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Delaware’s top court has approved $267mn in fees for lawyers representing shareholders who secured $1bn in a lawsuit over an acquisition involving Dell Technologies, rejecting claims that the award was excessive.
The ruling on Wednesday had been highly anticipated by legal observers looking to see how corporate law in Delaware, where most large US companies are domiciled, would treat blockbuster fees awarded in cases involving allegations of significant wrongdoing in corporate governance.
It also comes as another court in Delaware weighs a potential multibillion-dollar award to lawyers who had successfully convinced the court to cancel a $56bn pay package for Elon Musk earlier this year.
The latest judgment stems from a 2019 deal in which Michael Dell and private equity firm Silver Lake Partners had acquired shares of a Dell Technologies affiliate that they did not own, engineering a reverse merger that listed the broader Dell group at a $100bn enterprise valuation.
After the deal closed, shareholders sued, accusing Michael Dell, Silver Lake and its bankers at Goldman Sachs of breaching their fiduciary duties by acquiring the public shares too cheaply. The sides settled in 2022, just prior to a trial, for $1bn in cash, one the largest settlements in Delaware history.
Lawyers for the plaintiffs, led by the firms Labaton Sucharow and Quinn Emanuel, were ultimately granted $267mn in fees by the lower court. But a hedge fund who held shares in Dell, Pentwater, had argued that giving the lawyers an award equal to roughly 27 per cent of the $1bn settlement was excessive. Instead they said a sliding percentage scale typically employed by US federal courts would justify around a 15 per cent ratio.
The Delaware Supreme Court, however, agreed the lower Chancery Court had “more than adequately justified its fee award”.
Delaware courts have been encouraging plaintiffs’ lawyers to pursue meaningful cases rather than nuisance suits, in part by dangling large fees for plaintiffs’ lawyers, who typically work on contingency — meaning they only get paid if they succeed.
“The potential for large fees incentivises counsel to accept challenging cases,” the Supreme Court wrote. “They assume the risk of recovering nothing in the end.”
Still the court was aware of striking the right balance between incentives and excessive awards.
“In Delaware, we are used to big numbers,” the state Supreme Court wrote. “But it is also legitimate to ask, outside our somewhat insular legal universe, whether the public would ever believe that lawyers must be awarded many hundreds of millions of dollars in any given case to motivate them to pursue representative litigation or to discourage counsel from settling cases for less than they are worth.”
It added: “At some point, the percentage of fees awarded in a megafund case exceeds their value as an incentive to take representative cases and turn into a windfall.”
A similar argument against a large plaintiffs’ fee has been deployed by lawyers for Tesla in the Musk case. They have told the court that the request for 29mn Tesla shares — currently worth around $6bn — “defies established Delaware case law, mangles basic economics, and seeks to evade entirely the fairness checks this court imposes on fees”.
The lower chancery court is expected to rule later this year both on the fee and on whether a recent Tesla shareholder vote to reapprove the Musk pay package has any impact on the earlier decision to cancel it.
The Delaware Supreme Court’s decision on Wednesday also pushed back against criticism of Pentwater from the lower court, saying that it had the right to protest about a fee award it believed was unfair.
“Although it might sound quaint, lawyers are not in the same position as investment bankers and fund managers when it comes to class action settlements — they are fiduciaries for the class.”
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