operative complaint—that is, a complaint filed before the definitive proxy. I heard argument on the Motion to Expedite on February 13, at which time the Defendants made clear that the majority of the disclosure claims alleged in the Amended Complaint and argued in the opening brief in support of the Motion to Expedite were moot because they were disclosed in the definitive proxy. I reserved my decision to consider closely the few remaining non-mooted claims, and decided on February 16 to allow narrow expedited discovery on the nature of alleged conflicts of interest held by Goldman, and the related question of why a second financial advisor was hired and whether that was related to potential conflicts of interest on the part of Goldman. The parties engaged in discovery, including two depositions, as well as document requests which included bank books and Board minutes. On February 26, the parties reached an agreement in principle and the Company filed an 8-K with the Supplemental Disclosures.
This action was brought on a contingency basis, and according to the Plaintiffs the $500,000 requested would represent an implied hourly rate of $712.95 through the execution of the memorandum of understanding. It is my task to set a fee that adequately incentivizes litigation of benefit to a stockholder class, appropriate in light of the benefit achieved and the other Sugarland considerations, and consistent, to the extent possible, with awards in cases presenting similar circumstances. In consideration of the modest benefit conferred, albeit after considerable effort, I find that the Supplemental Disclosures merit a fee of $200,000. The Mooted Disclosures, in light of the value to the Class and the minimal effort involved, support a fee of $100,000. Together with costs, I find an aggregate award of $329,881.61 appropriate. A review of the remaining Sugarland factors does not convince me to depart from this determination.
For the foregoing reasons, I approve the Settlement and grant the fee request in the amount above. An appropriate Order has been entered separately.
A second former stockholder, Dr. Mark Stuart Day, sent a letter of objection on July 30, 2015, ostensibly motivated by reading a Wall Street Journal article about this settlement. That letter indicates that Day lacked a sufficient incentive to make a timely and substantive objection and conveyed Day's position that the "settlement is of no benefit to an ordinary shareholder like [him], and serves only to enrich the people filing the original suit(s)." While that letter raises an interesting question of the adequacy of an incentive for individual stockholders to object to settlements with which they disagree, it does not affect my analysis of the consideration given and received in this settlement under Delaware law. Plaintiffs, however, responded to Dr. Day's letter; Day's reply was submitted on August 7, 2015, and I consider the matter submitted for decision as of that date.