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It’s a rare client who thinks that four months of a lawyer’s time is worth $25 million. For Stuart Grant, Trust Co. of the West is that client. Grant represented the Los Angeles-based institutional investor in its suit against Intermedia Communications Inc. TCW believed that the Tampa, Fla.-based company’s board violated its fiduciary duties to Digex Inc. shareholders in the September sale of Intermedia and its 52 percent stake in Digex to WorldCom Inc. After a favorable decision from Delaware Chancellor William Chandler Dec. 13, 2000, Digex shareholders, including 4 percent holder TCW, won from Intermedia and WorldCom $180 million in WorldCom stock and other concessions that may be worth as much as $240 million. Supported by TCW, Grant filed with the Delaware Court of Chancery for a $24.75 million fee in the case. Digex independent directors Richard Jalkut and Jack Reich opposed Grant’s request and instead proposed that Chandler award him $8.25 million. In the end, Grant did not get his $25 million. But the fee fight is not likely to be the last and illustrates the ongoing debate over the nature of shareholder litigation and the appropriate way to compensate the lawyers who represent large institutional shareholders. Grant claims that institutions are more likely to file suits like Digex’s than they have been in the past and are more suited to lead them than are individual investors. He also believes that the lawyers who represent large shareholders in such cases deserve to be generously compensated for their work. “If I created $430 million in value in Digex, why shouldn’t I get the same $50 or $70 million that a CEO gets?” Grant asked. Intermedia’s board was a model of bad corporate governance in the company’s $3.9 billion sale to Clinton, Miss.-based WorldCom, which saw the deal as a way to gain control of Digex, a Beltsville, Md.-based Web and applications hosting company. As a condition of the deal, WorldCom demanded that the Digex board opt out of a Delaware law that would have limited WorldCom’s ability to combine its assets with those of Digex. The five members of Digex’s board who were also Intermedia board members voted on behalf of Digex to grant the waiver. Jalkut and Reich opposed the deal. FEE FIGHT TCW retained Grant in the case and agreed to pay his firm 15 percent of any settlement in the case, plus expenses. Chandler consolidated the various shareholder suits brought against TCW and named Grant lead counsel in the case. In an affidavit, TCW associate general counsel Linda Barker called the fee “on the low end of the reasonable range of fees.” It is also the only fee percentage that does not increase with the amount of the settlement or the stage of the proceedings, she said. Grant and TCW argued that courts should defer to fee agreements negotiated by large shareholders. That position contravenes the law in most states, which allows courts to oversee fee awards in class-action cases. Grant claims that such oversight is unnecessary because the large shareholders stand to pay their lawyers more than any other shareholders in a class action. His 18-lawyer firm specializes in representing institutional investors in such cases and is therefore uniquely qualified to handle them, Grant says. Many institutions are repeat players in the litigation game, which limits a lawyer’s ability to overcharge them. “The State of Wisconsin Investment Board has made it well-known that they have all sorts of people they can go to, and I think about that when I negotiate fees,” Grant said of one of his major clients. And there is a body of precedent for such bulky fee deals. Grant stressed the 1999 Chancery Court case Sanders v. Wang, in which Computer Associates International Inc. shareholders sued the company for issuing 20 million shares of the company’s stock to its executives. Under a settlement, the executives returned 4.5 million of those shares to the company. On June 22, 2000, the court approved a fee award to the shareholders’ lawyers of 20 percent of the $230 million settlement, or $46 million. Jalkut and Reich countered that the lawyers in the Computer Associates case put extraordinary effort into it. More typical, the directors claimed, were the nine federal cases in which there were fee awards of more than $150 million and the plaintiffs’ lawyer were paid a percentage of the recovery. In those cases, the fee awards were between 5 percent and 8.275 percent of the settlement fund. IRRITATING REQUEST Indeed, courts are unlikely to surrender their right to oversee fee awards in class-action cases, said Lawrence Hamermesh, a professor at Widener University School of Law in Wilmington, Del. “It’s hard to see the private kind of arrangement taking over from the traditional kind of class-action fee structure,” he said. Grant’s fee request irritated Digex independent directors Jalkut and Reich for reasons that went beyond mere lucre: The two men felt that they had created a strong record for Grant by opposing the Digex board’s decision to approve the deal and claimed that they, rather than Grant, negotiated the settlement with Intermedia, for which Grant also claimed credit. “We put in enormous time and effort over a six-month period trying to see if we could further improve the lot of the Digex shareholders,” Jalkut told Chandler in an April 6 hearing on the settlement and award of attorney’s fees. “And we take great offense at the fact that having accomplished that, the plaintiff’s attorney wants to take close to $25 million off the top.” Jalkut and Reich will each resign from the Digex board after the deal closes and get a $500,000 golden handshake. Their financial adviser, Credit Suisse First Boston, will receive $10 million for its work on the deal. Grant said the two directors acted in an effort to avoid becoming personally liable to Digex shareholders. “The Digex directors’ opposition to the settlement was driven by their own egos and the fact that everyone in this thing was making a lot of money except them,” he said. “Here, everything that was done, we created.” FIDUCIARY DUTY Chandler declined to apportion credit for the deal. Indeed, he praised both Grant and the independent directors in the April 6 hearing. But the judge also declined to give Grant the $24.75 million he requested or to limit him to the $8.25 million suggested by the directors. Instead, he awarded Grant $12.3 million, to be divided among the various plaintiffs’ lawyers in the case by Grant & Eisenhofer. Grant contended that, were the proposed award reduced, the judge would be discouraging institutional investors from entering into such fee agreements in the future, what Grant calls an essential part of reforming shareholder litigation. “Clients want to control the litigation,” Grant said in an interview. “If there’s no fee agreement, how does the client set the goals?” Chandler rejected that argument, which, he said, “does not acknowledge the fact that the court has a fiduciary duty to every other member of the class, not just the members of the class who negotiated the agreement with you, and who believes in good faith that it’s a fair and reasonable agreement.” Chandler also dismissed Grant’s claim that lawyers’ fees in comparable cases can be one-quarter to one-third of the settlement. “I don’t think it necessarily proves a whole lot,” the judge said. INCENTIVES Though he said his decision was not driven by a simple analysis of how much Grant and the other plaintiffs’ lawyers billed, Chandler noted that they worked about 4,150 hours on the case and incurred about $580,000 in expenses. At the lawyers’ standard hourly rates, that time would be worth $1.4 million, Chandler said; even a 400 percent premium would yield lawyers’ fees of $5.6 million. The judge came to his $12.3 million award by calculating a fee of 7.5 percent of the settlement fund. “There is no reason for the court to believe that a 7.5 percent fee will provide a disincentive to plaintiffs’ attorneys or their clients or that it will cause them not to bring meritorious suits or litigate them efficiently,” Chandler said April 6. Despite walking away from the case with $12.3 million, Grant said that the decision creates bad incentive effects for future plaintiffs. He said that courts should analyze fee agreements as they appeared to the parties that negotiated the fee structure before a judgment rather than looking strictly at the fees such structures generate in the wake of a decision. “Did we ever dream Digex would be worth what it was worth? No,” Grant said. He also questioned Chandler’s motives in cutting the fee request in half. “I’m asking Chandler for 200 times his annual salary. That pervades the entire discussion,” Grant said. “My guess is, if we had only gotten $100 million in value, we would only have been paid $12 million.” Abrams found Grant’s position specious. “The argument that a specialty subclass of plaintiffs lawyers needs financial inducements in the range of tens of millions of dollars is inconsistent with the ready availability of many sophisticated firms with greater resources which are willing to supply these services,” Abrams said. He noted that his own firm and other traditional law firms have represented institutional clients in the past “under fee agreements which are significantly less onerous to the class than the fee structures presented to the court in Digex as precedent.” SHAREHOLDER ACTIVISM Grant believes that Digex reflects the greater willingness of institutional investors to bring such suits, but he contends that few lawyers cater to institutions that wish to bring securities and corporate governance litigation. “Right now, I don’t think that prices [for such lawyers] are artificially high. Even with prices now, we’re not attracting people to leave their firms and serve this market,” he said, adding that law firms with large mutual fund practices might be well-suited for such work. Lawyers at two such firms said there are good reasons why their clients rarely bring such suits. “I’ve never quite understood why the institutional investors would want to take on this litigation burden,” said Bryan Chegwidden, a partner at Ropes & Gray in Boston. “For these guys to expose themselves in any sort of significant way takes resources, and I’m sure they’d rather spend those on what they’re better at doing, which is investing.” Grant counters that institutions often overlook the benefits of shareholder activism. He noted that because of the Digex decision, Viacom Inc. put its purchase of the 36 percent of Infinity Broadcasting Corp. it didn’t already own to a vote of Infinity’s shareholders in February. And though many institutions are chary of drawing public attention to situations in which they’ve lost money, Grant maintains that such fears are misplaced. “The fear that they’ve had is that people will hear about that and not want to invest,” Grant said. “I think the ones that have stepped in have found that that hasn’t been true, and if anything the opposite has been the case. Investors’ reaction is, ‘These people will fight for me when I’ve been ripped off, and I like that.’” Another mutual fund lawyer distinguishes between litigation involving a change in control and the class-action suits in which lawyers like Grant are encouraging institutions to participate. “In control situations in Delaware, institutional investors have been active for years,” said Peter Saparoff, a partner at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo in Boston. “I don’t think there’s been very much institutional activity in class-action cases, and I don’t think there will be,” Saparoff said. “I think there’s a difference between being lead plaintiffs and representing your own investors. Often the most prudent thing to do is to follow the case and get your share of the settlement. I’m not necessarily sure class actions work much better with institutional plaintiffs than without them.” Copyright (c)2001 TDD, LLC. All rights reserved.

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