North Carolina Judge Condemns 'Stinky Fees' Paid To Lawyers Suing Over Merger Transactions

North Carolina Judge Condemns 'Stinky Fees' Paid To Lawyers Suing Over Merger Transactions

In one of his final actions as a Business Court Judge, Judge Tennille threw down the gauntlet for lawyers representing class action plaintiffs who are seeking approval of settlements.  Last week in Ward v. Lance, Inc., Judge Tennille condemned what he called "stinky fees," which he said "just smell bad and have no economic justification."

Stinky fees, from Judge Tennille's observation, are paid because "[w]e have come to the point in this country that whenever a merger is announced, some lawyer with a client holding a small number of shares rushes to file a lawsuit containing class action allegations."

But it wasn't just the plaintiffs' lawyers who got a lashing from Judge Tennille.  He included the lawyers defending these cases, the investment bankers who arrange the deals, and also the companies engaging in the transactions.  Here's what he said:

For their part, defense lawyers, investment bankers, and the companies are willing to pay these fees to get the deal done, regardless of the merits. Defense lawyers get paid to handle them. The fees are not significant in light of the amounts involved in the deal. Defendants are, in effect, complicit in the economically valueless charade. Our overburdened courts do not have the time or adequate information to review the settlements. If we continue to impose these unnecessary financial burdens of our legal system on financial transactions, these transactions will eventually move to London, Hong Kong, or Munich, or some other venue outside the United States. . . .The Court suspects that investment bankers bake that fee into the anticipated costs of the transaction.

In a non-binding request to judges hearing fee petitions in future cases, Judge Tennille said
Ihat they "should decline to approve any settlement that does not benefit shareholders in a material way." 

There's no way to tell if that request will be followed, but there are multiple cases pending which challenge the Duke Energy-Progress Energy merger.  In the absence of a material benefit to shareholders of those companies from the cases, it might be a good time for the Business Court to take a stand against what Judge Tennille called "an economically valueless charade."

Read this article in its entirety on North Carolina Business Litigation Report, a blog for lawyers focusing on issues of North Carolina business law and the day-to-day practice of business litigation in North Carolina courts.

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