In re Wachovia Shareholders Litigation

• Decision Date: 18 January 2005
• Docket Number: No. COA04-402.,COA04-402.
• Citation: 168 NC App. 135,607 S.E.2d 48
• Court: North Carolina Court of Appeals
• Parties: In re WACHOVIA SHAREHOLDERS LITIGATION.

607 S.E.2d 48

168 NC App. 135

In re WACHOVIA SHAREHOLDERS LITIGATION.

No. COA04-402.

Court of Appeals of North Carolina.

January 18, 2005.

Wilson & Iseman, L.L.P., by G. Gray Wilson, Winston-Salem; Abbey Gardy, L.L.P., by Stephen T. Rodd, New York, NY, for Wachovia Shareholder plaintiff appellees.

Wilson & Iseman, L.L.P., by Linda L. Helms, Winston-Salem, for Wachovia Shareholder plaintiff appellees.

Robinson, Bradshaw & Hinson, P.A., by Robert W. Fuller, Charlotte; Bell, Davis & Pitt, P.A., by William K. Davis, Winston-Salem; Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., by James T. Williams, Jr., Greensboro; and Deputy General Counsel for Wachovia Corporation Francis C. Clark, for Wachovia Corporation defendant appellant. McCULLOUGH, Judge.

Arising from a complex business merger between Wachovia Corporation ("Wachovia") and First Union Corporation ("First Union"), this appeal raises a single question of law for our consideration. Did the special business court ("business court") have legal authority to award attorney's fees to shareholders of Wachovia Corporation ("plaintiffs") for their lawsuit brought against Wachovia, where the successful product of the lawsuit provided some alleged corporate benefit to fellow shareholders? Our following recitation of the facts is narrowed in scope to address this single issue of law.

On 15 April 2001, Wachovia and First Union announced their planned merger. Both were North Carolina corporations prior to their merger, as is the merged entity. Their merger agreement included two contested provisions, known in merger jargon as "deal protection devices": a cross option provision, and a non-termination provision. Under the cross-option provision, if the Wachovia/First Union merger failed to close, and one partner merged with a third entity within eighteen (18) months, the remaining partner was potentially entitled to what the business court referred to as a "$780 million break-up fee." Under the non-termination provision, Wachovia and First Union agreed their merger agreement would not terminate until January of 2002 even if either of their shareholders failed to approve the merger in the initial vote.

A number of suits were filed by shareholders of Wachovia seeking to block the merger by challenging the cross-option provision and the non-termination provision of the merger agreement ("the shareholder suits"). These suits alleged that the Board of Directors of Wachovia had breached its statutory "fiduciary" duties under N.C. Gen.Stat. § 55-8-30 (2003) by approving these provisions. Also stemming from the merger, Suntrust Banks, Inc. ("Suntrust") made a hostile bid on Wachovia. First Union filed suit against Suntrust ("the Suntrust suit"). Both the Suntrust suit and the shareholder suits were assigned to the business court, and the cases were consolidated for discovery and other purposes.

On 20 July 2001, the business court issued an order holding that the cross-option was a valid provision, but that the non-termination provision impermissibly restricted the ability of Wachovia's Board to consider merger partners other than First Union and was thus invalid and unenforceable. The business court determined that the non-termination provision cornered Wachovia's Board of Directors into the position of either breaching their fiduciary duty or breaching the merger agreement if a better merger offer came along during the agreement's dormancy. Additionally, the business court found the non-termination provision to be coercive upon the shareholders, stating: "[t]he longer the option is effective, the more likely shareholders are to vote for the bird in the hand."

Pursuant to this order, the business court plaintiffs petitioned the business court for attorney's fees. The business court postured plaintiffs' petition upon the following facts and legal considerations:

(53) The Court next turns to the fee issues in the class action litigation. In those cases, because the parties agreed to a consent dismissal of the cases as moot the Court is required to determine only the fee request which is strenuously opposed by defendants.

(54) In this class action no common fund was created. There is no pool of money from which to pay attorney fees and no money to be distributed to shareholders. In this instance there was not even an increase in the stock price attributable to any action by plaintiffs' counsel, nor did any subsequent bidder appear after the Wachovia sleeping pill [the non-termination provision] was invalidated.

(55) Under those circumstances, the fee request raises four issues for consideration by the Court.

(56) First, will North Carolina recognize a "corporate benefit" theory analogous to the common fund theory and award attorney fees where a common benefit is provided in merger and acquisition litigation?

(57) Second, was there a common benefit provided by the litigation in this case?

(58) Third, what standard should the Court apply in determining any fee award?

(59) Fourth, applying that standard, what would an appropriate fee award be in this case?

The business court answered the first question affirmatively, stating:

North Carolina would be well served by following the majority rule and adopting the Delaware decision framework.

Public policy, the legislative intent of N.C.G.S. § 57-7-46, and judicial economy and efficiency all dictate that the common law recognize that shareholders who file class actions in merger and acquisition cases and produce a real corporate demonstrable benefit for shareholders should be permitted to apply for attorney fees and expenses.

Upon this determination, plaintiffs were awarded $325,000 in attorney's fees and $36,000 for expenses.

We now address whether the business court, in making this determination, had authority to extend upon the equitable doctrines established in this state on non-statutory grounds for an award of attorney's fees.

Generally, attorney's fees are taxable as costs only as provided by statute. Horner v. Chamber of Commerce, 236 N.C. 96, 97, 72 S.E.2d 21, 22 (1952). However, our Supreme Court has recognized at least one equitable exception to the general rule known as the "common fund" doctrine:

The rule is well established that a court of equity, or a court in the exercise of equitable jurisdiction, may in its discretion, and without statutory authorization, order an allowance for attorney fees to a litigant who at his own expense has maintained a successful suit for the preservation, protection, or increase of a common fund or of common property, or who has created at his own expense or brought into court a fund which others may share with him.

Id. at 97-98, 72 S.E.2d at 22; see also, Pou Bailey v. State of North Carolina, 348 N.C. 130, 160, 500 S.E.2d 54, 71 (1998),

appeal dismissed,

353 N.C. 142, 540 S.E.2d 313 (2000); Taylor v. City of Lenoir, 148 N.C.App. 269, 275-79, 558 S.E.2d 242, 247-49,

disc. review denied, 355 N.C. 500, 564 S.E.2d 235 (2002). A separate and distinct equitable doctrine of awarding attorney's fees, where no such common fund is created, is known in other jurisdictions as the common "corporate benefit." This doctrine is most clearly expressed in Delaware common law, providing the following elements:

[A] litigant who confers a common monetary benefit upon an ascertainable stockholder class is entitled to an award of counsel fees and expenses for its efforts in creating the benefit.... To be entitled to an award of fees under the corporate benefit doctrine, an applicant must show... that:

(1) the suit was meritorious when filed;

(2) the action producing benefit to the corporation was taken by the defendants before a judicial resolution was achieved; and

(3) the resulting corporate benefit was causally related to the lawsuit.

Cal-Maine Foods, Inc. v. Pyles, 858 A.2d 927, 927 (Del.2004) (quoting United Vanguard Fund v. Takecare, Inc., 693 A.2d 1076, 1079 (Del.1997)).

In the case at bar, the business court "adopt[ed] the Delaware decisional framework" for the "corporate benefit" doctrine and awarded attorney's fee thereunder. See Energy Investors Fund, L.P. v. Metric Constructors, Inc., 351 N.C. 331, 334, 525 S.E.2d 441, 443 (2000) ("the Chancery Court of Delaware [] [is] generally recognized as an authority in the interpretation of business law[.]"). Plaintiffs contend the business court had authority to do so based on jurisprudence of this State's recognition that equity requires "allowance [of attorney's fees] [be] made in certain equity cases prosecuted in behalf of a class, when the successful prosecution of the cause inures to the benefit of the members of the class." Rider v. Lenoir County, 238 N.C. 632, 635, 78 S.E.2d 745, 747 (1953). Plaintiffs would have our Court decide this case as a matter of first impression, and adopt the common "corporate benefit" doctrine of attorney's fees based upon the above stated principles of equity, the application of the doctrine in numerous state and federal jurisdictions, and a number of policy concerns as specified in the business court's order.

Defendant, in seeking to reverse the business court's award, alleges that, upon similar facts to those at bar, we have already chosen not to adopt the common "corporate benefit" doctrine, and we are therefore bound by a prior panel of our Court.

In Madden v. Chase, 84 N.C.App. 289, 292, 352 S.E.2d 456, 458 disc. review denied, 320 N.C. 169, 358 S.E.2d 53 (1987), we denied an award of attorney's fees sought by a group of plaintiffs filing suit to enjoin a "going private" merger. The plaintiffs in that case believed the price per share being offered to the two private purchasers was undervalued. After the case had been pending for approximately five months, the investment banking firm which had initially appraised the shares for the directors re-evaluated its opinion and withdrew it. Thereafter, the "going private" merger was abandoned and the public shareholders maintained their shares,...