By Nate Raymond
Oct 9 (Reuters) - For all of the Delaware Chancery Court's
tough talk about attorneys' fees in merger class actions in
which investors get no cash, the judges haven't exactly stopped rewarding plaintiffs' lawyers for bringing the cases. In fact,
the Delaware bench regards a fee of $400,000 to $500,000 as the
going rate for a settlement that provides one or two
"meaningful" disclosures in a proxy statement. At those rates,
it's well worth lawyers' time to bring M&A disclosure suits.
But in Texas, the calculus is much less straightforward. In
August, a state appeals court in Dallas rejected a $1.1 million fee award that stemmed from shareholder litigation over the $3
billion merger of Centex Corp and Pulte Homes. With similar fee
challenges pending before two other Texas appeals panels, the
Texas Supreme Court is now deciding whether to take up the
Centex fee case to decide whether lawyers who bring proxy
disclosure suits in Texas can expect any fees at all.
Texas is a contrarian case study in what some academics have
opined to be a competition among state courts for complex
business litigation. A recent study co-authored by Ohio State
University associate law professor Steven Davidoff (aka Deal
Prof of The New York Times' Dealbook) found that state courts
use fee awards to induce plaintiffs' lawyers to file suits in
their jurisdiction, in an example of "inter-state jockeying"
among the courts. The $305 million fee that Delaware Chancellor
Leo Strine awarded Prickett, Jones & Elliott and Kessler Topaz
Meltzer & Check in a class action against Grupo México came amid
discussion that Delaware's market share for merger litigation
was in decline. The outsize award seemed to provide a data point
for the competition thesis.
On paper, Texas would seem like a good candidate to host M&A
suits, since, according to Davidoff's study, it is second only
to California as the headquarters of companies sued in M&A
cases. And while Texas didn't make Davidoff's list of top fee
awarders, state judges have been known to ladle out fees to
plaintiffs' lawyers. In February, for instance, the 2nd District
Court of Appeals in Fort Worth actually raised attorneys' fees
for 20 law firms, including Brower Piven, in a disclosure-only
settlement. The appeals court awarded the lawyers $8.61 million,
more than twice the $3.97 million they were granted by the judge
overseeing litigation stemming from Exxon Mobil Corp's $41
billion takeover of XTO Energy.
But fees of that magnitude in M&A disclosure-only cases may
become as much of a bygone Texas as cattle drives through Fort
Worth. In 2003, under Republican Governor Rick Perry, Texas
adopted a tort reform law that discouraged so-called "coupon
settlements," in which defendants get rid of class actions by
offering class members discounts on their goods. Lawyers used to
receive their fees in such cases in cash, not coupons, but the
2003 law said class counsel's fees had to take the same
cash-to-coupon ratio as the class's recovery.
The Dallas appeals court applied the same logic as the 2003
law in evaluating an appropriate fee award for the Centex
disclosure-only settlement, which was negotiated by Harwood
Feffer and Vianale & Vianale. "Here, if there was no cash
recovery for the class, fees could not be awarded in cash,
regardless of the value of the benefit to the class," wrote
Justice Martin Richter. The appellate court remanded the case
back to the trial court to "consider evidence and argument
offered by the parties regarding recovery of attorney's fees
within the constraints" of the tort reform law.
Last week, an objecting Centex shareholder asked the Texas Supreme Court to consider whether the entire settlement should
be thrown out. That should give the state high court a chance to
consider the issue of fees in disclosure-only settlements. (The
objector's petition was rejected on technical grounds but is
expected to be refiled. Objector counsel Jeffrey Weinstein of
Weinstein Law didn't return a call seeking comment. Plaintiffs'
counsel, Kenneth Vianale of Vianale & Vianale, declined
Even if the state Supreme Court doesn't take the Centex
case, two other intermediate appeals in Houston courts could
turn up the heat on plaintiffs' lawyers. In one, an objector
represented by Ted Frank of the Center for Class Action Fairness
asked the 14th Court of Appeals to nix $612,500 in fees in a
disclosure-only settlement in a suit arising out of the $2.85
billion merger of Holly Corp and Frontier Oil. "It was the most
trivial kinds of disclosure," Frank said. "It wasn't the CEO's
car color, but it was pretty close to that." (Plaintiffs'
lawyers at Edison, McDowell & Hetherington and Robbins Geller
Rudman & Dowdresponded that the Texas legislature never
intended the coupon rule to apply to suits seeking only
The 1st Court of Appeals, also in Houston, is separately
waiting for Dynergy Inc to emerge from bankruptcy to resume
consideration of its appeal of a trial judge's award of $1.6
million in fees and expenses to firms (including Susman Godfrey)
that handled shareholder litigation stemming from Blackstone's
failed $4.7 billion bid for Dynergy and Carl Icahn's subsequent
buyout proposal. Dynergy's lawyers at Skadden, Arps, Slate,
Meagher & Flom argued in a brief filed in January that the fees
aren't allowed under the Texas tort reform law.
It's too soon to say if Texas will lose out on M&A suits.
But David Sterling, a lawyer at Baker Botts who represents
Frontier, is predicting plaintiffs could turn away from the
Texas state courts, opting for federal court or Delaware
Chancery Court instead. "I think it makes Texas a less
attractive forum for an M&A case from the plaintiffs'
perspective," he said.
Harry Susman of Susman Godfrey, a lawyer for the Dynergy
plaintiffs, agreed. "Either people won't file in Texas," he
said, "or when they do file, there's no way class lawyers will
settle unless there's a monetary settlement. So they'll fight to
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