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Charles Almond as Trustee for Almond Family 2001 Trust v. Glenhill Advisors LLC

Court of Chancery of Delaware

April 10, 2019

CHARLES ALMOND AS TRUSTEE FOR THE ALMOND FAMILY 2001 TRUST, ALMOND INVESTMENT FUND LLC, CHARLES ALMOND, and ANDREW FRANKLIN, Plaintiffs,
v.
GLENHILL ADVISORS LLC, GLENHILL CAPITAL LP, GLENHILL CAPITAL MANAGEMENT LLC, GLENHILL CONCENTRATED LONG MASTER FUND LLC, GLENHILL SPECIAL OPPORTUNITIES MASTER FUND LLC, JOHN EDELMAN, GLENN KREVLIN, JOHN MCPHEE, WILLIAM SWEEDLER, WINDSONG DB DWR II, LLC, WINDSONG DWR, LLC, WINDSONG BRANDS, LLC, HERMAN MILLER, INC. and HM CATALYST, INC., Defendants, and DESIGN WITHIN REACH, INC., Intervenor and Counterclaim-Petitioner.

          Date Submitted: January 9, 2019

          Peter B. Ladig and Sara E. Bussiere of BAYARD, P.A., Wilmington, Delaware; David H. Wollmuth and Michael C. Ledley of WOLLMUTH MAHER & DEUTSCH LLP, New York, New York. Attorneys for Plaintiffs Charles Almond as Trustee for the Almond Family 2001 Trust, Almond Investment Fund LLC, and Charles Almond.

          David A. Jenkins of SMITH, KATZENSTEIN & JENKINS LLP, Wilmington, Delaware; Scott J. Watnik of WILK AUSLANDER LLP, New York, New York; Thomas A. Brown of MOREA SCHWARTZ BRADHAM FRIEDMAN & BROWN LLP, New York, New York. Attorneys for Plaintiff Andrew Franklin.

          Andrew D. Cordo and F. Troupe Mickler IV of ASHBY & GEDDES, Wilmington, Delaware; Adrienne M. Ward and Brian Katz of OLSHAN FROME WOLOSKY LLP, New York, New York; John B. Horgan of ELLENOFF GROSSMAN & SCHOLE LLP, New York, New York. Attorneys for Glenhill Advisors LLC, Glenhill Capital LP, Glenhill Capital Management LLC, Glenhill Concentrated Long Master Fund LLC, Glenhill Special Opportunities Master Fund LLC, Glenn Krevlin, William Sweedler, Windsong DB DWR II, LLC, and Windsong DWR LLC.

          Douglas D. Herrmann of PEPPER HAMILTON LLP, Wilmington, Delaware; Paul B. Carberry, Joshua Weedman, and Erin Smith of WHITE & CASE LLP, New York, New York. Attorneys for John Edelman and John McPhee.

          Frederick B. Rosner, Scott J. Leonhardt, and Jason A. Gibson of THE ROSNER LAW GROUP LLC, Wilmington, Delaware; S. Preston Ricardo of Golenbock Eiseman Assor Bell & Peskoe LLP, New York, New York. Attorneys for Windsong Brands, LLC.

          John D. Hendershot, Susan M. Hannigan, and Brian F. Morris of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Bryan B. House of FOLEY & LARDNER LLP, Milwaukee, Wisconsin. Attorneys for Defendants, Counterclaim Petitioners Herman Miller Inc. and HM Catalyst, and Intervenor and Counterclaim Petitioner Design Within Reach, Inc.

          MEMORANDUM OPINION

          BOUCHARD, C.

         In August 2018, the court issued a post-trial decision and entered judgment in favor of defendants and against two stockholder plaintiffs on all claims that were tried in this action arising out of Herman Miller, Inc.'s acquisition of Design Within Reach, Inc. ("DWR" or the "Company") in a transaction that involved a short-form merger. Despite losing on all claims, plaintiffs filed a motion after trial for an award of attorneys' fees and expenses in the amount of $1.5 million.

         The crux of plaintiffs' motion is that they should be rewarded for conferring a corporate benefit on DWR and Herman Miller by identifying certain defective corporate acts that the court judicially validated after trial under 8 Del. C. § 205. Herman Miller made the request for judicial validation in a counterclaim it filed after learning about the defective corporate acts that plaintiffs had discovered in this case. The court's validation of those and other defective corporate acts that Herman Miller discovered in investigating the matter removed a cloud over the validity of the merger.

         The odd aspect of plaintiffs' application is that they seek to be rewarded for "conferring" a benefit that they fought to prevent throughout this litigation. Rather than work constructively with defendants to correct what should have been obvious to plaintiffs to be a series of technical mistakes, plaintiffs chose a path of opposition. Plaintiffs opposed Herman Miller's motion for summary judgment on its counterclaim, opposed at trial judicial validation of certain of the defective corporate acts for the evident purpose of attempting to procure a windfall for themselves, and even now hold open the prospect that they may seek to set aside the court's validation ruling on appeal.

         Given these unusual circumstances, and for other reasons explained below, the court concludes that even though plaintiffs have made a prima facie showing to support a fee award under the corporate benefit doctrine, it would be inequitable to grant their fee application. Accordingly, the application will be denied.

         I. BACKGROUND

         The background of this action is described extensively in the post-trial decision issued on August 17, 2018 (the "Opinion").[1] This decision recites only those facts directly relevant to plaintiffs' fee application.[2]

         Plaintiffs are two former stockholders of the Company. In December 2014, plaintiffs filed this action against DWR's controlling stockholder-a group of investment funds known as Glenhill-and the directors of DWR who approved Herman Miller's acquisition of the Company, which closed in July 2014. In simplified terms, the transaction was structured so that Herman Miller would acquire over 90% of the Company's shares in a stock purchase and a share exchange, and then acquire the remainder of the shares in a short-form merger effectuated under 8 Del. C. § 253. Plaintiffs' shares of DWR were acquired in the Merger. The total equity value of the transaction was approximately $170 million.

         In their initial Complaint, plaintiffs challenged a number of transactions preceding the Merger that allegedly reduced their percentage ownership of the Company improperly and deprived them of a greater share of the Merger consideration. One of those challenges concerned Glenhill's conversion of shares of Series A preferred stock into shares of common stock in October 2013. According to plaintiffs, this conversion was wrongful because Glenhill purported to convert more shares of Series A preferred stock than were authorized at the time and thus received more shares of common stock than it was entitled to receive.[3] The initial Complaint did not assert, however, that the Merger was invalid. Plaintiffs subsequently amended their initial Complaint four times but they never challenged the fairness of the Merger consideration.

         In their Second Amended Complaint, filed in November 2015, plaintiffs added Herman Miller as a defendant and asserted for the first time that the Merger was void as a result of defects concerning (i) the implementation of a 50-to-1 reverse stock split in 2010 of both the Company's common stock and its Series A preferred stock (the "Reverse Stock Splits") and (ii) the conversion in 2013 of the Series A preferred stock and of a convertible note into shares of common stock (the "2013 Conversions"). As explained in the Opinion, unknown to anyone at the time, the Reverse Stock Splits were implemented in a defective manner that had the effect of diluting the number of shares of common stock into which the Series A preferred stock could be converted by a factor of 2500-to-1 instead of the plainly intended result of a 50-to-1 adjustment. According to plaintiffs, because of the defects identified in the Second Amended Complaint, Herman Miller had acquired "far less than 90% of DWR's shares validly issued and outstanding at the time of the Merger," which meant that "the Merger was not properly effected" as a short-form merger under 8 Del. C. § 253 and was therefore invalid.[4]

         In February 2016, after the filing of the Second Amended Complaint, Herman Miller took action under 8 Del. C. § 204 to ratify certain defective corporate acts and putative stock relating to the Reverse Stock Splits and 2013 Conversions. Herman Miller then filed a counterclaim asking the court to validate seven defective corporate acts (the "Defective Acts") under 8 Del. C. § 205. In July 2016, Herman Miller moved for summary judgment on its counterclaim, which plaintiffs opposed. Given the technical nature of the Defective Acts and the need for context concerning the implementation of the underlying transactions, the court denied the motion for summary judgment so that a full factual record could be developed before adjudicating the request for judicial validation under Section 205.[5]

         In August 2017, a few months before trial, plaintiffs filed their Fourth Amended Complaint, which asserted twelve claims, including a newly added claim for aiding and abetting against Herman Miller. Three of the twelve claims proceeded from the premise that defendants unlawfully benefited from, or converted to their own benefit, a greater percentage of the Company's equity in connection with the Merger as a result of the Defective Acts.

         In connection with the trial, plaintiffs dropped their opposition to judicial validation of five of the Defective Acts. Plaintiffs continued to oppose, however, validation of two of the Defective Acts that were at the heart of the double dilution mistake arising from the Reverse Stock Splits. In other words, plaintiffs continued to oppose Herman Miller's efforts to ensure that the Reverse Stock Splits achieved their intended result of reducing by a factor of 50-to-1 the number of shares of common stock into which the Series A preferred stock could be converted instead of a 2500-to-1 adjustment.

         In August 2018, the court issued the Opinion and entered judgment in favor of defendants on all twelve of plaintiffs' claims and in favor of Herman Miller on its counterclaim under Section 205. Relevant to the counterclaim, the court found that there was "zero evidence in the record that anyone involved intended for the Reverse Stock Splits to cause . . . double dilution" and that "all of the equitable considerations identified in Section 205 overwhelmingly favor judicial validation" of all the Defective Acts.[6] The court further commented that "plaintiffs' selective opposition to validation of the [Defective Acts] . . . (i.e., not opposing validation of the Reverse Stock Splits but opposing validation of the issuances to preserve the double dilution problem) betrays an intention to obtain a windfall for themselves in this litigation."[7]

         On November 2, 2018, plaintiffs filed a motion for an award of attorneys' fees and expenses in the amount of $1.5 million (the "Motion").

         II. THE PARTIES' CONTENTIONS

         Plaintiffs argue that they are entitled to a fee award under the corporate benefit doctrine because they "identified what Herman Miller's high-priced due diligence team had missed: the seven defective corporate acts" that were judicially validated in the Opinion under Section 205.[8] According to plaintiffs, "[t]hat validation legitimized the Merger for DWR" and "thereby conferred a substantial corporate benefit on DWR and Herman Miller."[9]

         The many lawyers representing plaintiffs in this action were compensated at their standard hourly rates and did not work on a contingent basis.[10] Plaintiffs assert that their counsel's discovery of defective corporate acts came "at Plaintiffs' considerable expense"[11] but the affidavits submitted by their counsel, which catalogue a wide variety of issues and tasks counsel performed, [12] make no effort to estimate the amount of time devoted to identifying the defective corporate acts alleged in their original Complaint or the Second Amended Complaint.[13]

         Plaintiffs note in the Motion that, for purposes of their fee application, they "accept the Opinion's rejection of their claims challenging the effectiveness of DWR's ratification of the defective corporate acts and of the Merger" but that they "reserve the right to appeal the Court's holdings reflected in the Opinion to the Delaware Supreme Court."[14]

         Defendants do not argue that plaintiffs' fee application fails to satisfy the basic elements of the corporate benefit doctrine. Defendants instead oppose the application on essentially two grounds. First, defendants argue that it would be inequitable to grant the application because plaintiffs "endeavored to prevent" rather than confer a benefit on DWR.[15] Second, defendants argue that plaintiffs did not confer a "net benefit" on DWR or Herman Miller because plaintiffs "subjected DWR to a trial on the defective capital structure allegations that they now claim to have saved DWR from-and lost."[16]

         Although defendants contend that prevailing in this action "came at great cost to DWR and Herman Miller," they-like plaintiffs-do not quantify the amount of expenses they incurred in connection with any particular part of this litigation, including the effort devoted to obtaining judicial validation of the Defective Acts, and they provide no supporting documentation concerning any of the expenses they incurred.[17] Finally, defendants contend that the amount of plaintiffs' fee request is excessive and that, if any award were to be granted, $15, 000 would be adequate to compensate plaintiffs fairly.

         III. ANALYSIS

         As our Supreme Court has observed, "litigants in Delaware are generally responsible for paying their own counsel fees, absent special circumstances or a contractual or statutory right to receive fees."[18] One special circumstance is that this court "may order the payment of counsel fees and related expenses to a plaintiff whose efforts result in the creation of a common fund . . . or the conferring of a corporate benefit."[19] The power to award fees in this circumstance "is a flexible one based on the historic power of the Court of Chancery to do equity in particular situations."[20]

         Under the corporate benefit doctrine, a litigant may receive an award of attorneys' fees if "(a) the action was meritorious at the time it was filed, (b) an ascertainable group received a substantial benefit, and (c) a causal connection existed between the litigation and the benefit."[21] Plaintiffs assert that each of these elements has been satisfied here. Defendants do not ...


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