In re TPC Group Inc. Shareholders Litigation
Date Submitted: June 11, 2014
Christine S. Azar, Esquire Labaton Sucharow LLP
Ronald N. Brown, III, Esquire Skadden, Arps, Slate, Meagher & Flom LLP
S. Mark Hurd, Esquire Morris, Nichols, Arsht & Tunnell LLP 1
Raymond J. DiCamillo, Esquire Richards, Layton & Finger, P.A.
This is a dispute about whether shareholders' efforts to challenge a merger caused a price increase and, if so, the amount of the fees to which their attorneys are entitled. Lead Plaintiffs Greater Pennsylvania Carpenters' Pension Fund and West Palm Beach Police Pension Fund (collectively, with other members of the class, the "Plaintiffs") were shareholders of TPC Group Inc. ("TPC"). After TPC announced its acquisition by First Reserve Corporation, SK Capital Partners, and their affiliates (collectively, the "PE Group"), Plaintiffs brought a class action against TPC, the members of TPC's board of directors, and the PE Group (collectively, the "Defendants").
The early complaints, filed in September 2012, alleged a number of problems with the announced deal, such as inadequate price, breaches of fiduciary duty through an unfair process, and inadequate disclosures in the preliminary proxy. For example, one complaint alleged that "[n]umerous analysts also agree that the Proposed Transaction Price is inadequate" and cited an analyst's opinion that "the offer should have been $45 to $46 a share." The process claims included conflicts arising from a management incentive plan, an agreement to forego a go-shop period, and a contingent fee arrangement with a key financial advisor, Perella Weinberg Partners LP ("Perella"). Disclosure claims involved concerns about the value of an alternative transaction, Perella's valuation analysis, and the effectiveness of the special committee's work, to name a few. Subsequent bidding and a supplemental proxy statement issued on November 21, 2012, have mooted Plaintiffs' claims,  and the Court has awarded attorneys' fees for the disclosures resulting from Plaintiffs' efforts.
Remaining for the Court is whether (and, if so, to what extent) Plaintiffs are entitled to attorneys' fees for the $5 per share ($79 million aggregate) increase in the merger price achieved between the commencement of this litigation and the acquisition's closing under an amended merger agreement. Plaintiffs argue that their legal challenge caused the PE Group to raise its bid from $40 to $45 per share and that $3, 150, 000 would be a reasonable award. Defendants contend that a competing proposal, not the litigation, caused the price bump.
When plaintiffs seek attorneys' fees for legal action that was subsequently mooted or settled by actions of defendants, plaintiffs must show that "(1) the suit was meritorious when filed; (2) the action producing benefit to the corporation was taken by the defendants before a judicial resolution was achieved; and (3) the resulting corporate benefit was causally related to the lawsuit." There is, however, a rebuttable presumption that the defendants bear the "burden of persuasion to show that no causal connection existed between the initiation of the suit and any later benefit to the shareholders" because the defendants are "in a position to know the reasons, events and decisions leading up to the defendant[s'] action." If attorneys' fees are warranted, the Court determines an appropriate amount by weighing, under the Sugarland standard, "1) the results achieved; 2) the time and effort of counsel; 3) the relative complexities of the litigation; 4) any contingency factor; and 5) the standing and ability of counsel involved."
The critical issue here is causation, and Delaware law presumes that plaintiffs are a cause. Defendants bear the burden of proving, by the preponderance of the evidence, that no causal connection (whether direct or indirect) existed between the price increase and the plaintiffs' litigation efforts.The burden falls on defendants because they are in a better position to explain their own actions. While the burden is heavy,  the presumption is rebuttable. To overcome the presumption, defendants must prove "'that the nonexistence of the presumed fact is more probable than its existence.'"
Here, the primary negotiators for the PE Group state that they were concerned about the October 5 competing proposal, negative publicity, public opposition by a significant stockholder, and the potential for an unfavorable evaluation by Institutional Shareholder Services ("ISS") when deciding whether the PE Group should raise its bid. They explain that the PE Group decided to raise its price in mid-October but waited to contact TPC until the definitive proxy was filed in order to avoid delaying the transaction. The PE Group's affidavits may be, as characterized by Plaintiffs, self-serving, but that is almost inevitable in matters of this nature. Given the current record, the Court finds no reason to discredit the statements that "the decision to increase the offer price had no relationship whatsoever to the litigation brought by Plaintiffs." It is necessary to consider the factual context, both that generally exists during a transaction like this and, more importantly, that served as the specific background for the TPC acquisition. The Court has tried to analyze different scenarios in which the litigation may have been an indirect cause of the price increase, but Defendants' account is the most credible and is consistent with the record.
It is tempting to assume that litigation challenging a transaction will influence the conduct of buyers, perhaps in ways even they do not understand. Moreover, it is reasonable to hold the view that a price increase will reduce shareholder litigants' likelihood of success or fervor for pursuing the litigation. Yet in this era, almost every merger of a public company is greeted with litigation, and relatively few price increases result. When a buyer knows that litigation is inevitable,  ensuing litigation does not necessarily have any effect on its conduct. If litigation necessarily motivates a buyer to raise its price, then the presumption as to causation would not be rebuttable; the question of causation would be simplified from was the litigation a cause to how much of a cause was the litigation. Finally, it would be unreasonable to conclude that allegations in Plaintiffs' complaint motivated the competing bidder. Thus, the Court finds that it is more likely than not that Plaintiffs' litigation did not, directly or indirectly, cause the PE Group, to any extent, to increase its bid.
The difficult aspect of this case is not whether to award Plaintiffs roughly $3 million or to award nothing. No matter how the evidence is weighed, Plaintiffs' contributions (or that to which they are entitled to credit for having caused) were minimal. The litigation achieved no defined benefit that might have facilitated a price increase. For example, deal protection measures were not modified.Closing was not delayed; a delay would have extended the time available for a competing proposal. Plaintiffs' arguments condense to something akin to: ...