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In re Orchard Enterprises, Inc. Stockholder Litigation

Court of Chancery of Delaware

August 22, 2014

IN RE ORCHARD ENTERPRISES, INC. STOCKHOLDER LITIGATION

Submitted: June 30, 2014

James R. Banko, FARUQI & FARUQI, LLP, Wilmington, Delaware; Samuel J. Lieberman, SADIS & GOLDBERG LLP, New York, New York; James S. Notis, Jennifer Sarnelli, GARDY & NOTIS, LLP, New York, New York; Attorneys for Plaintiffs.

William M. Lafferty, Jay N. Moffitt, Bradley D. Sorrels, Christopher P. Quinn, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Attorneys for Defendants Michael Donahue, David Altschul, Viet Dinh, Joel Straka, and Nathan Peck.

Philip Trainer, Jr., Toni-Ann Platia, ASHBY & GEDDES, P.A., Wilmington, Delaware; Kenneth J. Pfaehler, David I. Ackerman, DENTONS U.S. LLP, Washington, District of Columbia; Attorneys for Defendants The Orchard Enterprises, Inc., Dimensional Associates, LLC, Daniel Stein, and Bradley Navin.

Ronald A. Brown, Jr., Marcus E. Montejo, PRICKETT, JONES & ELLIOTT, P.A., Wilmington, Delaware; Attorneys for Objectors Merlin Partners LP, Quadre Investments, LP, Matthew Giffuni, and Christopher Yeagley.

MEMORANDUM OPINION

LASTER, VICE CHANCELLOR

The plaintiffs in this action filed suit on behalf of a class comprising the minority stockholders of The Orchard Enterprises, Inc. (“Orchard” or the “Company”). They challenged a cash-out merger between Orchard and its controlling stockholder Dimensional Associates, LLC (“Dimensional”), which they claimed resulted from breaches of fiduciary duty by Dimensional and the members of Orchard's board of directors. The case settled for a payment by the defendants of $10, 725, 000 to the class.

Stockholders who litigated an earlier appraisal proceeding to a final judgment objected to the settlement. They contended that their efforts contributed causally to the creation of the settlement fund and that they accordingly should be reimbursed for their counsel's fees and expenses.

On the facts presented here, the benefit conferred by the settlement resulted from serial contributions by the appraisal claimants and stockholder plaintiffs. Because the appraisal claimants were content to pursue only their own interests in the appraisal proceeding and did not undertake to serve the interests of the class as a whole, they lack standing to obtain a fee award. The stockholder plaintiffs in this action have standing to pursue a fee award, and their counsel is entitled to $2, 250, 000.

I. FACTUAL BACKGROUND

On July 29, 2010, Dimensional and Orchard effected a merger in which the shares of Orchard common stock, other than those held by Dimensional, were converted into the right to receive $2.05 per share (the “Merger”). At the time of the Merger, Dimensional and its affiliates held approximately 42% of Orchard's common stock and 99% of its Series A Convertible Preferred Stock. Through those holdings, Dimensional controlled approximately 53.3% of Orchard's outstanding voting power.

After the Merger closed, certain Orchard stockholders perfected their appraisal rights (the "Appraisal Claimants"). They hired lawyers (“Appraisal Counsel”) and entered into engagement letters to govern the representation, including Appraisal Counsel's fees and expenses. Appraisal Counsel filed and litigated an appraisal proceeding on the Appraisal Claimants' behalf.

On March 3, 2012, while the appraisal proceeding was pending, Dimensional entered into an agreement with Sony Music that provided for a merger of Orchard with a Sony entity at a valuation materially higher than $2.05 per share (the "Orchard/Sony Merger"). Appraisal Counsel did not pursue discovery concerning the Orchard/Sony Merger. In July 2012, Chief Justice Strine, then Chancellor, determined that the fair value of Orchard's common stock at the time of the Merger was $4.67 per share. See In re Appraisal of Orchard Enters., Inc., 2012 WL 2923305 (Del. Ch. July 18, 2012), aff'd sub nom. Orchard Enters., Inc. v. Merlin P'rs LP, 2013 WL 1282001 (Del. Mar. 28, 2013) (TABLE).

Two months later, and over two years after the Merger closed, the plaintiffs filed this breach of fiduciary duty action (the "Plenary Action"). The plaintiffs retained different counsel to litigate their breach of fiduciary duty claims ("Plenary Counsel"), although one of the law firms had played a role in the appraisal proceeding. The Appraisal Claimants and their counsel were aware of the Plenary Action, but they did not seek to intervene, whether to take over the litigation or to otherwise assist the class. They sat back and waited to see how the Plenary Action turned out.

After completing fact discovery, the parties to the Plenary Action filed cross motions for summary judgment. The plaintiffs sought determinations as a matter of law that the defendants had breached their duty of disclosure, that entire fairness was the operative standard of review, and that the Merger was not entirely fair. They also sought determinations as a matter of law that Dimensional and certain directors had breached their duty of loyalty and that judgment should be entered against them. The defendants resisted these determinations and sought rulings as a matter of law that the directors who served on a special committee were exculpated from liability and that neither rescissory damages nor quasi-appraisal were available remedies. The plaintiffs had named Orchard as a defendant, and Orchard argued that it could not be held liable for breach of fiduciary duty or for aiding and abetting.

The parties' cross motions were addressed in an opinion dated February 28, 2014. See In re Orchard Enters., Inc. S'holder Litig., 88 A.3d 1 (Del. Ch. 2014). The opinion denied the plaintiffs' motion except in two limited respects: (i) one of the claimed disclosure violations constituted a material misrepresentation as a matter of law, and (ii) the standard of review for trial would be entire fairness with the burden of persuasion on the defendants. The opinion also denied the defendants' motions except in two limited respects: (i) one of the allegedly misleading disclosure violations was factually accurate, and (ii) the plaintiffs could not hold Orchard liable on any of the theories asserted.

On April 28, 2014, the parties filed a stipulation and agreement of settlement that resolved the Plenary Action in exchange for a payment by the defendants of $10, 725, 000. The stipulation called for the payment to be allocated across the entire class, including the Appraisal Claimants, so that all of the minority stockholders would receive a nominally equal amount for their shares. The stipulation contemplated that Plenary Counsel would apply for an award of attorneys' fees and expenses. It did not contemplate that Appraisal Counsel would make a fee application or that the Appraisal Claimants would be reimbursed for Appraisal Counsel's fees and expenses.

The Appraisal Claimants objected to the allocation of the settlement consideration and the request for an award of attorneys' fees and expenses. The Appraisal Claimants maintained that their counsel's efforts contributed causally to the creation of the $10, 725, 000 fund and that accordingly they should be reimbursed for the fees and expenses that they incurred in the appraisal proceeding. The Appraisal Claimants advanced a related objection to the allocation of consideration in which they argued that if they had to bear counsels' fees, they would receive less consideration than the other minority stockholders on a net, per share basis.

After holding a fairness hearing on June 30, 2014, the court certified the class and approved the settlement. The court rejected the objection to the allocation of the settlement consideration, finding that an equal allocation was fair and that any functionally lesser share of the consideration to be received by the Appraisal Claimants would result from a decision on the award of attorneys' fees and expenses, not from the allocation of the settlement consideration. The court took the request for attorneys' fees and expenses under advisement.

II. LEGAL ANALYSIS

"'It is beyond dispute that litigants in Delaware are generally responsible for paying their own counsel fees, ' absent special circumstances or a contractual or statutory right to receive fees." Scion Breckinridge Managing Member, LLC v. ASB Allegiance Real Estate Fund, 68 A.3d 665, 686 (Del. 2013) (quoting Burge v. Fid. Bond & Mortg. Co., 648 A.2d 414, 421 (Del. 1994)). "It is also well established that a Chancellor or Vice Chancellor, 'under his equitable powers, has latitude to shift attorneys' fees.'" Id. (quoting Gatz Props., LLC v. Auriga Capital Corp., 59 A.3d 1206, 1222 (Del. 2012)).

Circumstances where a Vice Chancellor may use his equitable powers to award fees outside of an express statutory authorization or a contractual fee-shifting provision include, but are not limited to: (1) the presence of a common fund created for the benefit of others; (2) where the judge concludes a litigant brought a case in bad faith or through his bad faith conduct increased the litigation's cost; and (3) cases in which, although a defendant did not misuse the litigation process in any way, . . . the action giving rise to the suit ...

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