Delaware Supreme Court Should Revisit $304 Mln Legal Fee

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. September 17, 2012, 10:56 AM.Dealpolitik: Delaware Supreme Court Should Revisit $304 Mln Legal Fee  .Article Comments Deal Journal HOME PAGE ».smaller Larger .smaller Larger facebooktwittergoogle pluslinked ininShare.0EmailPrint

You thought your lawyer was expensive? After the Delaware courts socked Grupo Mexico, the controlling stockholder of Southern Copper, with a $2 billion judgment, they awarded an additional $304 million in legal fees against it for the plaintiffs’ legal fees. That came to about $35,000 per hour worked.



Nice work if you can get it.



The Delaware Supreme Court last month upheld the award when it affirmed the $2 billion judgment. But Grupo Mexico went back to the Delaware Supreme Court last week with an unusual motion for reconsideration, asking the Supreme Court to take one last look at that fee. The Supreme Court should listen to Grupo Mexico.



In these kinds of cases, when plaintiffs win, they get a contingency fee based on a percentage of the amount involved. And in this case, the fee, as the trial court said, is “only” about 15% of the judgment. The Supreme Court said in its decision last month that as much as 33% can be permitted—though that would be “the very top of the range of percentages” permitted.



Fifteen percent isn’t an outrageous fee in a normal contingency case. What Grupo is arguing though, and what the Supreme Court did not address in last month’s decision, is that the award here is really much more than 15% of the benefit the lawyers obtained for the public shareholders—it’s almost 80% of that benefit. Why?



The judgment against Grupo was based on a deal in which Grupo caused Southern Copper to buy from Grupo what was essentially a wholly owned subsidiary of Grupo in exchange for Southern Copper stock.



Southern Copper is a public company—listed on the NYSE and incorporated in Delaware—so its directors had a fiduciary duty to the public shareholders. The courts found that Southern Copper overpaid Grupo Mexico for that subsidiary by about $1.3 billion, which, when interest was added, resulted in the $2 billion judgment.



So Grupo, which denied the allegation, is going to need to repay Southern Copper that $2 billion.



It is hard to shed tears for Grupo, as the the courts found wrongful conduct on its part. However, when looking at that $305 million legal fee, there seems to be a huge windfall for the plaintiffs’ lawyers, given the parent/subsidiary relationship of Grupo and Southern Copper in this litigation.



Grupo says that through a subsidiary, it owns 81% of the outstanding stock of Southern Copper. Therefore, argues Grupo, it is effectively paying 81% of that $2 billion judgment to itself. Those plaintiffs’ lawyers got the $304 million fee award for representing the other 19% of the stockholders, an issue the Supreme Court didn’t address in its opinion.



Grupo calculates that the benefit to those shareholders whom the plaintiffs’ lawyers represented is only $386 million—or about 19% of the judgment. Looked at from that perspective, the plaintiffs lawyers are getting fees equal to 79% of the benefit for their clients.



Instead of giving the plaintiffs’ lawyers this kind of award, maybe state legislatures should be thinking of reforming the law to subject directors and shareholders to administrative remedies for breaches of fiduciary duties in appropriate circumstances as they do in other countries.



At least then the taxpayers would benefit from what are essentially fines, rather than plaintiffs’ lawyers getting what’s arguably much more than reasonable.



That’s not currently an option under U.S. corporate law, which is exclusively enforced by private litigation. But for now, the Delaware Supreme Court should give serious consideration to Grupo Mexico’s motion to rethink this fee. Even if it is a bad actor, paying $304 million to plaintiffs’ lawyers for $386 million of benefit is just too much.



http://blogs.wsj.com/deals/2012/09/17/dealpolitik-delaware-supreme-court-should-revisit-304-mln-legal-fee