In Re Xoom Corporation Stockholder Litigation ( 2016 )

COURT OF CHANCERY
OF THE
SAM GLASSCOCK III STATE OF DELAWARE COURT OF CHANCERY COURTHOUSE
VICE CHANCELLOR 34 THE CIRCLE
GEORGETOWN, DELAWARE 19947
Date Submitted: May 31, 2016
Date Decided: August 4, 2016
Blake A. Bennett, Esquire A. Thompson Bayliss, Esquire
Cooch and Taylor, P.A. Sarah E. Hickie, Esquire
The Brandywine Building Abrams & Bayliss LLP
1000 West Street, 10th Floor 20 Montchanin Road, Suite 200
Wilmington, DE 19801 Wilmington, DE 19807
Seth D. Rigrodsky, Esquire
Brian D. Long, Esquire
Gina M. Serra, Esquire
Jeremy J. Riley, Esquire
Rigrodsky & Long, P.A.
2 Righter Parkway, Suite 120
Wilmington, DE 19803
Re: In re Xoom Corporation Stockholder Litigation,
Consolidated Civil Action No. 11263-VCG
Dear Counsel:
This matter is before me on Plaintiffs’ application for attorneys’ fees, in what
is known as a mootness proceeding. Specifically, in connection with a cash-out
merger of their corporation, purported representatives of a stockholder class alleged
insufficient and misleading disclosures in addition to price and process deficiencies
in connection with the merger; the corporation made some of the disclosures
demanded, in response to the litigation, thereby mooting those claims; and
subsequently, the Plaintiffs voluntarily dismissed the action with respect to the
individual plaintiffs only. The Plaintiffs now seek an award of attorneys’ fees for
the benefit worked on all stockholders, consistent with this Court’s recommended
procedure under In re Trulia, Inc. Stockholder Litigation.1
I. BACKGROUND
The underlying action concerns the merger, announced July 1, 2015, between
PayPal Holdings, Inc. (“PayPal”) and Xoom Corporation (“Xoom” or the
“Company”), through which PayPal acquired Xoom for $25.00 per share (the
“Merger”). The Merger closed on November 12, 2015, after receiving near-
unanimous stockholder approval.2
The Plaintiffs filed their initial individual complaints in the wake of the
announcement of the Merger, between July 8, 2015 and July 15, 2015, alleging
unfair price and process claims against the “Individual Defendants,” directors of
Xoom, and aiding and abetting claims against the merging parties. The Company
filed a proxy on Schedule 14A (the “Preliminary Proxy”) with the Securities and
Exchange Commission (“SEC”) on July 21, 2015. Eight days later, on July 29, 2015,
the Plaintiffs filed their Verified Consolidated Class Action Complaint (the
“Complaint”), adding the allegation that the Individual Defendants breached their
fiduciary duties by filing a false and materially misleading Preliminary Proxy to
1
129 A.3d 884 (Del. Ch. 2016).
2
See Trans. Aff. of Sarah E. Hickie, Esq., Ex. A (September 2015 Form 8-K), at 2.
2
induce Xoom stockholders to support the unfair deal. Depending on how the
deficiencies recited are counted, the Plaintiffs alleged thirty-eight mal-disclosures
requiring relief.3
The Plaintiffs moved to expedite on August 5, 2015. Two days later, the
Company filed a definitive proxy on Schedule 14A (the “Definitive Proxy”) with the
SEC, supplementing the disclosures contained in the Preliminary Proxy (the
“Supplemental Disclosures”). I heard argument on Plaintiffs’ Motion to Expedite
on August 14, 2015—following utterance of the Definitive Proxy—after which I
denied expedition. On November 19, 2015, the Plaintiffs voluntarily dismissed the
action with prejudice as to the Plaintiffs only, reserving the right to seek a mootness
fee. The Plaintiffs filed an application for fees (the “Fee Application”) on January
19, 2016, and after full briefing, I heard argument on May 10, 2016. I requested
additional information, and the matter was submitted for decision thereafter.
The Plaintiffs seek $275,000 in attorneys’ fees, noting that their efforts in
bringing this litigation caused Xoom to make four Supplemental Disclosures in its
Definitive Proxy, thereby mooting four disclosure claims asserted in Plaintiffs’
Complaint. The Supplemental Disclosures pertain to (1) the amount of fees received
by Qatalyst—the Company’s financial advisor—within the past two years from
3
See Am. Compl. ¶¶ 115–18.
3
eBay Inc. (“eBay”), former owner of PayPal;4 (2) the value to the Company of any
potential recovery for a $30 million loss due to fraud (the “BEC Fraud”); (3) certain
elements of the financial analyses performed by Qatalyst; and (4) details of
conversations regarding post-closing employment between PayPal and members of
the Company’s board of directors (the “Board”) and management. I describe each
of the Supplemental Disclosures below.
1. Qatalyst Fees
The Preliminary Proxy provides:
Qatalyst Partners provides investment banking and other services to a
wide range of corporations and individuals, domestically and offshore,
from which conflicting interests or duties may arise. In the ordinary
course of these activities, affiliates of Qatalyst Partners may at any time
hold long or short positions, and may trade or otherwise effect
transactions in debt or equity securities or loans of Xoom, Parent,
Holdings or eBay, or certain of their respective affiliates. During the
two year period prior to the date of Qatalyst Partners' opinion, no
material relationship existed between Qatalyst Partners or any of its
affiliates and Xoom, Parent, Holdings or eBay pursuant to which
compensation was received by Qatalyst Partners or its affiliates other
than Qatalyst acting as financial advisor to eBay in connection with
(i) its acquisition of Braintree, Inc. in December 2013 and (ii) its
proposed sale of eBay Enterprise; however, Qatalyst Partners and/or its
affiliates may in the future provide investment banking and other
financial services to Xoom, Parent, Holdings or eBay and any of their
respective affiliates for which it would expect to receive
compensation.5
4
eBay was PayPal’s corporate parent for thirteen years until Summer 2015, when eBay spun off
PayPal almost simultaneously with PayPal’s acquisition of Xoom.
5
See Trans. Aff. of Kent Bronson, Esq., Ex. D (“Preliminary Proxy”), at 47–48.
4
The Plaintiffs argue that the Preliminary Proxy improperly failed to disclose the
amount of compensation Qatalyst received from Xoom, PayPal, and eBay in
connection with services provided over the last several years. The Definitive Proxy
added the following Supplemental Disclosure: “During the two year period ended
August 6, 2015, Qatalyst Partners received compensation for services provided to
eBay of approximately $7 million and will receive a customary fee upon the closing
of the proposed sale of eBay Enterprise.”6 The Plaintiffs argue that this information
is relevant and important to stockholders because it informed them of the magnitude
of the potential conflict of one of the Company’s financial advisors, and that the
Board was at least aware of, and had considered, the potential conflict.
2. The BEC Fraud
The Company disclosed in its Preliminary Proxy that “[o]n January 5, 2015,
Xoom announced that it had been a victim of a business e-mail compromise that was
carried out against Xoom in late December 2014, as more fully disclosed in Xoom’s
Form 8-K filed with the SEC on January 5, 2015.”7 The Plaintiffs argue that the
Preliminary Proxy was improperly “silent as to whether, and the extent to which, the
Board considered the possibility of recouping the millions lost in the BEC Fraud,”
and that “Xoom stockholders are entitled to know both the value attributed to any
6
See Trans. Aff. of Kent Bronson, Esq., Ex. F (“Definitive Proxy”), at 48.
7
Preliminary Proxy, at 29.
5
potential recovery as well as whether such recovery was factored into the
Acquisition price.”8 The Plaintiffs also contend that this information is significant
because it bears on the Board’s “stance, willingness and abilities to prevent and
recover losses incurred as a result of a threat.”9 The Definitive Proxy added the
following Supplemental Disclosure: “As disclosed in our 2014 Annual Report,
Xoom recorded a loss of $30.8 million in the fourth quarter of 2014 in connection
with the business e-mail compromise. As our chief executive officer indicated on
our February 10, 2015 earnings call, the Company does not expect any material
recovery.”10
3. Multiples in Qatalyst Financial Analysis
The Preliminary Proxy did not disclose the selected multiples used by Qatalyst
in its Illustrative Selected Companies and Illustrative Selected Transactions analysis,
providing only the median numbers. The Supplemental Disclosure provided the
comparable companies’ individual multiples. The Plaintiffs argue that this
disclosure “was valuable and material because multiples are a crucial element of
these market-based analyses, as these analyses are fundamentally based on
comparison and relative valuation.”11
8
Pl’s Mot. to Expedite (“MTE”) 13.
9
Pl’s Opening Br. 15–16.
10
Definitive Proxy, at 29.
11
MTE, at 22.
6
4. Management Employment
The Preliminary Proxy was silent as to the details of discussions with Xoom
management about the retention of certain employees. The Supplemental Disclosure
disclosed that such communications had taken place, the extent of those
communications, and the intention to retain Xoom’s CEO post-Merger, but that no
specific employment terms had been discussed. The Plaintiffs contend that these
disclosures are relevant and material because they “speak to whether there are
individual interests held by management and/or the Board in play which could
potentially override the interests of shareholders.”12
* * *
The Defendants contend that Plaintiffs’ Fee Application should be denied in
its entirety because the Supplemental Disclosures did not significantly alter the total
mix of information, and therefore were immaterial; in the alternative, they argue that,
should the Court determine some fee is appropriate, the Sugarland13 factors cannot
support an award close to the $275,000 that Plaintiffs seek.
II. ANALYSIS
This Court follows the American Rule, under which parties are responsible
for their own fees and costs.14 Exceptions exist. The theory under which a mootness
12
Pl’s Opening Br. 16.
13
Sugarland Indus., Inc. v. Thomas, 420 A.2d 142 (Del. 1980).
14
See, e.g., Horsey v. Horsey, 2016 WL 1274021, at *1 (Del. Ch. Mar. 21, 2016).
7
fee is awarded is a subspecies of the common-benefit doctrine, which recognizes
that, where a litigation provides a benefit to a class or group, costs necessary to the
generation of that benefit should also be shared by the group or its successor.15 Here,
the Plaintiffs generated four additional disclosures, which the Defendants concede
resulted from the litigation. The question is whether those disclosures added value
to the stockholders, and, if so, how much of Plaintiffs’ costs should thus be borne by
the Defendants, in equity.
I first address whether the Supplemental Disclosures must have been material
to stockholders to support an award of fees. This Court in Trulia made clear that, to
support a settlement and class-wide release based on disclosures only, the materiality
of the disclosures to stockholders must be plain.16 The mootness context, in my
view, supports a different analysis. That is because, here, the individual Plaintiffs
have surrendered only their own interests; the dismissal is to them only, not to the
stockholder class. Thus, with respect to the class, there is no “give” to balance
against the disclosure “get”; the benefit is the “get” of the disclosures, with no waiver
15
Fees may be awarded “where litigation is rendered moot through resulting action by the
defendants.” Waterside Partners v. C. Brewer & Co., Ltd., 739 A.2d 768, 770 (Del. 1999). A
party is entitled to fees where “the suit was meritorious when filed; action producing benefit to the
corporation was taken by the defendants before a judicial resolution was achieved; and the
resulting corporate benefit was causally related to the lawsuit.” Allied Artists Pictures Corp. v.
Baron, 413 A.2d 876, 878 (Del. 1980).
16
Trulia, 129 A.3d at 898 (“[P]ractitioners should expect that disclosure settlements are likely to
be met with continued disfavor in the future unless the supplemental disclosures address a plainly
material misrepresentation or omission . . . .”) (emphasis added).
8
of class rights to be set against that benefit.17 Therefore, a fee can be awarded if the
disclosure provides some benefit to stockholders, whether or not material to the vote.
In other words, a helpful disclosure may support a fee award in this context.
In examining whether and to what extent a fee is appropriate here, I am guided
by the factors our Supreme Court enumerated in Sugarland Industries, Inc. v.
Thomas.18 Most important here is the benefit worked; any disclosure benefit is, of
course, unquantifiable, and the fee awarded therefore is unavoidably arbitrary to
some degree.
I note first that the Supplemental Disclosure regarding the conflict of the
financial advisor, although providing some information as to magnitude lacking in
the initial disclosure, was only mildly helpful to stockholders. While banker
conflicts can be central to the primary consideration on which the stockholders must
vote—the sufficiency of the consideration—here, stockholders had already been told
that the advisor had done work for the acquirer and were aware that a second advisor
had been retained. In this context, the amount of fees received in the two years
before the Merger from the acquirer’s parent—$7 million—adds some detail that is
mildly helpful to stockholders. Next, with respect to the information provided
17
Of course, the costs of litigation borne by corporations theoretically affects deal prices generally.
18
The Sugarland factors are: “(1) the benefit achieved in the action; (2) the contingent nature of
the undertaking; (3) the difficulty of the litigation and the efforts of counsel; (4) the quality of the
work performed; and (5) the standing and ability of counsel.” Franklin Balance Sheet Inv. Fund
v. Crowley, 2007 WL 2495018, at *12 (Del. Ch. Aug. 30, 2007).
9
regarding the lack of value the Company ascribed to potential recovery in regard to
the BEC Fraud, this is information I consider somewhat valuable at best; it clarified
that an asset of the Company was (in management’s view) worthless, but did not
provide information contrary to that view or otherwise call the Merger consideration
into question. Similarly, I find the Supplemental Disclosure that provided
stockholders with information about management discussions of future employment
with the acquirer only somewhat of value. In other circumstances, this type of
disclosure might be important to stockholders evaluating a sale, but here, the
discussions revealed were at a general level only, and, importantly in my view, this
was a sale where PayPal was the only bidder; in other words, this was not a case
where one bidder might receive an advantage over another due to management
concerns about future employment. Finally, I find that the supplemental disclosure
of additional financial metrics concerning Qatalyst’s comparable-companies
analysis are of minimal benefit to a stockholder considering this Merger.
Of the four disclosures that resulted from the litigation, those involving the
banker conflict and post-Merger employment discussions are the most valuable.
None of the four is particularly strong. Cumulatively, I find the Supplemental
Disclosures represent a modest benefit to the stockholders.
The Plaintiffs seek a fee of $275,000 for having produced the benefits
described above. They affirm that attorney time invested, another Sugarland factor,
10
is 63 hours in regard to the Supplemental Disclosures achieved, implying a rate of
something over $4,000/hour, which they characterize as reasonable given the
contingent nature of the representation. I take this representation of time invested
as made in good faith, but also recognize the difficulty in segregating out time
productively spent obtaining disclosures from time spent, unfruitfully, on the many
unsuccessful allegations brought by the Plaintiffs. The Defendants, for their part,
advocate for no fee, in light of what they characterize as the non-materiality of the
Supplemental Disclosures. I have found above that the standard is benefit to the
class, not materiality, and I have found some benefit here.
In the merger context, under our model, this Court relies on the plaintiffs’ bar,
as representatives of stockholders, to vindicate those stockholders’ rights to a fair
transaction and an informed vote. Given the fast-moving process typical in the
merger context, it is common that suit is filed at a preliminary phase of the
proceedings. The decision of plaintiffs’ counsel, proceeding on a contingent-fee
basis, to pursue such litigation involves significant risk; any recovery to counsel is
contingent on producing value for the stockholder class. Because no recovery is
available absent value so produced, when counsel have in fact worked a benefit on
the class, this Court must award a fee sufficient to encourage wholesome levels of
litigation.
11
The position of the Plaintiffs’ counsel is reminiscent of a rodeo bull-rider. The
cowboy gets his bull by the luck of the draw. A “good” bull is aggressive and
vigorous; a “bad” bull is the opposite. A successful ride of a good bull results in a
high score. It takes a good rider to ride a good bull, but not even a great rider can
wring a high score from a bad bull. Not even great counsel can wring significant
stockholder value from litigation over an essentially loyal and careful sales process.
Where litigation develops significant stockholder value, this Court will set
fees accordingly. Here, I find that the Supplemental Disclosures worked a modest
benefit on the stockholders, and that in light of that benefit and the other Sugarland
factors, and in light of the stage of the litigation at which settlement occurred, that
an award of fees and costs of $50,000 is appropriate here.
To the extent the foregoing requires an Order to take effect, IT IS SO
ORDERED.
Sincerely,
/s/ Sam Glasscock III
Sam Glasscock III
12