After Derivative Litigation Judgment For Defendants, Delaware Court Of Chancery Denies Application For “Mootness” Fee For Purportedly Prompting Appointment Of Independent Directors Who Served On Special Litigation Committee
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  • After Derivative Litigation Judgment For Defendants, Delaware Court Of Chancery Denies Application For “Mootness” Fee For Purportedly Prompting Appointment Of Independent Directors Who Served On Special Litigation Committee
     
    02/21/2024

    On February 7, 2024, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery denied a motion for a “mootness” fee of plaintiffs in a derivative action brought against the founder of a technology company (the “Company”), its CEO, certain of its directors, and other individuals affiliated with a counterparty to an acquisition by the Company. In re Oracle Corporation Derivative Litigation, C.A. No. 2017-0337-SG (Del. Ch. Feb. 7, 2024). Plaintiffs had alleged that the founder and CEO caused the Company to overpay for the target and asserted claims for breaches of fiduciary duty seeking damages. After issuing a post-trial judgment in favor of defendants, plaintiffs applied for a $5 million fee for precipitating the appointment of two independent directors who served on the special litigation committee (“SLC”) of the board. The Court held that the appointment of the new directors “did not moot any issues in the case, nor was it an aim of [p]laintiffs’ litigation.” Accordingly, plaintiffs were not entitled to a fee under the corporate benefit doctrine.

    At the motion to dismiss stage, the Court had upheld the claims, finding that it was reasonably conceivable that a majority of the Company’s board lacked independence from its founder, who was also the largest shareholder of the target. Following that decision, the Company’s board appointed two new independent directors who were also subsequently appointed to the SLC, which was assigned to evaluate the derivative litigation. After an investigation, the SLC concluded that it was in the Company’s best interest for plaintiffs to proceed with their derivative claims on behalf of the corporation. The litigation continued for several years, but the Court found in favor of defendants after a trial and plaintiffs did not recover any damages for the corporation. Plaintiffs nevertheless sought a mootness fee because—they contended—the litigation worked the corporate benefit of increasing the percentage of independent directors.

    In rejecting plaintiffs’ application, the Court reasoned that, to justify a fee for a corporate benefit, “there must be a nexus between the theory of the action and the benefit.” Here, the Court found, the appointment of two independent directors to create a majority independent SLC did not on its own “specifically and substantially benefit the corporation and its stockholders.” Moreover, and “the appointment was incidental to . . . the litigation” and there was a “disconnect between the aim of the litigation and any benefit.” The Court was also unpersuaded by plaintiffs’ argument that future settlements for therapeutic benefits would be deterred by the denial of a fee award because courts can analyze the “give and get” of such settlements and assess the merits of a potential fee.

    CATEGORIES: Attorneys’ Fees, Deal Disputes, Demands on Boards, Fiduciary Duties

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