Request for Attorneys’ Fees Denied Under Corporate Benefit Doctrine

By: Annette Becker and Zack Sager

In Martin v. Harbor Diversified, Inc., the Delaware Court of Chancery denied the plaintiff’s request for attorneys’ fees under the corporate benefit doctrine because the corporate benefit produced by the litigation was “a mere externality” to the plaintiff’s ultimate, personal goal of achieving a buyout of his interest in the corporation.

Plaintiff Dr. Travis Martin (“Martin”) was a stockholder of Defendant Harbor Diversified, Inc. (“Harbor”).  In October 2018, Martin filed an action under Section 220 of the General Corporation Law of the State of Delaware (the “DGCL”) to inspect books and records and under Section 211 of the DGCL to compel an annual stockholder meeting.  The Delaware Court of Chancery ordered Harbor to hold an annual meeting and granted certain of Martin’s document requests.  After the trial, Martin sought attorneys’ fees and expenses invoking two grounds to depart from the American Rule providing that each party pay its own fees and expenses: corporate benefit and bad faith.

The corporate benefit doctrine compensates a litigant for fees and expenses where litigation it pursued conferred a non-monetary valuable benefit upon the corporation or its stockholders.  According to the Court, stockholders who benefit from the litigious efforts of another on their behalf should share in the reasonable costs incurred thereby.  Stockholders, however, should not be compelled to share the costs of the litigation of a fellow stockholder where that stockholder has pursued an action in his own interest and, having failed in that endeavor, seeks coerced reimbursement. 

Martin argued that he was entitled to fees and expenses because his actions conferred a corporate benefit on Harbor by (i) compelling an annual stockholder meeting and providing the stockholders director elections, and (ii) forcing Harbor to disclose its ownership structure, the identities of its management and directors, its ownership interests in certain entities, and related-party dealings.

While Martin’s litigation did produce some corporate benefit, the Court rejected his argument finding that Martin initiated and pursued his action for his personal benefit in large part in an effort to be bought out by Harbor.  In reaching this conclusion, the Court looked to Martin’s pre-suit demand letter, which stated that its purpose was to obtain information regarding the value of Martin’s stock and the value of Harbor’s assets. In addition, while the demand letter did make note that Harbor had not had a stockholder meeting since 2011, it did not make a demand to hold a meeting.  Martin did not demand an annual meeting until he filed his initial complaint.  It was clear to the Court that the corporate benefit produced by the litigation was “a mere externality” to Martin’s ultimate goal of achieving a buyout of his interest.

In addition, the bulk of the effort expended in the litigation was not to achieve the stockholder meeting since the litigation was not a contest over whether a stockholder meeting was required.  As evidence of this, in Harbor’s answer to Martin’s complaint, Harbor admitted that it had not held a meeting from 2012 through 2018, and, in its pre-trial brief, Harbor stated that it was prepared to proceed with an annual stockholder meeting.  Any effort to obtain a stockholder meeting was, therefore, de minimis.

The Court contrasted this case with EMAK Worldwide, Inc. v. Kurz, which held that a personal motive in bringing a lawsuit was not fatal to a request for fees under the corporate benefit doctrineIn EMAK, the plaintiff pursued a benefit for personal reasons that was also beneficial broadly to the class.  Here, however, Martin’s primary purpose would not have benefited Harbor.  According to the Court, the fact that a tactic he employed to pursue his personal benefit resulted in “some therapeutic benefit” to the corporation did not justify fee shifting.  As such, the Court denied Martin’s request for fees and expenses under the corporate benefit doctrine.

Lastly, the Court found that none of Harbor’s conduct constituted bad faith and likewise denied Martin’s request for fees and expenses on that basis.

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