Charmi Blog

By: Charmi Patel

Charmi Blog

          Generally, Delaware follows the “American Rule”, whereby each party is expected to pay its own attorneys’ fees and expenses, regardless of the outcome.[1] But the Delaware Court of Chancery has recognized equitable exceptions to the American Rule, including when “a stockholder party obtains a ‘corporate benefit.’”[2] The court may award attorney’s fees and expenses if an individual stockholder’s “litigation effort confers a benefit on the corporation, or its shareholders, notwithstanding the absence of a class or derivative component.”[3]

           In Hollywood Firefighters’ Pension Fund the court stated that a plaintiff is eligible to recover attorneys’ fees where “(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 benefit was causally related to the lawsuit.”[4]

          Chancellor McCormick applied the aforementioned factors to determine whether the plaintiffs in Totta were entitled to fee shifting.[5] In that case, the plaintiffs sued to challenge Defendant CCSB Financial Corp’s (“CCSB”) 2021 board election.[6] There was a dispute regarding the incumbent CCSB board’s interpretation of a provision in CCSB’s certificate of incorporation regarding voting limitations in an election.[7] Because of the incumbent board’s erroneous interpretation, the votes were recounted, and the insurgent nominees won the 2021 election.[8] After the Court issued its ruling, in favor of the plaintiffs, the plaintiffs moved for their attorney’s fees and expenses in connection with litigating the case.[9] The plaintiffs argued that the litigation conferred substantial benefits on CCSB’ stockholders because the insurgent candidates won, and now there is a uniform interpretation of the voting provision to prevent future issues.[10] CCSB denies receiving a benefit, countering that the plaintiffs obtained a personal benefit because the recount only rectified the plaintiffs’ voting power.[11]

          But, a personal motive to sue does not disqualify the plaintiff from fee shifting under the corporate benefit doctrine.[12] All plaintiffs have “some self-interested motivation; the relevant inquiry is whether the benefit is so purely personal as to render an award of attorney’s fees inequitable.”[13] With that, although the Court’s ruling only affects the plaintiffs’ votes in this situation, the judgment benefits all CCSB’s stockholders.[14] The plaintiffs success in this litigation will prevent future stockholders from being harmed by an erroneous interpretation of the voting provision.[15] Moreover, CCSB gained a substantial benefit by receiving a correct interpretation of the voting provision, which, in effect, sets the interpretation for future elections.[16]

           Next, the court will analyze the reasonableness of the proposed award and consider the following factors: 1) “the results achieved; 2) the time and effort of counsel; 3) the relative complexities of the litigation; 4) any contingent factor; 5) the standing and ability of counsel involved.”[17] The first factor is the most important of the five, “the benefit to the corporation achieved by the stockholder action.”[18] As stated above, the Court found that substantial benefits were conferred on CCSB. In considering the other Sugarland factors, the Court found the plaintiff’s requested $385,419.09 in attorney’s fees and expenses was justified.[19] The Court reasoned: “the case involved the interpretation of an unusual voting provision; the litigation required contested motions for expedition and dismissal; and Plaintiff was represented by respected counsel.”[20]

          Although the American Rule may be the default method followed by courts, there are exceptions, in equity. Delaware has also held parties may agree or disagree to fee shifting contractually.[21] So parties may want to consider adding indemnification provisions to future agreements.

[1] See generally Montgomery Cellular Hldg. Co., Inc. v. Dobler, 880 A.2d 206, 227 (Del. 2005).

[2] Totta v. CCSB Fin. Corp., C.A. No. 2021-0173-KSJM, 2022 WL 16647972, at *1 (Del. Ch. Nov. 3, 2022).

[3] Id. (quoting Tandycrafts, Inc. v. Initio P’rs, 562 A.2d 1162, 1163 (Del. 1989)).

[4] Hollywood Firefighters’ Pension Fund v. Malone, C.A. No. 2020-0880-SG, 2021 WL 5179219, at *6 (Del. Ch. Nov. 8, 2021).

[5] Totta v. CCSB Fin. Corp., C.A. No. 2021-0173-KSJM, 2022 WL 1751741 (Del. Ch. May 31, 2022), cert. denied, C.A. No. 2021-0173-KSJM, 2022 WL 4087800 (Del. Ch. Sept. 7, 2022), and appeal dismissed, 284 A.3d 713 (Del. 2022).

[6] Id.

[7] Id.

[8] Id.

[9] Totta, 2022 WL 16647972, at *1.

[10] Id.

[11] Id.

[12] See Martin v. Harbor Diversified, Inc., C.A. No. 2018-0762-SG, 2020 WL 568971, at *4 (Del. Ch. Feb 5, 2020); see also Totta, 2022 WL 16647972, at *2.

[13] Totta, 2022 WL 16647972, at *2.

[14] Id.

[15] Id. Cf. Keyser v. Curtis, C.A. No. 7109–VCN, 2012 WL 3115453, at *19 (Del. Ch. July 31, 2012) (holding the substitution of one control group for another does confer a substantial benefit to all stockholders.).

[16] Totta, 2022 WL 16647972, at *2, see EMAK Worldwide, Inc. v. Kurz, 50 A.3d 429 (Del. 2012) (stating stockholder “voting rights are sacrosanct” and an important part of a corporate governance.).

[17] Sugarland Indus., Inc. v. Thomas, 420 A.2d 142, 149 (Del. 1980).

[18] Totta, 2022 WL 16647972, at *3.

[19] Id., see Full Value Partners, L.P. v. Swiss Helvetia Fund, Inc., Civil Action No. 2017–0303–AGB, 2018 WL 2748261 (Del. Ch. June 7, 2018) (awarding attorney’s fees of $300,000 as the litigation resulted in repealing an offending bylaw and counting the plaintiff’s vote.).

[20] Id.

[21] See generally Paul Elton, LLC v. Rommel Delaware, LLC, C.A. No. 2019-0750-KSJM, 2022 WL 793126, at *1 (Del. Ch. Mar. 16, 2022).