Opening Delaware’s Black Box of Attorneys’ Fees

Anyone following the recent legislative battles in Delaware would be justified in thinking that there is only a single set of proposed reforms to Delaware stockholder litigation pending in the General Assembly. Senate Bill 21, which addresses transactions in which directors, officers, or controlling stockholders have a financial interest, has dominated recent news headlines coming out of Delaware.

There is a second set of pending reforms, however. A bipartisan group of Delaware legislators has proposed asking the Council of the Corporation Law Section of the Delaware State Bar Association to prepare recommendations for legislative action regarding fee awards in common fund stockholder litigation.

That request was motivated by the Court of Chancery’s recent eye-popping $345 million award of attorneys’ fees to the plaintiffs’ lawyers who successfully challenged Elon Musk’s stock option award in a derivative lawsuit filed on Tesla’s behalf. That record-setting fee award—25.3 times the lodestar—valued the lawyers’ time at almost $18,000 an hour.

We have spent much of our careers studying stockholder lawsuits and attorneys’ fees, and we have some thoughts on how the Council should tackle this study. We start with a simple premise: fee awards come directly out of settlements or judgments, so every dollar for the lawyers means one less dollar for stockholders. Basic economic theory therefore suggests that judges making fee awards on behalf of stockholders should be aiming for awards that are not a dollar more than it takes to incentivize plaintiffs’ attorneys to bring meritorious cases.

This economic insight is consistent with Delaware jurisprudence. When corporate boards pay more to officers than necessary to secure their services, courts say that the directors breached their fiduciary duty to the stockholders. Indeed, in the recent Tesla litigation, Chancellor McCormick held that Tesla’s board breached its fiduciary duties by failing to consider whether it could have accomplished its goals by awarding Musk a smaller compensation package. Delaware judges should hold themselves to the same standard they expect from corporate directors. The key question then: What is the smallest fee award that a court can order in a particular case that will still incentivize plaintiffs’ attorneys to file meritorious cases in the future?

That optimal fee award is simple in theory but daunting to calculate in practice. Right now, judges do not have the information they need to award fees, as the Court of Chancery recognized in the recent Dell case. There is no central repository of Delaware fee awards, so judges are left to rely on their own experience. To be sure, Delaware judges are widely respected for their experience in adjudicating corporate law disputes. But that experience is no substitute for hard data when awarding fees. A process that relies primarily on judges’ intuition creates a black box that only the judges themselves can understand. This black box makes it hard for the public to evaluate their decisions. As one example, Texas caps fees at four times the lodestar, but how does Delaware practice compare? We don’t know.

In the absence of systematic data, judges rely heavily on precedent: awards in other cases. But that is a recipe for replicating mistakes, as those decisions are not grounded in data either. We have reviewed numerous fee motions in which attorneys identify a few cases in which courts have used an even higher fee percentage or multiplier than the lawyers are requesting. This approach allows plaintiffs’ firms to cherry-pick outlier examples in their fee briefs rather than offering representative samples. Isolated numbers are meaningless without a baseline. Judges should rely on data, not anecdotes.

Moreover, fee awards are not the product of an adversarial process. Defendants typically agree not to contest fee awards in settlements, and there are rarely objectors. Even in the rare case in which an objector appears, they are handicapped by the lack of systematic data that might lend support to their arguments. The bottom line is that judges almost never hear well-developed arguments as to why a requested fee is too high.

If we want better fee awards, we need better data. Better data would afford both judges and the public a deeper understanding of the plaintiffs’ attorneys’ risk calculus in these cases. In reviewing executive compensation, including the recent Tesla litigation, Delaware judges analyze both the “give” and the “get” for the company. What did the company pay, and what did it get in return?

In analyzing their potential return in a particular case, a plaintiffs’ law firm should focus on the same factors:

1. The Give: The money and time that the firm will need to invest in the litigation;
2. The Get: The firm’s probable fee if it obtains a settlement or judgment and the risk of non-recovery.

Deciding to file a lawsuit is an investment decision, and plaintiffs’ law firms are no different from other businesses in having to make these judgments under uncertainty. Both the give and the get are influenced by the strength of the available allegations, the degree of difficulty posed by applicable doctrine, and how far the case proceeds before resolution, among other factors.

Judges should assess these same factors when awarding fees. If a judge’s goal is to award the lowest fee that incentivizes plaintiffs’ attorneys to file meritorious cases in the future, they need to understand the attorneys’ financial calculus. Yet judges do not have the necessary data to perform this calculus. Collecting systematic data to assess these factors is certainly possible. In our own work studying securities class actions, we have collected substantial datasets to analyze these factors. Delaware judges have dismissed the relevance of those studies, insisting that “Chancery litigation is unlike much else, including federal securities litigation. In this court, plaintiffs’ counsel faces ‘far higher rates of dismissal, far lower prospects of settlement, and far smaller potential recoveries.’” Tornetta v. Musk, 326 A.3d 1203, 1259 (Del. Ch. 2024) (citations omitted). Maybe so, but how would the judges know without any systemic data on Delaware fiduciary litigation? A judge’s intuition?

The Council has an opportunity to help judges do a better job in awarding fees and to provide the public with an opportunity to evaluate those fees. The report should recommend the creation of a comprehensive database of Delaware fiduciary litigation that includes information on attorney effort and fee awards. Setting up such a database would require only modest investment, and it would have the potential to save stockholders hundreds of millions of dollars over time. Once the database is created, it could be maintained at minimal cost under the supervision of the Court of Chancery. This database would also show the investing public that Delaware is committed to protecting stockholder funds and is serious about getting fee awards right.

Having collected data on representative litigation in thousands of cases, here is how we think such a database—the Delaware Fiduciary Litigation Repository—could work. Every lawyer filing a stockholder suit against a public company under Delaware Court of Chancery Rule 23 (class actions) or Rule 23.1 (derivative suits) would be required to file a simple form with the court at the end of the litigation. This form would be no more than 1-2 pages and would include three types of information.

First, the filing would include the name of the judge, the plaintiff(s), and the plaintiffs’ law firms potentially receiving fees from the case, including referring lawyers. The filing should also include whether specified allegations that make recovery more or less likely have been included in the complaint, such as the presence of a controlling shareholder, inadequate disclosures concerning a merger or acquisition, or lack of board oversight. The filing should also indicate whether the complaint was based on the results of a Section 220 books and records demand.

Second, the filing would provide information about the case’s resolution. The filing would include whether the case was dismissed (and whether the dismissal was voluntary or involuntary), settled, or ended in a judgment. The filing should also reflect the stages of litigation—was a motion to dismiss, a motion for summary judgment, and/or a motion for class certification filed, and was there a trial? If there was a settlement or judgment, the filing would include the monetary amount of the settlement or judgment, as well as any non-monetary consideration, such as corporate governance reforms.

Finally, and most critically, the filing would include basic information from all cases— dismissed or settled—about the work of the plaintiffs’ attorneys. That would include the names of the plaintiffs’ law firms that worked on the case, their hours, lodestar, and expenses, all broken down by stage of litigation. If there was a settlement or judgment, the filing would include both the requested and awarded attorneys’ fees, expenses, and any incentive awards paid to the representative plaintiff. If a mootness fee was paid, the consideration for the mootness fee and the amount of the fee would need to be disclosed.

Collecting data on the work and expenses for all cases, not just the ones that end in settlement or judgment, would allow for meaningful assessment of the actual risk that plaintiffs’ lawyers face in representative litigation in the Court of Chancery. How many hours do lawyers invest before a voluntary dismissal? A motion to dismiss? Summary judgment or class certification? Without knowing how many hours are invested in cases that do not pan out, it is impossible to assess the risk of cases that do.

Delaware has recognized that determining fee awards is a “difficult policy issue” that should reflect the state’s “commitment to striking the right balance” for the state, investors, and corporations. SCR No. 17. Relying on judges’ intuitions to award fees in stockholder litigation conceals this process in a black box. The Council could serve Delaware’s interests by recommending that the state replace that black box with fees based on facts and data. This approach would not only help judges, but also allow the public to evaluate fee awards, thereby promoting transparency and accountability.