Delaware Chancery Court Addresses Attorney Fees After Stipulated Dismissal Of Derivative Action

Freedman v. Adams, C.A. No. 4199-VCN (Del. Ch. March 30, 2012).

Issue Addressed

The Court of Chancery addressed the standard for awarding attorneys' fees when there has been a stipulated dismissal of a derivative action which was largely mooted by measures taken by the defendant board of directors shortly after the complaint was served.

Background

The complaint in this case consisted of eight pages and it was filed in November 2008, challenging the executive compensation plan approved by the board of XTO Energy, Inc. The specific objection was based on the fact that cash bonuses paid to key officers were not tax-deductible because they did not meet the requirements of Section 162(m) of the Internal Revenue Code. The cash bonuses did not meet the definition in Section 162(m) of "other performance-based compensation," which must be contingent upon achieving performance goals meeting certain statutory requirements. As a result, the plaintiff alleged that the company was not eligible for approximately $75 million in tax deductions over a two-year period. Shortly after the complaint was served, the board adapted a tax-deductible cash bonus plan which mooted most of the plaintiff's claims. Between the time that most of the plaintiff's claims were mooted, and the complaint's eventual dismissal, the defendants filed two motions to dismiss.

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