Gerstle v. Gamble-Skogmo, Inc.

United States District Court for the Eastern District of New York · Corporations

Corporationsshareholder class actionsproxy fraudattorneys' feesSection 14(a)Rule 14a-9proxy materialsclass action

Facts

The underlying minority stockholders' class action alleged breach of fiduciary obligations and omissions and misrepresentations in proxy material used by Gamble-Skogmo, Inc. to support a merger with General Outdoor Advertising Co., Inc. The litigation lasted about three and one-half years, involved novel and difficult questions under Section 14(a) and Rule 14a-9, and ultimately produced a final judgment of $10,744,356 for the stockholders. Plaintiffs' counsel sought a substantial fee and reimbursement of ordinary disbursements, and separately filed applications concerning accountants, consultants, and other assistants he had employed. Defendant objected principally to shifting any fees or expenses to it, while some stockholders objected to the size of the requested fee as based on excessive hourly charges.

Issue

What fee and expense award was fair and reasonable for plaintiffs' counsel in this successful Section 14(a) stockholder class action, and whether retained accountants and other non-lawyer professionals could receive direct awards or only reimbursement through counsel's disbursements. The court also considered whether some portion of the allowances should potentially be charged directly to the defendant because its tactics had increased the burden of the litigation.

Rule

In awarding counsel fees in a stockholders' class action under Section 14(a), the court considers the time spent, the quality of skill demanded, the actual skill employed, the amount involved, the result obtained, the lawyer's eminence, and gives substantial weight to the contingent nature of recovery and the difficulties involved. Percentage-of-recovery comparisons may guide the court but do not control, and the award must rest on the totality of relevant factors rather than mathematical precision. Non-lawyer professionals such as accountants generally have no standing to apply directly for fees, especially absent prior authorization for their employment; instead, reasonable amounts for their services may be included as counsel's disbursements subject to the court's approval.

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After a successful federal shareholder class action in Chicago challenging misleading proxy materials, class counsel for Elena Ruiz obtains a $24 million judgment for the shareholder class. Counsel seeks $4.8 million in fees, emphasizing that the case raised unsettled issues, required years of litigation, and was handled on a fully contingent basis, while objectors focus on the high implied hourly rate.

How should the court most appropriately evaluate the fee request?

Explanation. The majority opinion treats fee-setting as a totality-of-the-circumstances inquiry. Relevant factors include time spent, quality of skill demanded, actual skill employed, amount involved, result obtained, and counsel's eminence, with substantial weight also given to the contingent nature of recovery and the difficulties involved. Percentage-of-recovery figures may provide guidance, but they do not control. (Derived from Gerstle v. Gamble-Skogmo, Inc. (n.d.).)