Thursday, February 22, 2018

Jesse Small v. Monty J. Bennett (Cir. Ct. Balto. City)

Filed:  February 5, 2018

Opinion by:  Pamela J. White

Holding:  Demand for attorney's fees and costs incurred prior to the mooting of a shareholder derivative suit (1) failed to satisfy the requirements of the "corporate benefit rule" because the suit was frivolous and causally unrelated to the corporate benefit in question, and (2) failed to meet the requirements for a discretionary award under Maryland Rule 2-703.

Facts:  Defendants are a Texas-based publicly traded real estate investment trust ("Company"), the management group that conducts Company's day-to-day business affairs ("Advisor"), and Company's managing board ("Directors").

Company became a publicly traded corporation in late 2013 and soon entered into an advisory agreement engaging Advisor to perform management functions.  In mid 2015, concerned about a hostile takeover, Directors adopted a poison pill in the form of an amended advisory agreement; one which would impose an onerous termination fee payable by Company to Advisor upon a change in control or termination of the agreement by either side.

Displeasure over the termination fee's size and triggering mechanism was swiftly communicated by a minority shareholder ("Minority") who commenced derivative suits in early 2016.   Minority sued first in Maryland and weeks later in Texas, alleging breach of fiduciary duty for failing to approve candidates for a proxy battle and adopting a termination fee that threatened to reduce the firm's current equity by 50% in the event of a change in control.  Minority was ultimately unable to overcome the business judgment rule presumption and suffered the dismissal of all claims in February 2016.

Though they prevailed in their suit against Minority, Directors were not deaf to the rising noise of discontent.  Between February and April 2016, Directors established a committee to explore negotiation of a termination fee reduction.  Insufficiently placated by the measure, Plaintiff, a separately situated shareholder ("Shareholder") entered the scene and served a demand letter on Directors in April mirroring the claims made by Minority and requesting an investigation and recommendation on the merits of litigation.  

By that time, the record confirmed much of Advisor's and Directors' energies to be centered on the termination fee provision.  Independent directors of Company and Advisor began negotiations and  drafted revisions to the advisory agreement.  An unsolicited takeover offer received Directors' favorable attention and protracted discussions regarding the import and impact of the termination fee.  Directors retained outside counsel to conduct Shareholder's demanded investigation and to report findings at the upcoming December 2016 board meeting.

Directors described these events in several letters to Shareholder between April and October, but Shareholder considered his demand as having been refused.  In October 2016, Shareholder filed a derivative complaint in the Circuit Court for Baltimore City largely regurgitating the content and form of Minority's prior suits: naming the same defendants (Company, Advisor, and Directors) and alleging breach of fiduciary duty with focus on the "unconscionable" fee provision.

Meanwhile, negotiations over the fee provision continued into 2017.  In January, Company's independent directors approved and recommended the amended advisory agreement.  In June 2017 at Company's annual shareholder meeting, shareholders approved the amended advisory agreement which softened its termination fee calculation and trigger mechanism.

That approval served to moot Shareholder's derivative suit; however, arguing that his litigation had led directly to substantial and valuable benefit for Company's shareholders, Shareholder moved for an award in the amount of attorneys' fees and expenses.

Analysis:  The court began by outlining the standard for an award of discretionary fees according to the corporate benefit doctrine, which required Shareholder to demonstrate three elements: (a) that his suit was meritorious when filed, (b) that Directors' action to benefit the corporation was taken prior to judicial resolution, and (c) that the corporate benefit was causally related to the suit.

To the first, the court examined whether Shareholder's suit would have survived the motion to dismiss - and were left wanting.  Shareholder neglected to allege sufficient facts in his complaint to show that Directors had failed to act in accordance with the Business Judgment Rule or made anything other than good faith, informed business decisions.

To the third, the court's examination of the chronology of events led to a finding that neither the termination fee negotiations nor subsequent approval had been causally related to Shareholder's demand letter or threat of litigation.  Instead, the train of activity as to challenging and rectifying the termination fee and trigger mechanisms had already left the station following Minority's suit - and months prior to Shareholder's involvement by demanding an investigation or filing the instant litigation.  Finding insufficient support for the required elements, the court determined Shareholder's litigation to have yielded no corporate benefit.

The court finally turned to Maryland Rule 2-703 which might have permitted a discretionary award in consideration of factors such as (a) time and labor required, (b) novelty and difficulty of questions raised, (c) legal skills required,... (e) customary fees for such services, (f) contingent or fixed fee agreement, (g) time-limiting circumstances,... or (i) experience and ability of counsel, among other factors.  Even had Shareholder been able to meet his burden to show a corporate benefit, his neglect to support the 2-703 showing with sufficient evidence about any of the recited factors and inability to explain or justify the difference between an initial demand for $565,000 and an amended demand for $272,347 were fatal to a request for a discretionary award.

Accordingly, the court denied Shareholder's motion for award of attorneys' fees and expenses.

The full opinion is available in PDF.