The 'Look-Through Approach': Why Delaware Must Use this Approach for Determining Attorneys' Fees in Derivative Suits Similar to Southern Peru

Abstract

Derivative suits permit shareholders of a corporation to sue management on the corporation’s behalf if, for example, management breaches a fiduciary duty. Damages awarded in derivative suits go into a common fund, from which attorneys’ fees are deducted. In Delaware, a five-factor test is used to determine the percentage of the common fund to be paid as attorneys’ fees. Under firmly established Delaware precedent, any monetary award in a derivative suit must go to the corporation in its entirety, and not to the shareholders who brought the suit. This precedent applies even if the majority shareholder of the corporation on whose behalf the derivative suit has been brought is a defendant in the derivative suit. In Southern Peru, that was exactly the case. In Southern Peru, the Delaware Court of Chancery awarded a common fund of over $2 billion in a derivative suit. Subsequently, the Chancellor awarded more than $300 million of the common fund as attorneys’ fees. This amounted to an hourly rate of over $35,000 per hour, leading to claims that the attorneys’ fee award was a windfall. The majority shareholder defendant in Southern Peru appealed the fee award to the Delaware Supreme Court, which upheld the award. The majority shareholder defendant then filed a motion for reargument, claiming that only a portion of the common fund should have been used as the basis for attorneys’ fees, corresponding to the percentage of the corporation on whose behalf the derivative suit had been brought that was owned by minority shareholders. This approach, called the "look-through approach," was rejected by the Delaware Supreme Court, as being incompatible with Delaware precedent requiring that any monetary award in a derivative suit go to the corporation in its entirety. The motion was denied. This Note argues that, in cases similar to Southern Peru, Delaware needs to use the "look-through approach" to determine the portion of the common fund to be the basis for attorneys’ fees. As the approach would only be used to determine attorneys’ fees, it is compatible with Delaware precedent. The common fund would still go to the corporation in its entirety. Therefore, Delaware precedent is not violated. This Note argues that the "look-through approach" must be used by the Delaware courts when the majority shareholder of the corporation on whose behalf the derivative suit has been filed is a defendant in the derivative suit, and when the amount of the common fund is over $500 million. When those two conditions are met, use of the "look-through approach" would be bright-line and automatic. This Note argues that use of the "look-through approach" in such situations would further two important goals of the Delaware courts. Those two goals are discouraging forum-shopping and thus keeping shareholder litigation in Delaware, and reducing the possibility of attorneys’ fee awards being perceived as windfalls.