Hollywood Firefighters' Pension Fund v. John C. Malone ( 2021 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
HOLLYWOOD FIREFIGHTERS’ )
PENSION FUND and SHEET METAL )
WORKERS’ LOCAL UNION NO. 80 )
PENSION TRUST FUND, on behalf of )
themselves and all others similarly )
situated, )
Plaintiffs,
)
v. ) C.A. No. 2020-0880-SG
)
JOHN C. MALONE, GREGORY B. )
MAFFEI, GREGG L. ENGLES, )
RONALD A. DUNCAN, DONNE F. )
FISHER, and RICHARD R. GREEN, )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: October 5, 2021
Date Decided: November 8, 2021
Gregory V. Varallo and Andrew E. Blumberg, of BERNSTEIN LITOWITZ
BERGER & GROSSMANN LLP, Wilmington, Delaware; Michael Hanrahan, Kevin
H. Davenport, and Mary S. Thomas, of PRICKETT, JONES & ELLIOTT, P.A.; OF
COUNSEL: Mark Lebovitch, Jacqueline Y. Ma, and Daniel E. Meyer, of
BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York;
Lee D. Rudy, Eric L. Zagar, Christopher M. Windover, and Matthew C. Benedict, of
KESSLER TOPAZ MELTZER & CHECK, LLP, Randor, Pennsylvania; Robert D.
Klausner, of KLAUSNER KAUFMAN JENSEN & LEVINSON, P.A., Plantation,
Florida; and Aaron T. Morris, of MORRIS KANDINOV LLP, Stowe, Vermont,
Attorneys for Plaintiffs Hollywood Firefighters’ Pension Fund and Sheet Metal
Workers’ Local Union No. 80 Pension Trust Fund.
Robert S. Saunders, Joseph O. Larkin, Matthew P. Majarian, and Ryan M. Lindsay,
of SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Wilmington, Delaware;
OF COUNSEL: Richard B. Harper, Thomas E. O’Brien, and Vern Cassin, of BAKER
BOTTS LLP, New York, New York, Attorneys for Defendants John C. Malone and
Gregory B. Maffei.
Kenneth J. Nachbar, Megan W. Cascio, Thomas P. Will, and Sarah P. Kaboly, of
MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware,
Attorneys for Defendant Gregg L. Engles.
Douglas D. Herrmann and Emily L. Wheatley, of TROUTMAN PEPPER
HAMILTON SANDERS LLP, Wilmington, Delaware, Attorneys for Defendants
Ronald A. Duncan, Donne F. Fisher, and Richard R. Green.
GLASSCOCK, Vice Chancellor
To historically-minded Delawareans, the Wedge brings to mind a political
delta of land at the state’s northwestern corner. Delaware’s western boundary is the
Transpeninsular line, separating the state from Maryland. Its northern boundary
with Pennsylvania, uniquely, is formed by an arc with a radius of twelve miles—the
Twelve Mile Circle line—measured (originally at least) from the cupola of the Court
House in New Castle. The line separating Maryland and Pennsylvania, of course, is
the Mason-Dixon line. If these three lines were intended to meet at a point, that
intention was frustrated. The tangent of the Twelve Mile Circle missed the
intersection of Mason-Dixon and Transpeninsular lines, passing to its east, and
intersecting the Transpeninsular to the south. The rough square-mile triangle
resulting was the subject of a boundary dispute between Pennsylvania and Delaware
not settled until the 1920s.
Corporate finance academics have another delta in mind when they speak of
“the Wedge.” That delta represents the difference between the percentage of
corporate ownership held by a stockholder, and the percentage of voting power
represented by her stock; that differential results where various classes of stock have
distinct voting rights. Where voting power is concentrated in stockholders owning
a minority of corporate equity, misalignments of interest arise, and the greater such
disparity (the larger the Wedge, in other words) the more the misalignment decreases
the value of the company, theoretically at least.
1
Before me is a contested mootness fee request. The Plaintiffs sought
injunctive relief regarding a corporate merger, arguing that the merger violated
Delaware General Corporation Law (the “DGCL”), specifically Section 203. 1 The
parties agreed to a preliminary injunction stipulation (the “PI Stipulation”) that,
among other features, decreased the Wedge that would exist, post-transaction. The
litigation continued over other issues resulting from the transaction, and the
Plaintiffs procured a large damages award for their class (the “Settlement”), for
which I have approved their attorneys’ fees and costs in the amount of $22 million.2
That award is not at issue. The Plaintiffs here have filed a motion for a mootness
fee (the “Motion”), seeking an additional $22 million, for the benefits conferred by
the PI Stipulation, most but not all of which, in their view, is justified by the
reduction of the Wedge. They refer to an expert report, which ascribes very large
theoretical benefits to the Wedge reduction. The Defendants agree that a mootness
fee is appropriate, for the benefit achieved of compliance of the merger with Section
203, but argue that the benefits of the Wedge reduction are speculative and do not
run to the Plaintiff class. They suggest an award of $1 (or perhaps $2) million. I
find that I can award an appropriate mootness fee without addressing the pertinence
1
8 Del. C. § 203.
2
Stipulation and Agreement of Settlement, Compromise, and Release, Dkt. No. 123 [hereinafter
“Settlement Stip.”].
2
of the contentious Wedge issue. I find a fee of $9.35 million appropriate. My
reasoning follows.
I. BACKGROUND 3
A. The Parties
The Plaintiffs in the action are Hollywood Firefighters’ Pension Fund, West
Palm Beach Firefighters’ Pension Fund, and Sheet Metal Workers’ Local Union No.
80 Pension Trust Fund (together, the “Plaintiffs”).4
The Defendants in the action include GCI Liberty, Inc. (“GCI” or the
“Company”) and members of its Board of Directors (the “Board”): John C. Malone,
Gregory B. Maffei, Gregg L. Engles, Ronald A. Duncan, Donne F. Fisher, Richard
R. Green, and Sue Ann Hamilton (collectively with the Company, the
“Defendants”).5 Malone is GCI’s Chairman of the Board. Maffei is GCI’s chief
executive officer.
3
I draw these facts from the PI Stipulation and from the parties’ papers submitted in connection
with the Motion. Where further facts are necessary, I draw from the First Amended Complaint,
following In re Activision Blizzard, Inc. S’holder Litig. See In re Activision, 124 A.3d 1025, 1030–
31 (Del. Ch. 2015). “The Complaint’s contents provide a sound basis for evaluating the
Settlement, because its allegations present Lead Counsel’s claims in the strongest possible
light . . . . What follows are not formal factual findings.” Id. While this Motion pertains
specifically to the PI Stipulation and fees associated with the same, rather than the Settlement, the
Activision reasoning still applies.
4
West Palm Beach Firefighters’ Pension Fund ultimately withdrew as a Plaintiff in the action on
February 19, 2021. See Granted ([Proposed] Order Granting Withdrawal of Plaintiff West Palm
Beach Firefighters’ Pension Fund), Dkt. No. 113. It has been included in the above definition for
purposes of strictly construing the factual universe as it existed at the time of the PI Stipulation.
5
See Stip. at 2. Similarly, Sue Ann Hamilton and GCI were not named as defendants in the Second
Amended Complaint, but have been included in the above definition to reflect the facts existing at
the time of the PI Stipulation. See Second Am. Verified Class Action Compl., Dkt. No. 87.
3
The term Stipulating Parties includes each of the Plaintiffs and the
Defendants. 6
B. Factual Overview
1. The Original Merger Agreement and Merger Consideration
The instant case arose from the stock-for-stock merger between the Company
and Liberty Broadband Corporation (“Broadband”), announced in August 2020 (the
“Merger”).7 The consideration for the Merger anticipated at that time, broadly
speaking, would effect an exchange of the Company’s one-vote-per-share Series A
stock (“GCI Series A stock”) for Broadband’s zero-vote-per-share Series C stock
(“Broadband Series C stock”).8 The consideration also contemplated Malone, the
Chairman of GCI, and Maffei, the CEO of GCI, each converting their shares of the
Company’s ten-vote-per-share Series B stock (“GCI Series B stock”) into
Broadband’s ten-vote-per-share Series B stock (“Broadband Series B stock”). 9
Further, Maffei owned certain GCI options (the “GCI Series B Options”)
exercisable for shares of supervoting GCI Series B stock. 10 As a result of the Merger,
these GCI Series B Options were to be converted into Broadband options exercisable
6
Granted (Stipulation and [Proposed] Order Withdrawing Mot. for Prelim. Inj.) 2, Dkt. No. 84
[hereinafter “Stip.”].
7
Pls.’ Opening Br. Supp. Mot. Att’ys’ Fee Award Benefits Conferred by the Prelim. Inj.
Stipulation 1, Dkt. No. 125 [hereinafter “OB”].
8
Id. at 3–4.
9
Id. at 4.
10
Id. at 16.
4
for Broadband Series B stock (the “Rollover Broadband Series B Options”),
preserving the supervoting nature of the Series B across the conversion. 11
In addition to the anticipated conversions in connection with the Merger,
Malone negotiated for a relatively bespoke agreement that would have provided him
with the ability to maintain his 49% voting power in the combined company post-
Merger if his voting power was diluted (the “Exchange Agreement”).12 The
Exchange Agreement would have operated by exchanging shares of Broadband
Series C stock for Broadband Series B stock (i.e., exchanging zero-vote shares for
ten-vote shares).13
Although less thoroughly briefed, the Exchange Agreement is alleged to have
been designed such that “personal benefits” encapsulated in the agreement could be
transferred from Malone to Maffei.14 The Plaintiffs also alleged that Malone
“insisted on” the ability to transfer his supervoting shares to Maffei,15 though it is
unclear whether the transferability pertained to pre-Merger GCI Series B stock or
post-Merger Broadband Series B stock, and whether the transferability was
memorialized in the Exchange Agreement or elsewhere.
11
Id. at 17.
12
Id. at 5.
13
Id.
14
Id.
15
Id.
5
2. The Design of the Original Merger
The Plaintiffs’ Opening Brief in support of the Motion alleges that the genesis
of actions behind the Merger was in November 2019, when Maffei, as CEO of GCI,
communicated to investors that the market overvalued GCI relative to Broadband.16
The Plaintiffs’ discovery prior to the filing of the First Amended Complaint
indicated that this statement was borne of deliberate changes made to the accounting
practices underlying this assertion.17 Maffei’s statements to investors allegedly
caused the GCI stock price to suffer relative to Broadband.18
In March 2020, the exchange ratio for a merger between GCI and Broadband
was at an “all-time low” for GCI stockholders.19 On March 26, 2020, Broadband
formed a special committee which, in April, submitted an indication of interest to
the GCI Board. 20 That indication of interest was conditioned upon satisfaction of
the MFW factors.21
Following receipt of the indication of interest, the GCI Board formed its own
Special Committee (the “Special Committee”), composed of Defendants Gregg
16
Id.
17
Id. at 11–12.
18
Id. at 12.
19
Id.
20
Am. Verified Class Action Compl. Declaratory and Injunctive Relief, ¶ 117, Dkt. No. 39
[hereinafter “FAC”].
21
See generally Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (holding that the
business judgment rule applies where (i) a special committee of independent directors has
negotiated and approved the deal and (ii) an uncoerced, fully-informed majority of the minority
stockholders has voted in favor of the transaction); FAC ¶ 66.
6
Engles and Sue Ann Hamilton.22 The Plaintiffs raise concerns about Engles’s
objectivity with respect to his service on the GCI Special Committee, pointing to his
long friendships with Maffei and with Anthony Magro, a banker at Evercore, who
was ultimately hired as the Special Committee’s financial advisor. 23
A deal had not been reached at the beginning of June 2020, when the GCI
stock price began to recover, causing the exchange ratio for the potential transaction
to increase.24 On June 23 and June 24, 2020, Malone’s counsel informed the Special
Committee that Malone had adopted a Rule 10b5-1 trading plan.25 As a result,
Malone’s counsel indicated to the Special Committee that Malone might need to
make disclosures to the Securities and Exchange Commission (the “SEC”) in the
near future, including disclosure of the deal terms or a range of terms being discussed
by July 1, 2020. 26 The Plaintiffs imply that Malone’s trading plan was designed to
create an artificial time pressure to finalize deal terms.27
The Broadband special committee made an initial offer to GCI on June 10,
2020, and the companies negotiated over the next two weeks.28 The companies
disclosed on June 29, 2020 that the special committees had reached a “‘preliminary
22
OB 13, 19; FAC ¶ 72.
23
OB 6, 13.
24
Id. at 13.
25
FAC ¶ 115.
26
FAC ¶¶ 115, 117.
27
Id. ¶ 117.
28
OB 13–14.
7
understanding,’” and the joint press release announcing the Merger was published
on August 6, 2020.29 The deal was conditioned on a majority of minority approval
by GCI stockholders.30
GCI issued a definitive merger proxy on October 30, 2020, which the
Plaintiffs characterized as “materially misleading,” for the sake of obtaining
stockholder approval of the Merger. 31 In particular, the Plaintiffs complained about
the lack of information regarding the potential Section 203 violation, and the failure
to disclose management’s voting power in the post-Merger company, especially with
respect to Malone and Maffei.32
3. Alleged Effects of the Original Plan of Merger
The Plaintiffs’ First Amended Complaint alleged that the Merger, as outlined
above, would violate Section 203 of the DGCL, would “irreversibly and unfairly
strip GCI Liberty Series A [] holders of 100% of the voting power of their shares”
while providing those same holders with unfair economic consideration in
connection with the Merger, and would consolidate the control group (Maffei and
Malone)’s voting power over the combined entity post-Merger. 33 As above, the
29
Id. at 17.
30
Id.
31
FAC ¶ 1.
32
Id. ¶ 179.
33
Id. ¶ 1.
8
Plaintiffs also claim that the disclosure provided by the Company to its stockholders
in its merger proxy was insufficient.34
According to the First Amended Complaint, prior to the Merger, Malone
owned approximately 4.5% of GCI’s equity, but approximately 25.4% of GCI’s
voting power.35 With respect to Broadband, Malone owned approximately 3.6% of
the equity while holding 48.8% of the voting power.36 (These discrepancies are what
the Plaintiff points to as “the Wedge.”) For his part, Maffei held 1.2% of the equity
in GCI, but 9.9% of the voting power, assuming exercise of the GCI Series B
Options.37 As a point of contrast, Maffei held 1.5% of the equity and 1.1% voting
power in Broadband, demonstrating only a small Wedge, and one inverted
comparative to the others identified.38
Given Malone and Maffei’s historic and close relationship, the Plaintiffs
allege that the pair can be viewed as a control group with approximately 35.3%
voting control of GCI (assuming exercise of Maffei’s GCI Series B Options) and
approximately 49.9% voting control of Broadband pre-Merger. 39
34
OB 7; FAC ¶ 3.
35
FAC tbl. 5.
36
Id.
37
Id.
38
Id.
39
See FAC tbl. 1; OB 10–11.
9
The Merger consideration as originally designed would have expanded the
Broadband voting power figures for both Malone and Maffei following the Merger.40
The GCI Series A stockholders were slated to receive zero-vote Broadband Series C
shares, eradicating any dilutive influence they might have otherwise had upon
Malone and Maffei.41 Per the First Amended Complaint, Malone and Maffei would
have held 66.6% of the voting power of the post-Merger company, assuming the
exercise of Maffei’s Rollover Broadband Series B Options.42
The Plaintiffs alleged further that the original Merger would have violated
Section 203 of the DGCL.43 They theorized that Malone became an interested
stockholder in May 2018, following a reincorporation merger undertaken by GCI, at
which time Malone held 26.9% of the voting power in GCI.44 This surpasses the
15% voting power threshold established for qualification as an interested
stockholder under Section 203, making Malone an interested stockholder. 45 Further,
the Plaintiffs asserted that Maffei and/or Broadband became interested stockholders
as of June 2020 under the theory that they reached an “agreement, arrangement, or
understanding” with Malone regarding voting in connection with the Merger, and
40
See, e.g., OB at 2.
41
FAC ¶ 9.
42
Id. ¶ 179.
43
Id. ¶ 15.
44
Id. ¶ 52.
45
Id.; see also 8 Del. C. § 203.
10
that Maffei and Broadband were similarly subject to Section 203. 46 Accordingly, as
interested stockholders, Malone, Maffei, and Broadband were banned from
participating in business combinations with GCI for a period of three years.47
To cure the alleged Section 203 defect, the Company would have needed to
seek the affirmative vote of two-thirds of the outstanding voting stock of the
Company (exclusive of that stock owned by the interested stockholder), or to fold
the Merger into an exception in the statute.48 The Settling Parties ultimately chose
the latter option, as described below.49
Finally, the Merger required stockholder approval. The Plaintiffs claimed that
the disclosures made to stockholders regarding the Merger were insufficient.50
Among other things, the Plaintiffs sought additional disclosures with respect to the
fairness of the transaction, management’s voting power after the Merger and
management’s participation in Merger negotiations.51 Without such disclosures, the
majority-of-the-minority stockholder vote would have been uninformed and
therefore not compliant with MFW procedures. 52
46
FAC ¶ 54; see also 8 Del. C. § 203.
47
See 8 Del. C. § 203.
48
8 Del. C. § 203.
49
Defs.’ Answering Br. Opp’n to Pls.’ Mot. for Att’ys’ Fee Award Benefits Conferred by the
Prelim. Inj. Stipulation 14, Dkt. No. 141 [hereinafter “AB”].
50
FAC ¶¶ 178–79.
51
Id.
52
See, e.g., OB 28 n.74.
11
4. The PI Stipulation and Aftermath
On November 21, 2020, the parties submitted the PI Stipulation to this
Court.53 The PI Stipulation had several effects on the Merger consideration to be
received by stockholders. 54
First, Malone and Maffei both agreed to cause each outstanding share of GCI
Series B stock beneficially owned by them to be converted into shares of GCI Series
A stock on a one-to-one basis, meaning their supervoting stock was converted into
one-vote-per-share stock in GCI, which would be further converted into zero-vote
Broadband Series C stock following the Merger.55
Second, Maffei further agreed that, if he exercised any Rollover Broadband
Series B Options following the Merger, he would receive Broadband Series B stock,
which would then be exchanged for Broadband Series C stock on a one-to-one
basis. 56 Put another way, following the Merger, Maffei’s supervoting options would,
upon exercise, collapse down into zero-vote Broadband Series C stock.
Finally, the Exchange Agreement providing Malone with 49% voting control
of Broadband would terminate according to its terms at the time of the Merger,
53
See Stipulation and [Proposed] Order Withdrawing Mot. for Prelim. Inj., Dkt. No. 85.
54
See generally Stip.
55
Stip 1, 3.
56
Id. at 3.
12
because neither Malone nor his affiliates had the right to receive Broadband Series
B stock in the Merger. 57
After the PI Stipulation was entered, GCI filed a Form 8-K that contained
supplemental disclosures with respect to the PI Stipulation, as well as additional
disclosures regarding the personal relationships between Maffei and Engles, Maffei
and Evercore, the financial advisor, and Engles and Magro, the banker employed by
Evercore (the “November 24 8-K”).58 The November 24 8-K further provided
information regarding management’s voting power at Broadband assuming
consummation of the Merger. 59
Once the consideration to be received in the Merger was altered, the Merger
did not constitute a prohibited “business combination” under Section 203, as Malone
and Maffei benefitted only proportionately as stockholders of GCI. 60 The Plaintiffs
agreed as part of the PI Stipulation to dismiss their claims regarding violations of
Section 203 on the grounds that such claims were now moot. 61 The Plaintiffs did
not otherwise provide any release from liability to the Defendants. 62
57
Id. at 2; OB 20.
58
OB 27; see also GCI Liberty, Inc., Current Report (Form 8-K), at 3 (Nov. 24, 2020).
59
OB 27.
60
AB 14; see also 8 Del. C. § 203(c)(3)(v).
61
Stip. 7.
62
OB 7.
13
C. Procedural History
In October 2020, the Plaintiffs filed a complaint (the “Original Complaint”)
alleging breach of fiduciary duties of the Board in connection with the Merger and
violation of Section 203 of the DGCL.63 The Plaintiffs also filed a motion to
expedite. 64 Later that month, the motion to expedite was granted.65 On November
6, 2020, the Court entered a scheduling stipulation laying out the briefing schedule
applicable to the Plaintiffs’ motion for a preliminary injunction, and identifying
December 7, 2020, as the preliminary injunction hearing date.66 The Plaintiffs began
discovery expeditiously, and filed an amended complaint on November 1, 2020 (the
“First Amended Complaint”). 67 In November, the Plaintiffs and the Defendants
completed their document productions, and the Plaintiffs took five depositions. 68 On
November 21, 2020, the parties filed the PI Stipulation. 69 I entered the PI Stipulation
on November 23, 2020.70 The Company then filed the November 24 8-K with the
SEC, disclosing the terms of the PI Stipulation and certain disclosures regarding
63
Settlement Stip. ¶ A.
64
Id. ¶ B.
65
Id. ¶ C.
66
Id. ¶ D.
67
See, e.g., id. ¶¶ E, I.
68
Id. ¶¶ L, M.
69
Id. ¶ N.
70
Id.
14
relationships and interactions as described above.71 The Merger closed December
18, 2020. 72
The remainder of the litigation continued until the parties reached an
agreement to settle the action and memorialized the same in a term sheet dated May
5, 2021. 73 The Stipulation and Agreement of Settlement, Compromise, and Release
was filed on June 17, 2021 74 and I held a settlement hearing, approving the
Settlement and granting the Plaintiffs’ counsel $22 million in attorneys’ fees in
connection with the Settlement only, on October 5, 2021.75
II. ANALYSIS
A. Attorneys’ Fees under the Corporate Benefit Doctrine
Delaware caselaw permits a plaintiff to recover attorneys’ fees under the
corporate benefit doctrine if the applicant can show that “(1) the suit was meritorious
when filed; (2) the action producing benefit to the corporation was taken by the
defendants before a judicial resolution was achieved; and (3) the resulting corporate
71
Id. ¶ O.
72
Id. ¶ P.
73
Id. ¶ CC.
74
See generally id.
75
See generally Tr. 10.5.21 Settlement Hr’g and Oral Arg. on Pls.’ Req. Mootness Fee, Dkt. No.
142 [hereinafter “Tr. Settlement Hearing”].
15
benefit was causally related to the lawsuit.” 76 Delaware law also provides that the
corporate benefit “need not be measurable in economic terms” to support a fee. 77
The only element subject to any question is whether the suit was meritorious
when filed, because the action alleged to produce a corporate benefit here—the entry
into the PI Stipulation—clearly occurred prior to a judicial resolution, as the PI
Stipulation mooted the need for a preliminary injunction hearing altogether.
Additionally, in the PI Stipulation, the Defendants waived any right to assert that the
agreements therein were not causally related to the lawsuit, and element (3) is
therefore uncontested. 78
The question of the claims’ merit when filed is also easily resolved. A claim
is found to be meritorious “‘if it can withstand a motion to dismiss on the pleadings
[and], at the same time, the plaintiff possesses knowledge of provable facts which
hold out some reasonable likelihood of ultimate success.’”79 The meritorious-when-
filed test is a pleading-stage test, and therefore I assess the claims as originally pled
in the Original Complaint.
76
United Vanguard Fund, Inc. v. TakeCare, Inc., 693 A.2d 1076, 1079 (Del. 1997).
77
Tandycrafts, Inc. v. Initio Partners, 562 A.2d 1162, 1165 (Del. 1989); see also Allied Artists
Pictures Corp. v. Baron, 413 A.2d 876, 878 (Del. 1980) (internal citation omitted) (“But our law
recognizes that a pecuniary benefit to the corporation is not a prerequisite to a fee award to
counsel.”).
78
Stip. ¶ 11 (“Defendants . . . hereby agree to waive any right to assert . . . that the agreements set
forth in this Stipulation were not causally related to the efforts of Plaintiffs’ counsel in this
Action.”).
79
Allied Artists, 413 A.2d at 879 (quoting Chrysler Corp. v. Dann, 223 A.2d 384, 387 (Del. 1966)).
16
I have found previously in this case that the claims in the Original Complaint
were, at the minimum, colorable, and so expedited the proceedings.80 The claims
here would have similarly survived a motion to dismiss. Drawing all reasonable
inferences in favor of the Plaintiffs, the Original Complaint contains well-pled81
facts supporting reasonably conceivable inferences that the Merger would violate
Section 203, 82 that the disclosures the Company had made in connection with the
Merger were insufficient,83 that the individual directors had breached their fiduciary
duties84 and that Malone and Maffei had breached their fiduciary duties as
controlling stockholders.85
Altogether, then, the Plaintiffs’ counsel should be entitled to an award of
attorneys’ fees in connection with their efforts in this action. The Plaintiffs have
requested an award of $22 million; 86 the Defendants contend that the appropriate
size of the fee is $1 million, or $2 million. 87
80
Telephonic Oral Arg. and Rulings of the Ct. on Pls.’ Am. Mot. Expedited Proceedings, 40–41,
Dkt. No. 78.
81
See Kandell v. Niv, 2017 WL 4334149 at *12 n.192 (Del. Ch. Sept. 29, 2017).
82
See, e.g., Verified Class Action Compl. Declaratory and Injunctive Relief, ¶¶ 14–17, 46–52,
Dkt. No. 1.
83
See id. ¶¶ 173–74.
84
Id. ¶¶ 187–92
85
Id. ¶ 229.
86
See generally OB.
87
Tr. Settlement Hearing 102:18–20.
17
B. The Sugarland Factors in Application
To assess a claim for attorneys’ fees, I must apply the Sugarland factors to
make an equitable award. 88 These are: “(1) the results achieved; (2) the time and
effort of counsel; (3) the relative complexities of the litigation; (4) any contingency
factor; and (5) the standing and ability of counsel involved.”89 Historically, the
benefit achieved by the Plaintiffs’ counsel in the course of the litigation has received
the greatest weight.90 While attorneys’ fees are an issue for resolution in the Court’s
discretion, 91 I look to precedential cases to guide my review.92
1. Valuation of the Benefits Achieved
It is necessary to ascertain the benefits achieved before attempting to value
the same.
The Plaintiffs seek an award of fees for three benefits: bringing the Merger
into compliance with Section 203; the additional (but, per the Plaintiffs, allegedly
still inadequate)93 disclosures GCI made regarding the Merger to its stockholders
prior to the vote; and the reduction in the individual Defendants’ ultimate voting
88
See Americas Mining Corp. v. Theriault, 51 A.3d 1213, 1254 (Del. 2012).
89
Id.90
See id.91
See, e.g., In re James River Grp., Inc. S’holders Litig., 2008 WL 160926, at *2 (Del. Ch. Jan. 8,
2008).
92
See, e.g., Olson v. ev3, Inc., 2011 WL 704409, at *8 (Del. Ch. Feb. 21, 2011) (“Precedent awards
from similar cases may be considered for the obvious reason that like cases should be treated
alike.”).
93
See AB 29.
18
power that occurred due to the changes in consideration to be paid as a result of the
Merger. 94
The Defendants urge me to award fees with respect to the Section 203
compliance only.95 They cite Winthrop v. Central Coal & Coke Corporation, which
states that a fee award is justified where the “‘benefit’ produced by the defendants’
action [is] ‘the same or similar [to that] sought by the shareholder’s litigation.’”96
The Defendants read Winthrop to require that, to receive fees with respect to an
alleged benefit, a plaintiff must have made a specific, now-mooted, claim with
respect to each benefit. 97
This is too narrow a reading of Winthrop. In Winthrop, the plaintiffs filed a
complaint to remove a particular slate of directors. 98 A stockholder written consent
was executed that led to the re-election of that exact slate of directors, mooting the
plaintiffs’ complaint. 99 The plaintiffs sought fees for having worked a corporate
benefit, and the Court denied on the basis that the result—reelection of the very
directors the plaintiffs sought to remove—was “certainly not the result plaintiffs
sought to achieve when they filed [the] action,” and therefore the benefit produced
was not the same or similar to that sought by the plaintiffs in instigating the
94
See OB 2–3.
95
The Defendants continue to assert that Section 203 did not apply to the Merger. See AB 6.
96
2000 WL 33173168, at *1 (Del. Ch. Jan. 28, 2000) (internal citation omitted).
97
See AB at 15–16.
98
Winthrop, 2000 WL 33173168, at *1.
99
Id.19
litigation. 100 The Court also briefly analyzed but did not credit an argument by the
plaintiffs that insisted the “purpose” of their litigation was to seek the declaration of
a legitimate board of directors, instead stating that the Court “perceive[d] the
purpose of the litigation differently.”101
Here, the two extra benefits—additional disclosure and change in voting
control—dovetail with the overall “gravamen” of the litigation: “that the Merger
consideration for minority stockholders was inadequate while Malone and Maffei
received unfair special benefits.” 102 The additional disclosure provided
stockholders, whose majority-of-the-minority vote was still being sought, with
pertinent information—regarding the process by which Merger consideration was
set—for their contemplation before casting their votes. The change in voting control
following the PI Stipulation stripped Malone and Maffei of this unique consideration
they were to receive following the Merger. Thus, the questioned “benefits” are
clearly a similar result to that sought by the Plaintiffs in bringing suit, even if they
do not precisely correlate to a claim in the First Amended Complaint.
Therefore, I will value the three distinct benefits the Plaintiffs have provided
in securing the PI Stipulation: (1) additional public disclosures regarding conflicted
100
Id.101
Id.102
Pls.’ Reply Br. Further Supp. Their Mot. for Att’ys’ Fee Award Benefits Conferred By the
Prelim. Inj. Stipulation 10, Dkt. No. 136.
20
individuals; (2) curing of any Section 203 violation; and (3) a reduction in voting
control following the consummation of the Merger. I address each in turn.
a. Valuing the Additional Disclosures
In assessing the value of the disclosure claims, I look to precedents of this
Court. In In re ArthroCare Corporation Stockholder Litigation, the Court found that
a range of $800,000 to $1 million in fees was merited with respect to additional
disclosures made regarding the transaction at issue, because the disclosure claims
pertained to conflicted financial advisors and financing sources, which made them
stronger than the average disclosure claim. 103
I conclude that an award of $800,000 is appropriate with respect to the
disclosure claims. This is indicative of the fact that the disclosure claims in this case
were also related to conflicts regarding financial advisors as well as special
committee members. I have adjusted to the low end of the scale to reflect the fact
that the Plaintiffs still viewed the revised disclosures as insufficient to fully inform
GCI stockholders ahead of the vote. 104
103
In re ArthroCare Corp. S’holder Litig., Cons. C.A. No. 9131-VCL, at 28:4–8 (Del. Ch. Nov.
6, 2014) (TRANSCRIPT).
104
OB 28 n.74 (“Plaintiffs maintain that the stockholder vote on the Merger was still uninformed
even with the Supplemental Disclosures.”).
21
b. Valuing Compliance with Section 203
The Plaintiffs’ Section 203 claim was expressly mooted in connection with
the PI Stipulation,105 given that the changes to the Merger consideration brought the
transaction within a statutory safe harbor.106
The Defendants argue that, while the Section 203 claims are an “appropriate”
basis for a mootness fee, 107 a fee of $1 to 2 million is the most that ought to be
awarded. 108 Essentially, the Defendants maintain the position that, despite entry into
the PI Stipulation, the Company had previously validly waived the applicability of
Section 203 to the Merger, and therefore no true economic benefit was obtained by
the Plaintiffs. 109 This reasoning is uncompelling. While the Plaintiffs may not have
received a fungible cash payment constituting an economic benefit, ensuring that the
merger was statutorily sound is of value to stockholders. Confirming that the Merger
is compliant with the statute is itself an important benefit. Further, the compliance
ensures that management attention is not diverted in attempting to respond to
litigation and inquiries with respect to the alleged violation.
In response, the Plaintiffs point me to Hawkes v. Bettino, in which a $3.85
million contested attorneys’ fee was awarded in exchange for mooting a Section 203
105
See Stip. ¶ 7.
106
See AB 14; see also 8 Del. C. § 203(c)(3)(v).
107
AB at 26–27.
108
See id. at 27; see also Tr. Settlement Hearing 102:16–20.
109
See AB 17, 28.
22
violation prior to consummation of a business transaction.110 I find that a substantial
corporate benefit occurred here, and that the fee awarded in Hawkes is thus a helpful
guidepost.
I note, however, the need to avoid duplicity in measuring an applicable award
of fees. The Hawkes benefit included supplemental disclosures.111 I treat disclosure
as a separate benefit to be valued, and thus discount the Hawkes award by
$800,000.112 This accounts for the additional disclosures regarding the litigation,
which were included in the November 24 8-K. Altogether, an award of $3.05 million
is appropriate for the mooting of the Section 203 claims.
c. Valuing the Change in Voting Control
The decrease in the individual Defendants’ voting power worked a
compensable benefit. In valuing that benefit, the Plaintiffs urge me to consider the
Wedge and assign its shrinkage here an express valuation. In support of their
position, they proffer the Expert Report of Benjamin Sacks, a financial economist
(the “Sacks Report”). The Sacks Report purports to assign a concrete valuation to
three separate avenues by which, Sacks argues, the Wedge was decreased in
connection with the PI Stipulation: (1) the fact that Malone and Maffei’s
110
See generally Hawkes v. Bettino, C.A. No. 2020-0360-PAF (Del. Ch. Apr. 1, 2021)
(TRANSCRIPT).
111
See generally id.
112
See supra Section II.B.1.a.
23
consideration for the Merger was ultimately converted into non-voting Broadband
Series C stock; (2) the fact that Maffei’s high-vote Rollover Broadband Series B
Options must now, upon exercise, be converted into non-voting Broadband Series C
stock; and (3) the termination of the Exchange Agreement, which otherwise would
have allowed Malone to retain 49% ownership of Broadband.113
To bolster the Sacks Report, the Plaintiffs point to “economists and investor
groups,” the SEC’s Investor Advisory Committee, and statements of this Court in
written opinions and oral rulings, supporting the concept that a Wedge can reduce
firm value. 114 While these sources support the concept of the Wedge, no additional
mathematical reasoning has been provided to bolster Sacks’s conclusion. I, too, find
the concept of the Wedge compelling, but that does not equate with an immediate
ability to quantify the concept. The Sacks Report, while providing one theory of
quantification, does not persuade me of the appropriateness of the fee award its
valuation is purported to justify: $18 to $19 million for this benefit alone. 115
113
See Unsworn Decl. Pursuant to 10 Del. C. § 3927 of Andrew E. Blumberg in Supp. of Pls.’
Mot. For Att’ys’ Fee Award Benefits Conferred by the Prelim. Inj. Stipulation, at Ex. 1., Dkt. No.
125.
114
See OB 31.
115
I conclude that the Plaintiffs ask me to award $18 to $19 million on strength of the Wedge
analysis by way of simple algebra. The Plaintiffs suggest a $22 million award; they do not
expressly lay out the formula by which they arrived at this number in their opening brief, but they
urge that “The Section 203 and Disclosure Benefits Support a Fee Award of $3 to $4 million.” Id.
at 51.
24
Instead, I look again to precedent to determine a valuation for the change in
voting control secured by the PI Stipulation. In re Activision is instructive.116 That
case involved the valuation of three major components: (1) a payment of $275
million to the company; (2) a reduction in two directors’ voting power, from 24.9%
in the aggregate to 19.9%; and (3) the expansion of the applicable board of directors
by two spots to be filled by independent directors.117 The board of directors at issue
also became facially independent as a result of the expansion.118 The Court treated
(1) separately but stated that an award of $5 to 10 million for the reduction of voting
power and the addition of two independent directors would be supported by
precedent. 119 In support, the Court cited a number of cases, each of which awarded
between $5.14 and $8.5 million in fees for a variety of nonmonetary beneficial
outcomes. 120
Precedent further suggests that the addition of a single independent director
could itself support an award of $1 million in attorneys’ fees.121 Backing that value
116
In re Activision Blizzard, Inc. S’holders Litig., 124 A.2d 1025 (Del. Ch. 2015).
117
Id. at 1071.
118
Id.119
Id.120
See id. at 1071 n.30 (citing In re Google Inc. Class C S’holder Litig., Cons. C.A. No. 7469-CS,
at 109 (Del. Ch. Oct. 28, 2013) (TRANSCRIPT), then citing In re Yahoo! S’holders Litig., C.A.
3561-CC, Let. Op. at 1 (Del. Ch. Mar. 6, 2009), and then citing Minneapolis Firefighters’ Relief
Assoc. v. Ceridian Corp., C.A. No., 2996-CC, Order at 2 (Del. Ch. Mar. 24, 2008)).
121
In re Tile Shop Holdings, Inc. S’holder Derivative Litig., 10884-VCG, at 42 (Del. Ch. Aug. 23,
2018) (TRANSCRIPT).
25
(unachieved here) out of the Activision range suggests that an appropriate range for
the reduction in voting control might here fall between $3 and $8 million.
I conclude that $5.5 million, the midpoint of the adjusted range, is an
appropriate award for the benefits relating to voting control achieved by the PI
Stipulation. Multiple distinguishing facts here inform my conclusion but return it to
the mean figure.
First, the Activision lead counsel achieved a change with respect to the facial
independence of the board, which has not been accomplished here, counseling for a
fee in the lower end of the range.
Further, the PI Stipulation prevented de jure control from being established,
but ultimately Malone and Maffei remain in a position of soft control with respect
to the combined company.122 While this fact does not militate against receiving an
award, moderation should guide the quantification of the fee.
On the other hand, the delta between the voting power of Malone and Maffei
before and after the PI Stipulation here is roughly fourteen percent,123 in comparison
122
See, e.g., OB 4 (discussing the “‘soft control’” Malone and Maffei had in GCI by virtue of their
pre-Merger 35% voting position). If 35% voting control can be viewed as soft control, 47% voting
control of the combined company can likewise be considered soft control. See, e.g., id. at 2
(identifying Malone and Maffei’s voting control of the combined company as “approximately
47%”).
123
See, e.g., id. (“[T]he PI Stipulation reduced [Malone and Maffei’s] collective voting power on
an absolute basis, taking their combined vote from over 61% in the post-Merger company to
approximately 47%.”); but see FAC ¶ 179 (“[T]he two will have 66.6% of the voting power of the
combined company taking into account the exercise of Maffei’s rolled options and the conversion
of Malone’s “C” shares as permitted by the Exchange Agreement”). Because Maffei’s GCI Series
26
to the five percent change in Activision,124 suggesting that the fees awarded should
perhaps be nudged upwards.
This delta leads the Plaintiffs to suggest that the value of voting control should
be subject to a concomitant multiplier (approximately three), and to propose a range
of $9 to $24 million in fees associated with the voting control. I cannot agree with
this proposition. The stockholders’ position was certainly improved, but not so
dramatically as to invite an award of fees well exceeding the precedential ranges in
Activision and the cases to which it cites.
On balance, an award of $5.5 million with respect to the voting control change
is appropriate. This sits comfortably within the range promulgated in Activision as
adjusted for the two additional board seats. It further rewards the Plaintiffs for
preventing de jure control, but acknowledges the reality that Malone and Maffei
likely still maintain soft control over the combined company post-Merger. It also
accounts for the fact that a facially independent board of directors was not
established here.
B Options were not exercised, and because his Rollover Broadband Series B Options must now
collapse into non-voting Broadband Series C stock upon exercise, I do not include them in the
delta calculation. I do not consider the Exchange Agreement conversion because the agreement
has been terminated. Relatedly, the Plaintiffs, in their First Amended Complaint, also urge the
conclusion that the potential to achieve 66.6% of the vote was a motivator for Malone and Maffei,
as it would allow the two to overcome the supervoting provisions in Broadband’s certificate of
incorporation with respect to future transactions. See id. ¶ 203. Because this change was
speculative in nature, given that it hinged on Maffei’s decision as to whether to exercise his
Rollover Broadband Series B Options, I do not credit it in the award here.
124
Activision, 124 A.3d at 1071.
27
In sum, then, an appropriate fee for the benefit acquired for the corporation is
$9.35 million in total: $3.05 million for resolution of the Section 203 claim;
$800,000 for the improved disclosures pertaining to conflicted directors, special
committee members, and financial advisors; and $5.5 million accorded to the change
in voting control.
2. The Remaining Sugarland Factors and the Lodestar Cross-Check
The remainder of the Sugarland factors are comparatively straightforward to
address. The case was taken by the Plaintiffs’ counsel on a contingent basis, and the
experience, skill, standing and ability of both the Plaintiffs’ and the Defendants’
counsel are well known to this Court to be exemplary. The litigation here was
complex, not only in the sense that the underlying transaction was complex, but also
logistically with respect to the expedited timeline seeking relief in advance of the
stockholder vote.
Sugarland also highlights that the time and effort of counsel must be
recognized. Given the course of expedited discovery, the Plaintiffs’ counsel
received almost eleven thousand documents and took five depositions, while
preparing briefing and argument and also negotiating the PI Stipulation in parallel.
Prior to the PI Stipulation, the Plaintiffs’ counsel had devoted over 2,700 hours to
this matter, which such total is truncated due to both the expedited schedule and the
28
determination that it was appropriate to enter into the PI Stipulation ahead of
additional depositions, briefing, and argument.
To prevent granting of windfall awards, this Court has historically considered
hours worked as a “crosscheck.”125 The Plaintiffs’ counsel reported in their Opening
Brief that they worked 2,716.4 hours prior to the PI Stipulation, which they value at
approximately $1.6 million. 126 Assuming an award of $9.35 million, this implies an
hourly rate of $3,442.06. In light of the contingent nature of the litigation, I find this
is within the range of precedents and confirms the fee award granted here is not a
windfall.
In sum, each of the Sugarland factors weighs in favor of an award of
attorneys’ fees to the Plaintiffs’ counsel of $9.35 million, exclusive of the settlement
fee award.
III. CONCLUSION
The Plaintiffs’ Motion for Attorneys’ Fees is GRANTED in the amount of
$9,350,000. An appropriate Order is attached.
125
Olson v. ev3, Inc., 2011 WL 704409, at *8 (Del. Ch. Feb. 21, 2011).
126
OB 57.
29