[Update: The Delaware Supreme Court affirmed the award.]
Back in October, I never got around to writing about the whopping $1.2 billion dollar award in the shareholder derivative action In re Southern Peru Copper Corporation Shareholder Derivative Litigation, C.A. No. 961-CS because so many substantive articles had been written about it already. Francis Pileggi summed it up, as did Kevin LaCroix, Alison Frankel, and Steven Davidoff, Business Law Prof, and some Gibson Dunn lawyers over at the Harvard Law School Forum.
The merits have been covered from tip-to-tail, but some of the background is important to know in order to understand the latest development involving the plaintiffs’ attorneys’ fees. In short, minority shareholders in Southern Peru Copper Corporation, a NYSE-listed mining company, claimed that the company was cheated when the Board of Directors approved the exchange of $3.1 billion dollars of its shares to buy Grupo Mexico’s controlling interest in a Mexican mining company, Minera. They asked the Delaware Chancery Court to review the “entire fairness” of the transaction, per Kahn v. Tremont Corp., 694 A.2d 422 (Del. 1997).
Did I mention that Grupo Mexico, the seller, owned more than 50% of Southern Peru Copper, the buyer, and that Minera was really worth only $2.4 billion? That the “special committee” formed to “independently” review the sale (because Grupo Mexico was quite obviously a controlling shareholder) used a preposterously foolish “relative valuation” method that inexplicably de-valued Southern Peru’s own publicly-traded stock to justify the sale?
As Chancellor Leo Strine of the Delaware Court of Chancery concluded,
[W]hat remained in real economic terms was a transaction where, after a bunch of back and forth, the controller [Grupo Mexico] got what it originally demanded: $3.1 billion in real value in exchange for something worth much, much less – hundreds of millions of dollars less.
Despite Chancellor Strine’s misplaced affection for James Taylor — like Strine’s predecessor, former Chancellor Chandler, I’d rather roll with 50 Cent — Strine is a good and fair jurist, so he did the right thing: socked Grupo Mexico, the Grupo Mexico-affiliated directors of Southern Peru, and the members of the Special Committee with a judgment for the difference in price.
Then came the plaintiff’s petition for attorney’s fees. (Even in the absence of a class action or a derivative claim, “counsel fees may be awarded to an individual shareholder whose litigation effort confers a benefit upon the corporation, or its shareholders” under Tandycrafts, Inc. v. Initio Partners, 562 A.2d 1162 (Del. 1989).
There was ample reason to believe that Judge Strine would be hostile to the plaintiffs’ lawyers demands for fees, given how the opinion itself repeatedly criticized their performance:
Although the plaintiff in this case engaged in a pattern of litigation delay that compromised the reliability of the record to some extent and thus I apply a conservative approach to shaping a remedy…
This case lurched forward over a period of six years largely because of the torpor of the plaintiff’s counsel, and the passage of time has had the regrettable effect of producing some turnover within the plaintiffs’ ranks. …
The parties shall confer regarding whether they can reach agreement on a responsible fee that the court can consider awarding, with the plaintiff’s counsel taking into account the reality their own delays affected the remedy awarded and are a basis for conservatism in any fee award.
Given the language above and further explanation in the opinion, no one would have been surprised if Judge Strine concluded Monday’s hearing over the fees with, “I award you no fees, and may God have mercy on your soul.” As Frankel understandably predicted, “Strine didn’t suggest attorneys’ fees for the plaintiffs’ lawyers, but it doesn’t sound like he’s going to approve a windfall payout for this extraordinary award.”
Chancellor Strine, however, appears to be that rare species of jurist who, unlike the majority of the United States Supreme Court, understands the reality of contingent fee litigation. Back in 2004, in an unrelated case, Chancellor Strine explained:
I have a little different viewpoint on trimming back percentages of plaintiffs’ lawyers when big amounts are recovered. I don’t get it. I really don’t. If some plaintiff’s lawyer goes to trial and wins a $10 billion recovery, I will say right now, that’s when I am most likely to award 33 percent. I just am. Why? Because that’s when the real risk has been taken.
Earlier this year, he reiterated:
And so it’s a big fee, but I think it’s important – and I’ve said this before and I will continue to say it – that, you know, you don’t reduce people’s fees because they gain much. You should, in fact, want to create an incentive for real litigation. That’s what benefits diversified investors, when people will take, you know, good cases and actually prosecute them and take risk. What doesn’t benefit investors is simply the filing of a case every time there’s a valuable business opportunity and simply having a handout and getting a toll.
Hallelujah! As I’ve written many times before on this blog (e.g., here and here and here), contingent fee litigation is not a free lunch. It’s risky, difficult, and expensive. Moreover, if a case is dismissed or if a judge or jury renders a verdict for the defense, this doesn’t mean “no profit” for plaintiff’s lawyers, it means “huge loss” given all the expenses paid on the case — none of which can even be deducted for our taxes, unlike every other business in America — and the foregone opportunities.
Indeed, the risk taken on by plaintiff’s lawyers is at its zenith when the case goes through trial to judgment, because by that point the lawyers on both sides have fully “worked up” the case and have rejected all settlement offers. There’s a good reason most cases settle and large numbers of claims are compromised for a fraction of their real value: no one, not even a trial lawyer, likes taking on too much risk.
Chancellor Strine thus treated the Southern Copper case as it should be treated, like a complicated contingent fee case involving a difficult issue, and awarded the plaintiffs’ lawyers a 15% contingent fee:
The plaintiffs’ attorneys in a shareholder lawsuit involving Southern Copper Corp won a blockbuster $285 million fee award from Delaware’s Chancery Court on Monday. … Strine approved the payment, which amounts to about $35,000 per hour of work on the case by two law firms, Kessler, Topaz, Meltzer & Check LLP of Radnor, Pennsylvania, and Prickett, Jones & Elliott, of Wilmington, Delaware.
The reaction from the anti-plaintiffs crowd was predictable, with Stephen Bainbridge being the first to claim that Strine unconsciously used the case as a marketing effort for Delaware’s courts:
I’m confident Strine ruled on the merits, but I’m also confident there are a lot of folks in Delaware who are happily expecting this decision to encourage plaintiffs to come back to Delaware.
What does that even mean? Did Strine rule honestly or not? Unfortunately, Alison Frankel thought that drivel worthy of mention, and completed the argument that Bainbridge didn’t have the stones to spell out:
So why did Strine agree to grant such exorbitant fees? Because he was sending a message not just to the lawyers in the Southern Copper case, but to the entire securities class action bar.
As both Hals and Professor Stephen Bainbridge of the UCLA School of Law noted Monday, Strine’s ruling comes with a very particular context. Delaware, according to some recent academic research, has been losing cases to other venues because plaintiffs’ lawyers perceive the Chancery Court as an unfriendly jurisdiction. …
Monday’s hearing on the Southern Peru fee request made it clear that the chancellor wants a certain kind of (legal) business to remain in Delaware. At the 90-minute hearing Strine talked about why this case isn’t like the M&A injunction suits that settle quickly for minimum benefit to shareholders. According to Hals’s report: “A windfall, he said, was a quickly settled case in which the plaintiffs’ attorneys get a fee of a few hundred thousand dollars and the shareholders they represent get meaningless disclosures — a type of litigation that has surged recently.”
Nonsense. The chancellor was simply recognizing a basic fact about contingent fee litigation: if taking a huge risk like bringing a case all the way through trial doesn’t result in fair compensation for the lawyers, then plaintiffs’ lawyers will have a strong incentive to avoid meritorious claims and instead engage in “troll” litigation that simply pesters a defendant until they pay a modest toll to keep doing what they were doing.
It’s not like the plaintiffs’ lawyers can walk into court and demand a check. These types of shareholder lawsuits are routinely dismissed without even a trial. As explained on the Delaware business litigation blog run by Morris James (coincidentally, co-counsel for defendants in the Southern Copper case), entire fairness complaints are often dismissed without even a chance at trial, even if they allege otherwise improper conduct.
Although the “entire fairness” standard is often referred to as a “plaintiff-friendly” standard, it’s still more friendly to defendants than plaintiffs in practice, and defendant companies routinely prevail in these cases. In January, the Chancery Court approved a similar transaction involving a single shareholder controlled company, and in March did it again in the Hallmark case. Despite its reputation, Delaware law is not very predictable, and unpredictable law usually favors defendants.
Moreover, there’s no law anywhere that says plaintiffs must hire contingent fee lawyers. Upset about an unfair transaction at a company you own stock in? There are thousands of experienced, competent lawyers more than happy to represent you at $500–$1,000 an hour. Shareholders like public pension plans choose to hire lawyers on a contingent fee because they want to, because they would rather the lawyers carry the risk and have a stake in the litigation.
Same goes for the Southern Copper case. Despite the company losing over a billion dollars, and thus over $200 million for the minority shareholders, who owned 20%, the investors didn’t want to invest their own money in a lawsuit, probably for good reason. They weren’t just taking on Grupo Mexico, but the financial advisor who recommended the absurdly unfair transaction: Goldman Sachs. Goldman Sachs seems to have a knack for covering up fraudulent transactions — it’s no surprise the defendants thought they could prevail at trial with that sort of expertise on their side.
Not that any of the above matters to anti-shareholder bloggers like Bainbridge. They’re happy with any reason to deny shareholders and their lawyers compensation, and the big tort reform meme these days is to attack judges as trying to “sell” their jurisdiction to plaintiffs’ lawyers, just like they’re doing to Philadelphia’s class action and mass torts program. The problem is that legislators or judges might just listen to that nonsense.