The Delaware Chancery Court has dismissed an action brought by three plaintiffs’ law firms seeking legal fees in connection with merger litigation that was initially successful, but which ultimately failed on appeal when the transaction closed and the objector lost standing.  Bragar Eagel & Squire, PC, et al. v. Kinder Morgan Energy Partners, LP, et al., C.A. No. 2017-0841-JTL (Del. Ch. Apr. 9, 2018).  The court determined that principles of res judicata required that it reject the firms’ subsequent action to recover fees and that, even if that were not the case, the firms’ prior efforts had not produced a “cognizable benefit” for the objecting plaintiff sufficient to justify a fee award.

The action arose from prior merger litigation, In re El Paso Pipeline Partners, LP Derivative Litigation, C.A. No. 7141-VCL (Del. Ch. 2017) (the “Derivative Action”).  There, the three plaintiff firms had represented an objector who brought a suit asserting direct and derivative claims on behalf of a partnership purchasing assets from its ultimate controller.  During the litigation, the partnership and its controlling entity were purchased by an unaffiliated third party.  That transaction closed after the trial went forward.  The trial, however, resulted in an award of over $170 million to the partnership.  The defense then sought dismissal, arguing that the plaintiff objector had lost standing as a result of the merger.  The trial court disagreed, reasoning that some of the plaintiff’s claims had been direct rather than derivative.  Nonetheless, on appeal, the Delaware Supreme Court agreed with the defense that the merger had eliminated the plaintiff’s standing.  Accordingly, on remand, the trial court entered an order dismissing the action, which order also provided that each side was to bear its own legal fees and costs.

Thereafter, plaintiff’s counsel initiated the present action seeking to recover their fees and costs in connection with the Derivative Action.  The defense argued that the issue was already decided by the final order dismissing the Derivative Action, and thus the second action was barred by res judicata.  The trial court agreed but also noted that, even if res judicata were not applicable, plaintiffs nonetheless failed to state a claim for relief, as the Derivative Action had provided no “cognizable benefit” to the partnership.  The court noted that, despite the substantial trial verdict, the Delaware Supreme Court’s decision meant the case should have been terminated upon completion of the merger, and no other issues should have been reached; that is, the matter should be viewed as if the Derivative Action had never been brought.  Further, while the court noted that the plaintiffs had obtained helpful information to their case through discovery, the benefit from such discovery was speculative.  Accordingly, since there was no tangible benefit to the partnership, the plaintiff’s firms could not recover their fees.

The court also addressed plaintiffs’ secondary argument that, irrespective of benefit, they should be able to recover under the doctrine of quantum meruit.  Plaintiffs noted authority in another jurisdiction that allowed recovery for plaintiff’s counsel where a plaintiff abandons a claim, arguing by analogy that such case law supported a reward for their substantial efforts. The Chancery Court rejected this argument as well, observing that, in Delaware, “[f]or nearly thirty-five years, lawyers have not been entitled to fees following a merger-based loss of standing unless they could point to tangible monetary or non-monetary benefits that the litigation played some causal role in generating.”  Further, the court noted that the reasoning under the Delaware Supreme Court’s standing ruling, touting the ability of an acquiring company to “move forward free and clear of pre-transaction derivative claims after a merger closes,” would be undermined by the plaintiffs’ suggested approach.  As the court explained, such an approach “could create a scenario similar to the pattern of disclosure-only settlements in which cases got dismissed, the defendants paid their own lawyers, and even the plaintiffs’ lawyers got paid, even though the class received nothing meaningful.”

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Impact for D&O Insurers:  D&O carriers will appreciate the court’s analysis here, particularly with respect to the rejection of the quantum meruit theory.  Where an objecting plaintiff loses standing, there should be no basis under Delaware law for an award of legal fees and costs, at least so long as the plaintiff cannot point to a non-speculative “cognizable benefit” conferred by the litigation.  The Chancery Court properly rejected the plaintiff’s lawyers’ invitation to create a new method of obtaining fees from derivative claims that otherwise provide no value to a target company (or its shareholders).