D&O Insurance: Limiting Attorneys' Fee Awards in Derivative Suits

On May 6, 2010, the Delaware Court of Chancery approved the settlement of a derivative action captioned In re Cox Radio, Inc. Shareholders Litigation, No. Civ. A. 4461-VCP, and ruled on plaintiffs' attorneys' application for a fee award. The court's decision on the fee award may have a material impact on directors and officers ("D&O") insurers' coverage analysis with respect to such awards.

Cox was a derivative class action brought by plaintiff shareholders alleging breaches of fiduciary duties in connection with a tender offer by the controlling shareholder of defendant Cox Radio, Inc. Plaintiffs alleged that defendants breached their fiduciary duties by offering inadequate consideration and making misleading disclosures. Such cases are frequently referred to as "bump up" cases because they seek additional consideration for, or a "bump up" in, the price of the stock. Approximately one month after the suit commenced, the case settled for over $16 million in additional merger consideration. Defendants also agreed to provide significant additional disclosures about the transaction at issue. The court attributed the "bump up" to: (i) market forces, (ii) the efforts of a special committee that negotiated with the buyer, and (iii) the litigation. In light of the additional consideration provided, plaintiffs sought an award of attorneys' fees and costs amounting to $3.6 million (21 percent of the "bump up"). In turn, defendants contended that the fees and expenses should be capped at $490,000.

Faced with this dispute, plaintiffs filed a motion seeking: (i) class certification, (ii) approval of the settlement, and (iii) an award of attorneys' fees and costs in the amount of $3.6 million. Defendants responded that they did not oppose class certification and agreed that the settlement should be approved by the court because it met the entire fairness standard. Defendants also acknowledged that plaintiffs were entitled to attorneys' fees and costs, but objected to the amount of the fee award as an unreasonable request and argued that it should be limited to $423,598, plus expenses.

In ruling on plaintiffs' motion, the court agreed that the class should be certified and that the settlement award was reasonable and fair to class members. As such, it approved those portions of plaintiffs' motion.

On the other hand, the court denied plaintiffs' fee award request, finding that it was unreasonable relative to the size of the modest benefit conferred on the...

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