In re Del Monte Foods Company Shareholders Litigation: Court of Chancery Awards Plaintiff’s Counsel $2.75 Million in Attorneys’ Fees and Expenses for Supplemental Disclosures
August 1, 2011
In In re Del Monte Foods Company Shareholders Litigation, C.A. No. 6027-VCL (Del. Ch. June 27, 2011), the Delaware Court of Chancery awarded plaintiff’s counsel $2.75 million in attorneys’ fees and expenses for supplemental disclosures achieved during the preliminary injunction phase of the case. Previously, the Court had enjoined for a period of 20 days the stockholder vote on this $5.3 billion transaction, in which a private equity group consisting of Kohlberg Kravis Roberts & Co., L.P. (“KKR”), Vestar Capital Partners (“Vestar”) and Centerview Partners acquired all outstanding shares of Del Monte common stock.1
As an initial matter, the Court noted that granting an interim fee award is within its equitable and discretionary powers. Referencing Louisiana State Employees Retirement Systems v. Citrix Systems, Inc., 2001 WL 1131364 (Del. Ch. Sept. 17, 2001), the Court concluded that an interim fee award was appropriate in this instance because “the benefits [resulting from dissemination of the supplemental disclosures] cannot be revised or modified as a result of future events.” Although Vice Chancellor Laster cautioned that he will not “invariably entertain post-injunction fee applications” and that other members of the Court of Chancery may not share this preference, he will consider an interim fee petition where the Court has expended judicial resources ruling on a preliminary injunction motion and the resulting benefit is not subject to reversal or alteration as litigation proceeds. 2
Next, the Court applied the factors established in Sugarland Industries, Inc. v. Thomas, 420 A.2d 142 (Del. 1980). With regard to the benefits conferred by the supplemental disclosures, the Court identified three general categories of supplemental disclosures: (i) disclosures that “adverted to Barclays’ behind-the-scenes activities during the sales process”; (ii) disclosures of Barclays’ and Perella Weinberg’s estimates of Del Monte’s future cash flows and additional information about the summaries of the investment bankers’ analyses; and (iii) disclosures pertaining to Del Monte executives’ individual compensation arrangements. With respect to the first category, the Court used the fee award in In re Lear Corp. Shareholder Litigation, C.A. No. 2728-VCS (Del. Ch. June 3, 2008) (TRANSCRIPT), where the negotiator of a transaction was conflicted, as a starting point. The Court distinguished Lear on the grounds that the plaintiff’s counsel in the present case uncovered facts previously unknown to the Del Monte board of directors, thus informing two corporate decision-making bodies – the board and the stockholders – and “empower[ing] the Del Monte directors to re-evaluate their prior decisions and reliance on Barclays.” Accordingly, the Court awarded $1.6 million for this aspect of the fee application. For the second category, the Court concluded that disclosures regarding the Barclays and Perella Weinberg opinions, bankers’ fees and historical engagements warranted a fee of $950,000, well above the usual $400,000-$500,000 range awarded for supplemental disclosures about banker analyses and relationships. The third category of supplemental disclosures, which warranted a fee award of $200,000, provided a comparison between the proceeds each executive would receive upon consummation of the merger as opposed to what they would receive if terminated without a change in control.
The Court declined, however, to award interim fees based on the benefit conferred by the preliminary injunction because “the fruits of post-injunction discovery and the insights provided by live witnesses at trial should help … develop a more tailored assessment” of an appropriate award. The Court offered guidance on the value of the injunction, noting that the benefit conferred does not vary depending on whether or not a topping bid actually emerged. Moreover, the Court stated that pricing the benefit requires two inputs: “(i) the overall likelihood of a topping bid,”3 and “(ii) the incremental gain that the likely topping bid would have created.” As to the first input, the Court indicated an intent to rely on an article by Professor Guhan Subramanian, which examined the percentage of instances of topping bids generated in certain going-private deals between January 2006 and August 2007 where the transaction included a no-shop or go-shop provision.4 As to the second input, the Court noted that the negotiated termination fee should serve as a lower bound for the incremental value of a topping bid because it “represented the parties’ responsible estimate of the minimum incremental price increase that a serious acquirer would be willing to offer.”
3In Health Grades, Chancellor Strine seemed to reject the quantification approach taken by Vice Chancellor Laster in Del Monte, noting “I don’t pretend to know how you would price [the assurance for strategic buyers that, if they made a topping bid, they would not be blocked] in some sort of market for options in reduced deal protections and how that translates into the probability of a topping bidder emerging. And I think it’s actually counterproductive to try to quantify something that’s unquantifiable.” Health Grades, Inc., C.A. No. 5716-CS, Tr. at 77.