Opening Delaware’s Black Box of Attorneys’ Fees
Anyone following the recent legislative battles in Delaware would be justified in thinking that there is only a single set of proposed reforms to Delaware stockholder litigation pending in the General Assembly. Senate Bill 21, which addresses transactions in which directors, officers, or controlling stockholders have a financial interest, has dominated recent news headlines coming […]
Adam C. Pritchard is the Frances & George Skestos Professor of Law at the University of Michigan Law School, and Jessica M. Erickson is the Nancy Litchfield Hicks Professor of Law at the University of Richmond School of Law. This post was prepared for the Forum, and is part of the Delaware law series; links to other posts in the series are available here.
Anyone following the recent legislative battles in Delaware would be justified in thinking that there is only a single set of proposed reforms to Delaware stockholder litigation pending in the General Assembly. Senate Bill 21, which addresses transactions in which directors, officers, or controlling stockholders have a financial interest, has dominated recent news headlines coming out of Delaware.
There is a second set of pending reforms, however. A bipartisan group of Delaware legislators has proposed asking the Council of the Corporation Law Section of the Delaware State Bar Association to prepare recommendations for legislative action regarding fee awards in common fund stockholder litigation.
That request was motivated by the Court of Chancery’s recent eye-popping $345 million award of attorneys’ fees to the plaintiffs’ lawyers who successfully challenged Elon Musk’s stock option award in a derivative lawsuit filed on Tesla’s behalf. That record-setting fee award—25.3 times the lodestar—valued the lawyers’ time at almost $18,000 an hour.
We have spent much of our careers studying stockholder lawsuits and attorneys’ fees, and we have some thoughts on how the Council should tackle this study. We start with a simple premise: fee awards come directly out of settlements or judgments, so every dollar for the lawyers means one less dollar for stockholders. Basic economic theory therefore suggests that judges making fee awards on behalf of stockholders should be aiming for awards that are not a dollar more than it takes to incentivize plaintiffs’ attorneys to bring meritorious cases.
