By Nick I. Froio and Thomas F. Meyer

In Almond v. Glenhill Advisors LLC, C.A. No. 10477-CB (Del. Ch. April 10, 2019), the Court denied Plaintiffs’ motion for attorneys’ fees, even though Plaintiffs made a prima facie showing to support a fee award under the corporate benefit doctrine, given that Plaintiffs fought to prevent the particular benefit throughout the litigation. The Court held that it would be inequitable to reward Plaintiffs for “conferring” a benefit they fought to prevent throughout the litigation.

In July 2014, Herman Miller, Inc. (“Herman Miller”) acquired Design Within Reach, Inc. (“DWR”) in a short-form merger transaction (the “Merger”).  In December 2014, two former stockholders of DWR (“Plaintiffs”) filed an action against DWR’s controlling stockholder and the directors of DWR who approved the Merger (“Defendants”).

In their initial complaint, Plaintiffs challenged transactions preceding the Merger that allegedly reduced their percentage ownership of DWR and deprived them of a greater share of the Merger consideration.  In a subsequent complaint (the “Amended Complaint”), Plaintiffs asserted that the Merger was void as a result of defects in, among other things, the implementation of previous reverse stock splits of DWR’s stock (the “Reverse Stock Splits”).  The Reverse Stock Splits were implemented in a defective manner that had the effect of diluting the number of shares of common stock into which DWR’s Series A preferred stock could be converted.  Because of these defects, Herman Miller had acquired less than the required DWR shares to properly effect a short-form merger.

After Plaintiffs filed the Amended Complaint, Herman Miller filed an action under 8 Del. C. § 204 to ratify defective corporate acts, including those relating to the Reverse Stock Splits (the “Defective Acts”).  Herman Miller then filed a counterclaim asking the court to validate the Defective Acts under 8 Del. C. § 205.  Herman Miller then moved for summary judgment on its counterclaim, which Plaintiffs opposed.  The Court denied the motion so that a full factual record could be developed.

Plaintiffs continued to oppose validation of the Defective Acts throughout the litigation.  After the trial, the Court entered judgment in favor of Defendants on all claims and in favor of Herman Miller on its counterclaim, finding that “all of the equitable considerations identified in Section 205 overwhelmingly favor judicial validation” of the Defective Acts.  Despite losing on all claims, Plaintiffs filed a motion for an award of attorneys’ fees and expenses, arguing that they should be rewarded for conferring a “substantial corporate benefit on DWR and Herman Miller” by identifying the defective corporate acts that were judicially validated.  Defendants argued that it would be inequitable to grant the application because Plaintiffs endeavored to prevent rather than to confer a benefit on DWR.

The Court explained that, under its flexible equitable powers, it may order the payment of counsel fees and expenses to a plaintiff whose efforts result in the conferring of a corporate benefit.  Under the corporate benefit doctrine, a plaintiff may receive an award of attorneys’ fees if (a) the action was meritorious at the time it was filed, (b) an ascertainable group received a substantial benefit, and (c) a causal connection existed between the plaintiff and the benefit.  The Court found that each of these elements had been satisfied, and Defendants did not contend otherwise.  Plaintiffs’ Amended Complaint identified many of the Defective Acts.  DWR and Herman Miller received a corporate benefit as a result of judicial validation of the Defective Acts, which removed a cloud hovering over the validity of the Merger.  Additionally, Herman Miller made the request for judicial validation only after learning about the defective corporate acts that Plaintiffs had discovered. Despite satisfying the corporate benefit doctrine elements, the Court declined to exercise its equitable discretion to award attorneys’ fees.  The Court concluded that Plaintiffs’ motivation was to serve their personal interests and not the interests of DWR or any of its other stockholders.  The Court noted that Plaintiffs’ opposition to the validation of the Defective Acts indicated Plaintiffs’ intention to obtain a windfall for themselves in the litigation.  Plaintiffs did not pursue any claims on behalf of a class and did not seek to extend the benefits of their efforts to any other stockholders of DWR.  Rather than working constructively with Defendants once Herman Miller sought judicial validation to correct obvious technical mistakes, Plaintiffs “chose a path of opposition.”

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Copyright © 2024, K&L Gates LLP. All Rights Reserved.