                                 COURT OF CHANCERY
                                          OF THE
                                 STATE OF DELAWARE

J. TRAVIS LASTER                                                  New Castle County Courthouse
VICE CHANCELLOR                                                   500 N. King Street, Suite 11400
                                                                 Wilmington, Delaware 19801-3734

                             Date Submitted: May 27, 2016
                             Date Decided: August 16, 2016

Kurt M. Heyman, Esquire                        John L. Reed, Esquire
Samuel T. Hirzel, Esquire                      DLA Piper LLP
Aaron M. Nelson, Esquire                       1201 North Market Street, Suite 2100
Proctor Heyman Enerio LLP                      Wilmington, DE 19801
300 Delaware Avenue, Suite 200
Wilmington, DE 19801

A. Thompson Bayliss, Esquire                   Eric Lopez Schnabel, Esquire
Sarah E. Hickie, Esquire                       Robert Mallard, Esquire
Abrams & Bayliss LLP                           Alessandra Glorioso, Esquire
20 Montchanin Road, Suite 200                  Dorsey & Whitney (Delaware) LLP
Wilmington, DE 19807                           300 Delaware Avenue, Suite 1010
                                               Wilmington, DE 19801

       RE:    Baker v. Sadiq
              C.A. No. 9464-VCL

Dear Counsel:

       The parties settled this case using the transitive property of entity litigation. The

parties disagree about how an attorneys’ fee award should be determined when the

transitive property has been deployed. They consequently part ways on the amount of the

award. They also disagree about who should be obligated to pay it.

       The transitive property of entity litigation recognizes that a derivative action that

asserts claims for breaches of fiduciary duty or violations of the entity’s constitutive

documents, and an investor class action that asserts similar theories, while conceptually

distinct and doctrinally separate, can be functionally equivalent and, therefore,
August 16, 2016
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substitutes. Envision the following scenario. The controller of a privately held entity

extracts private benefits from the entity. A minority investor sues derivatively on behalf

of the entity to recover the value of the private benefits. If the plaintiff prevails entirely,

then the most likely remedy is a monetary recovery by the entity equal to the amount of

the private benefits.1 The entity-level monetary recovery benefits all of the investors

indirectly, including the controller, in proportion to their respective equity stakes. The

indirect benefit to the minority investors is thus equal to their percentage interest in the

entity multiplied by the amount of the entity-level recovery. Given this fact, the controller

could make the minority investors whole through a direct cash payment equal to their

proportionate share of the entity-level recovery.

       This, in a nutshell, is the transitive property. In mathematics, the transitive

property states that if A = B, and B = C, then A = C. Transplanted into the world of entity

litigation, the transitive property recognizes that an entity-level recovery can be the

equivalent of an investor-level recovery and vice versa.

       Proposition A:        The entity receives an entity-level recovery.

       Proposition B:        The entity-level recovery confers an indirect benefit on the
                             minority investors equal to their percentage interest in the
                             entity multiplied by the value of the recovery.

       Proposition C:        The minority investors receive an investor-level recovery
                             equal their percentage interest in the entity multiplied by the
                             value of the entity-level recovery.

       1
         This is a simplification that ignores the alternative possibility of equitable
remedies, such as rescission. It also glosses over whether the benefits are to be quantified
using an out-of-pocket measure or a rescissory measure.
August 16, 2016
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Through the transitive property, an entity-level recovery can be reframed as an investor-

level recovery and vice versa.2

       In Delaware, parties frequently deploy the transitive property to settle derivative

actions using investor-level relief.3 Examples include:

      In re Clear Channel Outdoor Holdings, Inc. Derivative Litigation. The plaintiffs
       sued derivatively, claiming that the parent company of the nominal defendant
       caused the nominal defendant, pre-IPO, to loan the parent money on excessively
       favorable terms. Post-IPO, the loan balance continued to grow while the parent
       company’s credit rating decreased. The complaint attacked the defendants’ actions
       in approving the initial loan and allowing the loan balance to balloon. The
       defendants formed a special litigation committee under Zapata Corp. v.
       Maldonado, 430 A.2d 779 (Del. 1981), evidencing their view that the claims were
       derivative. The case was settled by, among other things, having the parent make a
       partial repayment of $200 million combined with a dividend in the same amount

       2
        The functional equivalency exists at the snapshot in time when the recovery is
achieved. After that, the possible outcomes diverge. The entity-level recovery can be re-
deployed by those in charge of the entity, and it may generate positive or negative returns
for the entity as a whole, including the minority. The recipients of the investor-level
recovery similarly can reinvest the proceeds in projects of their choosing, which may
perform better or worse than re-investment by the entity.
       3
          By contrast, courts rarely deploy the transitive property to convert what
otherwise would be an entity-level recovery into an investor-level recovery. See In re El
Paso Pipeline P’rs L.P. Deriv. Litig., 132 A.3d 67, 75 (Del. Ch. 2015) (“[S]ubstantial
authority supports a court’s ability to grant a pro rata recover on a derivative claim. Such
a recovery is the exception, not the rule, but it is possible.”). This is because for an on-
going entity, the entity-level remedy is elegantly simple and avoids myriad complexities,
such as how to treat changes in investor-level ownership between the time of the wrong
and the time of the recovery. See In re Activision Blizzard, Inc. S’holder Litig., 124 A.3d
1025, 1046-52 (Del. Ch. 2015). The entity-level recovery also respects the higher priority
of other claimants in the capital structure, such as creditors. Given these and other
potential issues, courts appropriately have resisted awarding investor-level remedies in
derivative actions, reserving their use for cases where an entity-level remedy is no longer
feasible, extreme situations involving supervening equities, or the rare circumstance
when an investor-level recovery is more efficient. See El Paso, 132 A.3d at 122-26
(discussing scenarios in which investor-level recoveries have been awarded).
August 16, 2016
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      to the stockholders. Then-Chancellor Strine approved the settlement, noting “[i]t’s
      a derivative action, which is actually, if you think about it, a form of class action”
      and that “the dividend feature of it, the reduction of the outstanding amount [of the
      loan] plus the dividend out, in particular to the public stockholders, is a substantial
      benefit.” Settlement Hearing, In re Clear Channel Outdoor Hldgs., Inc. Deriv.
      Litig., Consol. C.A. No. 7315, at 35, 38 (Del. Ch. Sept. 9, 2013) (TRANSCRIPT).

     Davis v. Holmes. The plaintiffs claimed that the defendants violated their fiduciary
      duties to the nominal defendant corporation by (i) operating the corporation as an
      unregistered investment company, (ii) paying excessive compensation, (iii) selling
      substantially all of the corporation’s assets, and (iv) engaging in self-dealing. The
      settlement included the creation of a $3.2 million fund that was distributed to the
      corporation’s unaffiliated stockholders. Vice Chancellor Lamb approved the
      settlement, observing that the claim was “really a derivative claim” but that the
      pass-through structure was a “very favorable outcome.” Settlement Hearing, Davis
      v. Holmes, C.A. No. 638, at 23 (Del. Ch. June 21, 2006) (TRANSCRIPT).

     In re Freeport-McMoRan Copper & Gold Inc. Derivative Litigation. The plaintiffs
      sued derivatively, claiming that the members of the board of directors of the
      nominal defendant corporation caused the entity to overpay to acquire a company
      in which the directors had an interest. The defendants moved to dismiss pursuant
      to Rule 23.1, evidencing their view that the claims were derivative. While those
      motions were pending, the parties settled for consideration consisting principally
      of a gross settlement fund of $137.5 million plus interest that was paid directly to
      the corporation’s stockholders as a special dividend. Vice Chancellor Noble
      approved the settlement. See Settlement Hearing, In re Freeport-McMoRan
      Copper & Gold Inc. Deriv. Litig., Consol. C.A. No. 8145 (Del. Ch. Apr. 7, 2015)
      (TRANSCRIPT).

     Franklin Balance Sheet Investment Fund v. Crowley. The plaintiffs challenged the
      defendants’ practice of having the nominal defendant entity pay premiums for
      split-dollar life insurance policies that were owned by the entity’s controlling
      stockholder. The defendants moved to dismiss, relying on derivative standing
      doctrines such as the continuous ownership requirement and the failure to make
      demand. See Franklin Balance Sheet Inv. Fund v. Crowley, 2006 WL 3095952, at
      *2 (Del. Ch. Oct. 19, 2006) (reciting procedural history). The case was settled by
      having the controlling stockholder take the nominal defendant private. Franklin
      Balance Sheet Inv. Fund v. Crowley, 2007 WL 2495018 (Del. Ch. Aug. 30, 2007).
      Only the stockholders who owned stock at the time of the going-private
      transaction, not those who held stock at the time of the alleged wrongs, received
      the benefit of the settlement. Id. at 5 n.8. The minority stockholders thus received
August 16, 2016
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      a remedy for a derivative claim that consisted of their pro rata share of the value
      of the corporation, including some value attributed to the derivative claim. Vice
      Chancellor Parsons approved the settlement. Id.

     Gerber v. EPE Holdings, LLC. This settlement resolved two actions. In the first
      action, the plaintiffs asserted a derivative claim for breach of fiduciary duty arising
      out of the nominal defendant’s acquisition of a related party. In the second action,
      the plaintiffs asserted direct and double derivative claims after the defendants
      agreed to a merger that failed to compensate the plaintiffs for their extinguished
      derivative claims. Both cases were settled in exchange for a direct payment by the
      defendants to those investors who held units at the time of the merger. Vice
      Chancellor Noble approved the settlement. See Settlement Hearing, Gerber v. EPE
      Hldgs. LLC, C.A. Nos. 5989 & 3543 (Del. Ch. July 1, 2014) (TRANSCRIPT).

      Using the transitive property to settle derivative litigation with an investor-level

recovery can generate advantages for both sides over a classic entity-level recovery. One

plus for the defendants is that the settlement requires less cash, because rather than

making a payment to the entity based on the full amount of the private benefits extracted

from the entity, they need only fund a percentage of the payment equal to the minority

investors’ stake. One plus for the plaintiffs is that they get actual cash rather than the

indirect benefit of the entity-level recovery. Because of the endowment effect, humans

value items that they own or control more highly than items of equal value that they do

not own or control. See generally Daniel Kahneman, Jack L. Knetsch & Richard H.

Thaler, Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias, 5 J.

Econ. Perspectives 193 (1991). All else equal, humans therefore would prefer to receive

and control the proceeds of the recovery themselves, rather than having the entity receive

it and someone else control it. The preference for a direct recovery should be particularly

strong for investors who believe that the fiduciaries who would control the entity-level
August 16, 2016
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recovery have a history of breaching their fiduciary duties. From the investors’

standpoint, the prospect of an entity-level recovery leaves the foxes in charge of the

henhouse, so having more chickens in the henhouse isn’t nearly as attractive as receiving

chickens directly. This is another way of saying that investors who believe their

fiduciaries have defalcated in the past will discount the value of an entity-level recovery

because of the risk that it may happen again, making the entity-level recovery less

valuable to them.

       Through a feedback loop, the fact that the plaintiffs place greater value on an

investor-level recovery generates reflexive benefits for the defendants. If a direct

payment is sufficiently attractive, then the plaintiffs may agree to accept less than their

proportionate share of what they would demand in the form of an entity-level recovery.

The defendants then need only fund the lesser amount. Still other advantages accrue

when a direct payment can be combined with a buyout of the minority’s shares. In that

scenario, the investors may value the opportunity for exit, and both sides may like the

idea of ending a litigious relationship.

       All of these advantages increase the possible surplus that can be allocated in a

settlement. Moving beyond the zero-sum game of how much the defendants will pay at

the entity level thus facilitates the resolution of cases.

       But there is a downside for the plaintiffs’ lawyers in using the transitive property.

Recasting a derivative settlement as an investor-level recovery means a smaller headline

benefit, and a smaller headline benefit likely means a smaller fee award. That may not be
August 16, 2016
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a problem if the parties can agree on a fee that the defendants will not oppose, and if the

parties also can agree on who will pay it. It becomes a problem if the parties cannot agree

on the amount and if there is a dispute about who will pay the fee.

       In this case, minority stockholders in Navseeker, Inc. sued derivatively on its

behalf. They contended that NavSeeker’s controlling stockholder, HIMEX Limited,

misappropriated technology assets from NavSeeker worth approximately $25 million

(which effectively constituted NavSeeker’s entire business). This was not a pie-in-the-sky

number. The plaintiffs validated their damages figure by pointing to two past

transactions. In July 2013, Quindell PLC purchasd 19% of HIMEX for total consideration

worth approximately $13.4 million.4 In February 2014, Quindell paid approximately

$226 million to increase its stake in HIMEX to 85%.5 The plaintiffs also pointed to a

proposal by Quindell to buy out NavSeeker’s employee stockholders based on an implied

valuation of $25 million. Quindell later proposed to buy all of NavSeeker’s assets for $20

million.

       Rather than litigating the case through trial, the parties used the transitive property

to achieve a settlement. The specific terms of the settlement were as follows:



       4
        Quindell is a British firm. It paid £1,800,000 in cash plus 64,800,000 marketable
shares of Quindell stock valued at £6,900,000. At then-current exchange rates, the cash
was worth roughly $2,738,520 and the stock worth roughly $10,598,072.
       5
         In this transaction, Quindell purchased additional equity in HIMEX in return for
£23,000,000 in cash plus 324,000,000 marketable shares of Quindell stock valued at
£115,000,000. At then-current exchange rates, the cash was worth roughly $37,545,200
and the stock worth roughly $188,338,150.
August 16, 2016
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   1. HIMEX, Quindell and/or Individual Defendants and/or their insurance carriers
      (the “Funding Parties”) shall make a $2,750,000 Cash Payment to NavSeeker for
      the purpose of buying out the Minority Stockholders. Settlement §§ 1.19, 2.1-2.4.

   2. HIMEX will discharge $500,000 of NavSeeker debt. Id. § 2.3.

   3. The effectiveness of the Settlement is contingent upon acceptance of the proposed
      Stock Purchase Agreement by all Plaintiffs, but not on acceptance of the proposed
      Stock Purchase Agreement by any other Minority Stockholder. Id. § 2.4.

   4. All Parties stipulate that the efforts of Plaintiffs’ Counsel have conferred a benefit
      on NavSeeker of at least $2,750,000. Plaintiffs’ Counsel reserve all rights to argue
      that the amount of the benefit exceeded that amount, and Defendants reserve all
      rights to oppose any such argument. Id. § 6.5.

   5. Plaintiffs (on their own behalves and derivatively on behalf of NavSeeker),
      Plaintiffs’ Counsel, NavSeeker, and every Participating NavSeeker Stockholder
      shall have and by operation of the Judgment shall be deemed to have fully, finally,
      and forever released, relinquished, and discharged the Released Defendants from
      any and all of the Released Claims—which, importantly, includes individual
      claims. Id. § 3.1(a).

   6. The Released Defendants shall provide reciprocal releases to Plaintiffs and all
      participating Minority Stockholders. Settlement §§ 1.15, 3.2.

   7. Minority Stockholders who do participate in the Settlement will not be deemed to
      release anything other than derivative claims.6

The parties did not agree on the amount of a fee award to plaintiffs’ counsel, the size of

the benefit conferred by the settlement, or who would pay the fee.

       The settlement that the parties reached is a classic example of the transitive

property at work. The underlying derivative claim sought damages of $25 million. The

minority stockholders who were not affiliated with the defendants owned 10.75% of

NavSeeker’s equity. Had they prevailed at trial, they would have benefitted, indirectly, to

       6
           This aspect is moot because all minority stockholders elected to participate.
August 16, 2016
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the tune of $2,687,500 from a corporate level recovery. Through the settlement, the

minority investors received consideration of $2,750,000 in the form of a buyout.

       For virtually all of the parties involved, the stockholder-level settlement was a

superior outcome. The controllers only had to come up with $2.75 million instead of $25

million. The minority investors got real cash instead of an indirect increase in the value of

their shares. Plus they were able to exit from a controlled company where they contended

the controllers were engaging in wholesale misappropriation. And both sides severed a

troubled relationship and put an end to the burdens of litigation.

       But the picture wasn’t so good for plaintiffs’ counsel. Instead of being able to

claim a corporate level benefit of $25 million, plaintiffs’ counsel obtained a corporate

level benefit of $3.25 million (consisting of $2.75 million to fund the buyout plus

$500,000 in debt forgiveness).7 The picture was even worse because the natural party to

pay the fee award was NavSeeker, who, according to the plaintiffs, had been stripped of

its assets and had no cash, and whose controllers were providing just enough funding,

through secured debt, to meet current bills. If plaintiffs’ counsel sought to enforce their

rights as creditors, they would find themselves in a position junior to the secured debt

owed to NavSeeker’s controllers. A fee award for plaintiffs’ counsel therefore would




       7
         Plaintiffs’ counsel might be able to claim to have conferred a separate
stockholder level benefit in the form of the liquidity and exit, but that benefit would call
for a fee award from the minority stockholders, not from NavSeeker, and plaintiffs’
counsel has not sought it here.
August 16, 2016
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amount to an invitation to negotiate with NavSeeker over the amount of the haircut that

plaintiffs’ counsel would have to accept before seeing any cash at all.

        Facing this conundrum, plaintiffs’ counsel agreed to the settlement, but reserved

the right to litigate the aggregate amount of the benefit conferred, the amount of the fee

award, and who would pay it. Plaintiffs’ counsel then filed a fee petition in which they

sought an award of $6 million plus expenses. To support the award, plaintiffs’ counsel

argued that the fee award should be based on the implied derivative recovery rather than

the re-cast stockholder-level settlement. Recognizing that NavSeeker lacked the cash to

pay that amount (or any amount), plaintiffs’ counsel argued that the defendants should be

held jointly and severally liable for the amounts awarded. Plaintiffs’ counsel contended

that all of the defendants benefitted from the settlement and should therefore bear the

cost.

        Although plaintiffs’ counsel could not identify a specific precedent for their

request, they cobbled together cases that provided indirect support. They also advanced a

policy argument. They observed that as fiduciaries pursuing this litigation in a

representative capacity, they had little choice but to support the settlement, which was

more favorable than the best possible outcome that their clients could achieve through the

litigation. Yet their fiduciary obligation to support the settlement ran against their

personal interest in continuing to litigate the derivative claim to (i) generate a larger

recovery that would support a more meaningful fee award and (ii) obtain the types of

post-trial factual findings that would support holding other defendants liable for paying it.
August 16, 2016
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Plaintiffs’ counsel have pointed out that if they cannot obtain a meaningful recovery

against a solvent defendant, then future lawyers will anticipate this Catch-22 and decline

to represent minority stockholders in similar scenarios. Those situations, involving small

companies and large-scale acts of expropriation, are in turn the cases where enforcement

mechanisms are most needed.

       Plaintiffs’ counsel has identified a problem, and I do not claim to have a solution.

Based on the present posture of the litigation and the current state of the record, I am not

in a position to impose liability for a fee on any party other than NavSeeker. One could

envision some type of post-settlement proceeding to determine whether grounds exist to

impose fee liability on NavSeeker’s controllers, but that route appears unprecedented. It

also would embroil the parties in precisely the type of litigation that they reached a

settlement to avoid.

       Based on the present posture of the litigation and the current state of the record, I

am not able to value the benefit conferred at any amount greater than $3.25 million. It is

true that the equivalent derivative recovery would be an order of magnitude greater, but

the parties used the transitive property to achieve a stockholder-level settlement, not a

derivative settlement. In the converse situation, where a plaintiff has achieved a full-

blown derivative recovery, this court has not reduced the size of the benefit conferred to

account for the controller’s ownership stake and the much smaller benefit that inures

indirectly to the minority. See In re S. Peru Copper Corp., 2011 WL 6866900 (Del. Ch.

Dec. 29, 2011) (ORDER) (granting fee award on full amount of the derivative judgment
August 16, 2016
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even though the controlling stockholder would receive 82% of the benefit), aff’d sub

nom. Ams. Mining Corp. v. Theriault, 51 A.3d 1213, 1254 (Del. 2012); Carlson v.

Hallinan, 925 A.2d 506, 546-48 (Del. Ch. 2006). These decisions suggest that formal

structure matters.

       The present task is to determine a fee award for plaintiffs’ counsel. When

awarding fees, the Court of Chancery “must make an independent determination of

reasonableness.” Goodrich v. E.F. Hutton Gp., 681 A.2d 1039, 1046 (Del. 1996). The

court considers the factors laid out in Sugarland when determining the amount of a

reasonable award. See Sugarland Indus., Inc. v. Thomas, 420 A.2d 142, 149-50 (Del.

1980). Although the factors appear diffusely throughout the Sugarland opinion, see id.,

the Delaware Supreme Court recently summarized them as follows: “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.” Ams.

Mining, 51 A.3d at 1254.

       The Delaware Supreme Court noted in Americas Mining that “Delaware courts

have assigned the greatest weight to the benefit achieved in litigation.” Id. Later in that

decision, the Delaware Supreme Court reiterated that “our holding in Sugarland assigns

the greatest weight to the benefit achieved in the litigation” and instructed that “[w]hen

the benefit is quantifiable, . . . Sugarland calls for an award of attorneys’ fees based upon

a percentage of the benefit.” Id. at 1259. After surveying a range of precedent, the

Delaware Supreme Court observed that “Delaware case law supports a wide range of
August 16, 2016
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reasonable percentages for attorneys’ fees, but 33% is the very top of the range of

percentages.” Id. (citation and internal quotation marks omitted). The Delaware Supreme

Court then provided guidance on how this court should approach the percentage-of-

benefit analysis by first noting with approval that this court “has a history of awarding

lower percentages of the benefit where cases have settled before trial” and then grouping

the percentages into categories based on the stage at which the litigation settled:

       When a case settles early, the Court of Chancery tends to award 10-15% of
       the monetary benefit conferred. When a case settles after the plaintiffs have
       engaged in meaningful litigation efforts, typically including multiple
       depositions and some level of motion practice, fee awards in the Court of
       Chancery range from 15-25% of the monetary benefits conferred. . . .
       Higher percentages are warranted when cases progress to a post-trial
       adjudication.

Id. at 1259-60 (citations omitted). Selecting an appropriate percentage requires an

exercise of judicial discretion. Id. at 1261.

       Because of the manner in which the settlement was structured, the maximal

benefit that plaintiffs’ counsel can claim to have conferred is $3.25 million (consisting of

$2.75 million to fund the buyout plus $500,000 in debt forgiveness).

       The case did not involve significant discovery, but it did involve meaningful

litigation efforts, primarily because of serial reversals of position by the defendants and

repeated efforts by the plaintiffs to combat them. The litigation was also relatively more

complex due to the presence of foreign defendants and the involvement of the

Department of Labor, which was concerned about misconduct relating to NavSeeker’s
August 16, 2016
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management of its 401K plan. Under the circumstances, an award of 20% of the benefit

is warranted. That amount equates to $650,000.

          Plaintiffs’ counsel pursued the litigation on a contingent basis. Counsel has

averred that if plaintiffs had billed this matter on an hourly basis they would have billed

fees of over $390,000. A fee award of $650,000 is not excessive by that measure.

Defendants’ counsel billed over $2,000,000. By comparison to that figure, the fee award

is low.

          Counsel are experienced in corporate litigation in Delaware and well-known to the

court. Their involvement fully justifies the amount of the fee sought.

          Plaintiffs’ counsel is awarded fees and expenses of $650,000 from NavSeeker. No

other party is liable for the judgment.

                                                  Sincerely yours,

                                                  /s/ J. Travis Laster

                                                  J. Travis Laster
                                                  Vice Chancellor

JTL/krw
