On February 5, 2020, the Court of Chancery, in Martin v. Harbor Diversified, Inc., 2020 WL 568971 (Del. Ch. Feb. 5, 2020), rejected a plaintiff's petition for attorneys' fees because the related lawsuit was motivated by the plaintiff's interest in a buyout of his shares and the corporate benefit produced was "a mere externality." Following the plaintiff's appeal, the Delaware Supreme Court affirmed the Court of Chancery's holding. See Martin v. Harbor Diversified, Inc., 2020 WL 7640719 (Del. Dec. 22, 2020).
In Martin, the plaintiff, a stockholder of defendant Harbor Diversified, Inc. ("Harbor"), initiated an action under Section 220 of the General Corporation Law (the "DGCL") to inspect Harbor's books and records, and under Section 211 of the DGCL to compel an annual stockholder meeting. After a trial on a paper record, the Court of Chancery ordered Harbor to hold an annual meeting and to produce certain of the corporate records sought. The plaintiff then petitioned the Court to have $673,691 in attorneys' fees paid by Harbor because the plaintiff's lawsuit purportedly conferred corporate benefit and the defendant acted in bad faith.
The Court explained that under the corporate benefit doctrine, a plaintiff is entitled to have its attorneys' fees and expenses paid by the company where the lawsuit conferred a non-monetary valuable benefit upon the corporation or its stockholders. But, neither a company nor its stockholders shall be compelled to share in the costs of a litigation pursued primarily in the best interest of a plaintiff-stockholder. The plaintiff, in this case, asserted that his lawsuit conferred a corporate benefit on Harbor by (i) compelling an annual stockholder meeting and facilitating director elections, and (ii) forcing Harbor to disclose its ownership structure, the identities of its management and directors, its ownership interests in certain entities, and related-party dealings.
While the plaintiff was right that his lawsuit provided some benefit to Harbor and its stockholders, the Court of Chancery declined to award fees and expenses to the plaintiff because he pursued his lawsuit against Harbor mostly for his personal benefit, seeking to be bought out by Harbor. That conclusion was driven, at least in part, by the plaintiff's books and records demand letter, which stated a purpose of obtaining information regarding the value of the plaintiff's stock and the value of Harbor's assets. "While the demand letter makes reference to the fact that Harbor had not had a stockholder meeting since October 25, 2011, there is no demand to hold a meeting." In fact, the plaintiff did not request an annual meeting until he filed his initial complaint. The plaintiff's counsel also sent several letters to Harbor, seeking financial information "related primarily to the Plaintiff's interest in selling his shares."
Moreover, the bulk of the effort expended in the litigation was not to achieve the stockholder meeting since Harbor's answer to the complaint conceded that Harbor had not held a meeting from 2012 through 2018. And, on the first page of Harbor's pre-trial brief, the company recognized its obligation to hold an annual meeting and committed to do so. Thus, "[a]ny effort required to achieve a meeting, in other words, was de minimis." In light of these circumstances, the Court determined that the corporate benefits produced by the plaintiff's claims were "a mere externality to the Plaintiff's ultimate goal of achieving a buyout of his interest."
The Court of Chancery further found that none of Harbor's conduct constituted bad faith and, as a result, denied the plaintiff's request for fees and expenses on that basis.
Takeaway
It is not abnormal for a stockholder client to inquire whether filing a summary proceeding of some sort might inconvenience a corporation and its management enough to shake loose a buyout or some other favorable resolution. But, as Martin v. Harbor Diversified, Inc. teaches, if the stockholder's primary purpose is personal gain, the Court of Chancery is unlikely to award attorneys' fees to the plaintiff. While this decision has no bearing on the Court's evaluation of the merits of a stockholder's self-interested claim, the likelihood that the Court will deny a petition for fees requires a stockholder-plaintiff to consider whether the benefits it may derive from such a litigation are worth the related fees.
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