After an appeal of the second-largest fee award in Delaware history, the Delaware Supreme Court ruled that the Court of Chancery had not exceeded its discretion in deciding not to apply a declining percentage and awarding $266.7 million in fees for a $1 billion settlement.
The challenged transaction involved redemption of Dell Technologies, Inc. Class V shares, a tracking stock issued for a prior acquisition. Dell Technologies formed a special committee to negotiate the redemption of the stock but abandoned that process and negotiated directly with six investment funds that held large blocks of Class V shares. After Dell Technologies reached terms with those funds, the special committee approved the same terms for the remaining stockholders. Sixty-one percent of unaffiliated stockholders voted to approve the redemption.
In a consolidated class-action lawsuit alleging direct claims for breach of fiduciary duties, the Court of Chancery denied a motion to dismiss after finding sufficient allegations that the special committee was not wholly independent and thus that the transaction was subject to entire fairness review. Soon before trial, the parties agreed to a $1 billion settlement. Counsel sought a fee award of 28.5 percent. Objectors contested that request. The Court of Chancery awarded fees of 26.67 percent of the settlement, or $266.7 million. The objectors appealed.
The Supreme Court determined that the Court of Chancery has the discretion, but not the obligation, to apply a declining percentage based on the size of the award. The Supreme Court explained that equitable principles underpinning fee awards in common fund cases, as well as concern for excessive compensation or windfalls, make it both appropriate and essential to consider the size of an award in a megafund case when deciding the fee percentage. This is particularly so given that at some point the percentage of fees awarded in a megafund case exceed its value as an incentive to take representative cases and turns into a windfall. But there is no per se rule or award amount that controls, and in awarding a fee percentage of 26.67 the Court of Chancery had properly exercised its discretion when determining that no reasons for reducing the fee applied in this case—including its finding that there was a significant risk of non-recovery in the litigation, and the settlement was not a product of deal size. The Supreme Court also upheld Chancery’s determination that the settlement benefit, though one-tenth of the amount sought before trial, was a significant as 5 percent of equity value, and that the implied rate of counsels’ time was within the allowable range, albeit at the high end. The Supreme Court did indicate disapproval of the Court of Chancery’s approach of noting that the objectors were investment funds that themselves did not utilize declining fee structures in their own business practices; courts should not deter meritorious objections from stockholders who have been harmed by subjecting their business practices to scrutiny as part of fee award proceedings.
