Legal fees for the prevailing lawyers in class actions can be eye-popping.
Take the $129 million sought by those who successfully challenged a
proposal in 2016 to issue nonvoting stock to help
keep control of the company. Facebook, in fighting the fee, says it represents a $9,146 hourly rate. Pretty good work if you can get it.
But there is a more impressive number at work here. Late last month, Vice Chancellor J. Travis Laster effectively told Facebook that if it wanted to continue the fee fight in his Delaware court, Mr. Zuckerberg needs to testify at a hearing expected to take up to six hours.
In my view, Mr. Zuckerberg won’t want to do that, particularly since the company threw in the towel when his testimony was imminent in the underlying litigation last year. But I predict skipping a trip to Delaware could end up costing Facebook somewhere close to $20 million for each hour of testimony Mr. Zuckerberg avoids.
Since Facebook’s IPO in 2012, Mr. Zuckerberg has held a class of stock with 10 times the voting power of the shares sold to the public. That allows him to have a majority of the votes even though he only has a minority of the overall shares. However, Mr. Zuckerberg is committed to contributing a substantial portion of his net worth to charity, and that will require him to dispose of most of his supervoting shares and ultimately lose his ability to control Facebook.
So in 2016, Facebook proposed issuing a new class of nonvoting stock and distributing it as a dividend to all shareholders along with some governance improvements Mr. Zuckerberg agreed to. The distribution of the new shares would enable Mr. Zuckerberg to sell stock to fund much of his charitable commitment without losing any of his voting power.
Facebook was then hit with class-action lawsuits seeking to block issuance of the nonvoting shares. Although shareholders approved the plan, the company needed Mr. Zuckerberg’s supervoting shares to keep the most controversial elements from being rejected. Last September, a few days before the trial in which Mr. Zuckerberg was going to be required to testify, the whole plan was called off.
The plaintiffs’ lawyers claimed victory and asked Facebook to pay them that big fee because of all the value they say they created for shareholders. (Lawyers typically seek a so-called “mootness fee” when a company gives up on a challenged plan before a court can rule on the class action, and Facebook hasn’t objected to some fee but it says it shouldn’t be more than $20 million.)
To be clear, shareholders didn’t collect any cash, but the lawyers’ view is the outcome accelerates the timetable for the public to control the company.
At the hearing last month, there was a lot of squabbling about that and how much longer Mr. Zuckerberg will be in control.
That led to Vice Chancellor Laster requiring Mr. Zuckerberg to come to Delaware and testify at a two-day hearing. Since the executive gave up last year before appearing in court, who thinks Mr. Zuckerberg is going to want to subject himself to cross-examination now just to save Facebook legal fees that, although astonishing for the rest of us, are a rounding error for a company worth $500 billion? I suspect the Vice Chancellor doesn’t.
Instead, I predict a negotiated settlement that could value Mr. Zuckerberg’s court time at around $20 million an hour, because to get the law firms to settle without a hearing, Facebook will probably have to give them much of what they seek.
Facebook said in a statement: “The reclassification proposal has been withdrawn. The only issue still being litigated is compensation for plaintiffs’ lawyers, who are seeking the second highest fee in the history of the court. We continue to oppose their efforts to recover a windfall at the expense of stockholders.”
It’s easy to be critical of the attorneys’ fees in class actions. Big fee awards in cases like this where no cash goes to shareholders or companies do give pause. But in our system there is no sanction for breach of directors’ fiduciary duties other than through this type of litigation. Plus, recent Delaware court decisions have restricted the circumstances in which such claims can be made. If there aren’t big fees for the lawyers who do prevail, don’t expect anyone to challenge dicey deals anymore.