The Delaware Court of Chancery awarded roughly $2.3 million in attorney fees to the minority shareholders’ counsel in the Orchard Enterprises merger litigation, based on the benefit created for the entire shareholder class. However, the court declined to award attorney fees to claimants who sought a related appraisal action, ruling their litigation sought only to benefit themselves, not all shareholders.
“If the same counsel had litigated a combined appraisal proceeding and plenary action from start to finish, I would have no difficulty awarding fees and expenses for the aggregate effort in both proceedings based on the total benefit conferred,” said Vice Chancellor J. Travis Laster in In re Orchard Enterprises Stockholder Litigation. “This decision awards $2,250,000 to plenary counsel for their role in creating the benefit. Because the appraisal claimants were content to pursue only their own interests and did not undertake to serve the interests of the class as a whole, they lack the standing to obtain a fee award for the appraisal counsel’s role in creating the benefit.”
An affiliate of private equity firm JDS Capital LP, Dimensional Associates LLC, acquired Orchard Enterprises, a music and video distributor, in 2010, according to court documents. Prior to the merger, Dimensional held roughly 42 percent of Orchard’s common stock and 99 percent of its Series A Convertible Preferred Stock, granting the acquiring company 53 percent of Orchard’s voting power.
The merger closed, granting Orchard stockholders the right to receive $2.05 per share, according to court documents. Certain shareholders initiated an appraisal action in the Chancery Court. While the appraisal proceeding was pending, Dimensional merged Orchard with a Sony Music Entertainment Inc. entity in a transaction valuing the company higher than $2.05 per share. In July 2012, then-Chancellor Leo E. Strine Jr. ruled in In re Appraisal of Orchard Enterprises that Orchard’s value was $4.67 per share.
After the merger closed but before Strine resolved the appraisal action, other Orchard stockholders retained different counsel to pursue fiduciary duty claims, identified in court documents as the plenary claims. The appraisal shareholders were aware of the plenary action, but did not seek to intervene or otherwise assist in the case, according to Laster’s opinion.
In February, Laster ruled one of Orchard’s proxy disclosures constituted a material misrepresentation and a trial would be held under the entire fairness standard of review, placing the burden of proof on the defendants. The plenary action was eventually resolved in April when the parties agreed to settle the case. Under the settlement, the plaintiff class dropped their claims in exchange for roughly $10.7 million. According to court documents, the settlement was allocated across all Orchard shareholders, including the appraisal claimants.
The plenary action shareholders filed a motion seeking to recoup attorney fees and expenses, but the appraisal claimants objected to the allocation of the settlement funds and the attorney fees request. In a motion, the appraisal claimants alleged their counsel’s efforts contributed causally to the creation of the $10.7 million fund.
Laster rejected the appraisal plaintiffs’ motion, ruling the plenary plaintiffs initiated the litigation and pursued claims based on the merger between Orchard and Sony and were the only shareholders to raise fiduciary duty claims related to disclosures.
“Plenary counsel deserves sole credit for the second tranche of settlement consideration,” Laster said. “They alone pursued a rescissory damages claim based on the Orchard/Sony merger. The appraisal claimants did not seek discovery covering the time period when the Orchard/Sony merger took place. The appraisal claimants chose to rely exclusively on plenary counsel to prosecute the fiduciary duty claims in excess of $4.67 per share.”
Plenary counsel requested roughly $3.3 million in attorney fees, or roughly 30 percent of the total settlement consideration, but Laster noted cases settling two months before trial, such as the Orchard litigation, typically generate attorney fees between 22.5 percent and 25 percent of the benefit conferred. The vice chancellor concluded a roughly $2.3 million award would fall comfortably within that range.
In denying the appraisal claimants’ fee award, Laster said the appraisal plaintiffs only sought to create a benefit for themselves and not the class as a whole.
“In my view, however, the appraisal claimants lack standing to recover any amount because they did not pursue a classwide recovery on behalf of the other minority stockholders,” the vice chancellor said. “They were content to serve themselves and they should be left where they stand.”
Laster compared the appraisal plaintiffs to hostile bidders, noting the Chancery Court typically denies fees to such plaintiffs. ”A court of equity can deny a plaintiff standing to receive a fee award, regardless of whether the plaintiff otherwise can establish a prima facie case supporting an award, if the plaintiff has proceeded in a manner designed to benefit the plaintiff individually … and any benefit achieved for the class has happened as an incidental by-product of the plaintiff’s self-interested pursuit.”
The plenary plaintiffs were represented by James R. Banko of Faruqi & Faruqi, Samuel J. Lieberman of Sadis & Goldberg and James S. Notis of Gardy & Notis.
Ronald A. Brown of Prickett, Jones & Elliott represented the appraisal plaintiffs.
Orchard and Dimensional were represented by Philip Trainer Jr. of Ashby & Geddes and Kenneth J. Pfaehler of Dentons US.
Brown and Banko did not return calls seeking comment.