Cal-Maine Foods, Inc. v. Pyles, 69,2004.

• Decision Date: 03 September 2004
• Docket Number: No. 69,2004.,69,2004.
• Parties: CAL-MAINE FOODS, INC., Defendant Below, Appellant, v. David PYLES, H. David Schneider, Twin Valley Farms Exchange, Inc., Leon Eshelman, Gary Eshelman, Valerie Eshelman, Pamela Fredericks and Terry Bixler, Plaintiffs Below, Appellees.
• Court: United States State Supreme Court of Delaware

858 A.2d 927

CAL-MAINE FOODS, INC., Defendant Below, Appellant, v. David PYLES, H. David Schneider, Twin Valley Farms Exchange, Inc., Leon Eshelman, Gary Eshelman, Valerie Eshelman, Pamela Fredericks and Terry Bixler, Plaintiffs Below, Appellees.

No. 69,2004.

Supreme Court of Delaware.

Submitted: July 14, 2004.

Decided: September 3, 2004.

Jesse A. Finkelstein, Esquire, Peter B. Ladig, Esquire (argued), and Elizabeth C. Tucker, Esquire, of Richards, Layton & Finger, P.A., Wilmington, Delaware, for Appellant.

Michael Hanrahan, Esquire, and Gary F. Traynor, Esquire (argued), of Prickett, Jones & Elliott, P.A., Wilmington, Delaware, for Appellees.

Before STEELE, Chief Justice, HOLLAND and BERGER, Justices.

BERGER, Justice.

In this appeal, we consider whether the Court of Chancery properly applied settled legal principles in awarding attorneys' fees to stockholders after their breach of fiduciary duty claims were mooted by the company's decision to abandon the contested transaction. The trial court found that the stockholders' suits were meritorious when filed and that the company failed to rebut the presumption that the litigation had some causal relationship to the company's decision to terminate the transaction. As both of those findings are supported by the record, and the amount awarded is not unreasonable, we affirm the Court of Chancery's decision.

Factual and Procedural Background

On August 18, 2003, Cal-Maine Foods, Inc., the largest producer and distributor of shell eggs in the United States, announced a going-private transaction at $7.35 per share. On the last trading day before that announcement, Cal-Maine's common stock closed at $7.56 per share. One week later, Cal-Maine stockholders filed a complaint alleging breach of fiduciary duty and seeking injunctive relief. Among other things, the complaint alleged that the proposed price was unfair because it failed to reflect rising egg prices and Cal-Maine's improved performance.

Cal-Maine had not filed its proxy materials with the Securities and Exchange Commission, nor had it set a date for the stockholders' meeting, when the court held its first scheduling conference on September 2, 2003. Nonetheless, the court granted the stockholders' motion for expedited proceedings and scheduled the preliminary injunction hearing for October 1, 2003, based on the company's October 10th target date for its stockholders' meeting. The stockholders proceeded with discovery and prepared to depose the Special Committee's financial advisor, among others.

On October 6, 2003, Cal-Maine announced its very favorable financial results for the quarter ended August 30, 2003. The next day, the SEC sent Cal-Maine a Comment Letter raising numerous questions and possible revisions to the proxy materials. In light of the Comment Letter, the preliminary injunction hearing date was postponed—first until November 20, 2003, and later, until an unspecified date in January 2004.

From October 13, 2003, through October 29, 2003, the Special Committee considered higher cash-out prices that might be acceptable to the stockholders. The parties did not reach an agreement, however, and on November 6, 2003, Cal-Maine abandoned the proposed transaction. The company's directors made that decision because: (i) the Special Committee's financial advisor had withdrawn its fairness opinion due to market volatility; and (ii) in their view, the transaction price would be too high. Cal-Maine stock closed at $11.00 that day, and closed as high as $43.59 before the end of the year.

On November 21, 2003, the stockholders filed a motion for attorneys' fees and expenses. The Court of Chancery awarded $800,000 in fees and $31,617.23 in expenses, finding that the decision to abandon the transaction was causally related to the litigation, and that the abandonment provided a significant benefit to the stockholders. This appeal followed.

Discussion

The law governing an award of attorneys' fees in a mooted class action is settled. Under the "common corporate benefit" doctrine:

[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....

* * *

[T]o 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

...