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Securities Lawyers Flocking to Delaware

The Recorder

Jaws dropped in 2011 when the Delaware Court of Chancery granted plaintiffs lawyers a record-breaking $300 million in fees for their work on a shareholder derivative suit over an M&A deal by Southern Peru Copper Corp., the world's largest publicly traded copper-mining company.

The fees stemmed from a whopping $2 billion judgment—an outsized recovery in an area where settlements often include corporate governance reforms but no cash, and attorney fees tend to be modest. Here, plaintiffs lawyers from Kessler Topaz Meltzer & Check and Prickett, Jones & Elliott, hit a bonanza that amounted to a breathtaking $35,000 an hour.

The message to the plaintiffs bar was clear—you can win big in Delaware. Some court watchers say the award was intentionally mouth watering, promotion for the state's cottage industry in securities litigation.

The nation's second-smallest state has cemented its grip on litigation challenging company mergers and management decisions.

That has California-based securities lawyers increasingly fixated on Delaware law—and the business of law in Wilmington. A cluster of out-of-town firms with large securities defense practices, including Wilson Sonsini Goodrich & Rosati, have recently set up or augmented permanent shops there.

One reason Delaware is in fashion is that more companies are adopting bylaws that establish the court's exclusive jurisdiction over certain shareholder actions, short-circuiting venue battles. No longer able to tire defendants with scattershot litigation, plaintiffs lawyers are bringing more cases directly to Delaware. And although regional jockeying hasn't completely evaporated, lawyers for both plaintiffs and defendants see upsides in the court's predictability and efficiency.

"We have a lot of litigation shifting to Delaware that may normally have been brought in California," said Ropes & Gray partner Richard Gallagher.

The court can seem alien to out-of-towners, he said. "California corporate litigators have to understand that the Delaware bar and courts operate a lot differently." The Court of Chancery, founded in 1792 and headquartered in Wilmington, specializes in merger and acquisition and shareholder derivative suits, and hears almost nothing else. There is no jury. Decisions rest solely in the hands of Chancellor Andre Bouchard and four vice chancellors.

Other courts are "fine at what they do," said Bouchard, who has lived in Delaware since second grade, but his bench has an unparalleled knowledge of Delaware corporate law.

"It's like a surgeon," he said. "Would you rather have a surgeon who's done 1,000 brain surgeries, or 10?"


In 2010, ruling in a case against Revlon Inc., Vice Chancellor J. Travis Laster mused that boards and shareholders should be free to establish the forum for litigating certain disputes in their bylaws. About 1,000 publicly traded corporations have since added Delaware forum-selection provisions to their bylaws, said law professor Joseph Grundfest, who founded Stanford Law School's Securities Class Action Clearinghouse. In 2013, former Chancellor Leo Strine Jr. upheld the forum-selection provisions adopted by Chevron Corp. and FedEx Corp.

Though blessed by the Chancery Court, the measures don't always hold up out of state. In 2011, U.S. District Judge Richard Seeborg of the Northern District of California rejected Oracle Corp.'s bylaw specifying Delaware as its forum of choice.

Companies may choose to litigate in Delaware because the court has a reputation for predictable rulings, said Michael Celio, a partner in Keker & Van Nest's securities practice, who says about half his cases include a Delaware component.

The Chancery Court is more of a known quantity than the California courts, which he called "famously inconsistent." Most importantly, he said, defendants don't want to pay to fight duplicative suits in different courts.

On the other hand, the court's uncommon efficiency caters to plaintiffs. In November, Activision Blizzard Inc. shareholders extracted a $275 million settlement just 11 months after the Court of Chancery appointed Delaware lawyer Joel Friedlander of Friedlander & Gorris co-lead plaintiffs counsel and set trial for December of 2014.

That kind of turnaround is rare in other courts, Friedlander said, and it can drive up settlements. "The defendants are facing this, 'do we settle or do we try it' decision a lot earlier on," he said.

Cornerstone Research in Menlo Park closely tracks shareholder litigation stemming from mergers valued at more than $100 million where the target company is incorporated in Delaware. According to the group's preliminary research for 2014, 78 deals sparked litigation, with almost 80 percent involving suits in Delaware. Roughly 35 percent of the deals were challenged only in Delaware, a reflection of corporate boards' strengthened ability to push cases to the Chancery Court. Last year, more merger suits settled in Delaware Chancery Court than in all other jurisdictions combined, according to Cornerstone.

Plaintiffs lawyers seem to see the writing on the wall. "There's more of an expectation, I think, now that the case will end up in Delaware," Friedlander said.


The Delaware court also isn't afraid of enormous judgments and fee awards, as evidenced by its 2011 ruling in the Southern Peru Copper case. A small-town jury might balk at such a large sum, said Robbins Geller Rudman & Dowd partner Randall Baron, a San Diego attorney who specializes in Delaware corporate law.

"If you bring a case and ask for hundreds of millions of dollars in Green Bay, Wis., that might not play as well," he said. In 2011 Vice Chancellor Laster awarded plaintiffs attorneys $22.3 million in a merger case involving Del Monte Foods Inc. that settled for $89.4 million. In October, Laster awarded shareholders of Rural/Metro Corp. $75.7 million, and likely will follow that up with sizeable attorney fees.

Steven Davidoff Solomon, a professor at Berkeley School of Law and columnist for The New York Times, has theorized hefty fee awards are part of a strategic bid by Chancery Court judges to keep litigation in state. That keeps their lawyers employed, Solomon said, and ensures the judges get to shape corporate governance law. "It appears that some of the better cases may be migrating to Delaware because they think that the judges may reward them better," he said.

At the same time, the judges are cracking down on fees in M&A settlements that give shareholders more disclosure about pending deals, but no cash.

In 2013, Laster slashed the $450,000 fee request of lawyers representing Glen-Probe Inc. shareholders, awarding them $100,000 for settling a "very weak" case. "I think the idea that we're giving out, left and right, 500 grand for five numbers, when you now see what people get when they actually get real money, there may need to be a recalibrating of the market," Laster said during the settlement hearing.


Several national firms maintain Delaware offices, including Morgan, Lewis & Bockius and Paul, Weiss, Rifkind, Wharton & Garrison. Last year, when Wilson Sonsini Goodrich & Rosati expanded its Delaware office led by former Chancellor William Chandler III, the firm remarked in a press release on Wilmington's "unique role in the business ecosystem."

In October, Sidley Austin hired former Delaware Supreme Court Justice Jack Jacobs to open its first office in Wilmington.

"Basically I am the person that the other partners consult on Delaware corporate law, including litigation," said Jacobs, who also spent 18 years on the Delaware

Court of Chancery bench. Having a good field guide can be essential in Delaware, several lawyers said.

To an outsider, the small city of Wilmington seems to be populated almost entirely of lawyers. Downtown empties out when the law firms close at the end of the day. Go out to lunch, and you're sure to bump into at least one person you've just seen in court.

"It's kind of weird," Keker & Van Nest's Celio said. "The percentage of people dealing with this corporate thing is incredibly high." In fact there are more corporations in Delaware than people—1 million compared to 925,000 in 2013.

California lawyers fly into Philadelphia—Delaware doesn't have a major airport—and almost always stay at the 100-year-old Hotel DuPont.

"Picture red velvet floors, pictures of people on horses with swords," said James Kramer, chair of the Orrick, Herrington & Sutcliffe securities group.

Picking the right Delaware cocounsel is often a California lawyer's most important strategic move. Many of those relationships are handed down over years in the large firms.

Robbins Geller, for example, has been working for more than 10 years with Friedlander of Delaware's Friedlander & Gorris, where Chancellor Bouchard was managing partner until he was sworn in as head of the Court of Chancery in May. On the defense side, California lawyers at Orrick, Herrington & Sutcliffe and Ropes & Gray have ties to A. Thompson Bayliss of Abrams & Bayliss, a firm founded by Vice Chancellor Laster.

Those close connections between the bench and the bar can leave out-of-town attorneys with the sense that they are on the outside looking in.

"The thing that you just always leave feeling," Celio said, "is this fact that it's a club that you're not a member of."