EMAK Worldwide, Inc. v. Kurz: Attorneys Receive $2.5 Million Award for Providing Benefits to a Delaware Corporation

In EMAK Worldwide, Inc. v. Kurz, No. 512, 2011, 2012 WL 1319771 (Del. Apr. 17, 2012), the Delaware Supreme Court affirmed the Court of Chancery’s judgment awarding $2.5 million in fees to Donald A. Kurz’s attorneys.  In Delaware, courts reward plaintiffs’ attorneys for providing “a benefit to a Delaware corporation, even if the benefit does not produce immediate monetary rewards.”  The Court of Chancery based the judgment on the finding that the voting rights preserved in Kurz v. Holbrook, 989 A.2d 140 (Del. Ch. 2010) and Crown EMAK Partners, LLC v. Kurz, 992 A.2d 377 (Del. 2010) were meaningful. 

Crown and Kurz, previously discussed here, involved a fight for control of EMAK’s board between the common and preferred shareholders.  Kurz was the largest common shareholder and Crown held all of the preferred shares.  Crown was able to unilaterally appoint two directors to the seven-director board.  When Kurz attempted to re-take control of EMAK in 2008, Crown began negotiations with EMAK to exchange its preferred shares for new preferred shares with voting power in director elections (“Exchange Transaction”).  Kurz filed a complaint seeking to enjoin the transaction, but Crown rescinded the transaction prior to court action.  Kurz subsequently amended the complaint to challenge the consent disclosures (“Ratification Consent”) of EMAK.  The court unsealed the record filings to correct the disclosures because of Kurz’s action.  Crown, in response to Kurz’s proxy contest in late 2009, then began gathering consents to shrink the board from seven to three directors (“Crown Consent”); however, the court found that the Crown Consent violated Delaware law. 

The long fight for control of EMAK ended in the $2.5 million judgment awarding Kurz’s attorneys “$1.7 million for rescinding the Exchange Transaction, $400,000 for correcting the Ratification Consent disclosures, and $400,000 for invalidating the Crown Consent.”  EMAK appealed and the court applied an abuse of discretion standard, meaning a judgment will not be vacated unless the lower court’s “factual findings…are clearly wrong and justice requires it, or they are not the product of an orderly and logical deductive process.” 

The court affirmed the award connected to the rescission of the Exchange Transaction based on the corporate benefit doctrine and the mootness rule.  The doctrine allows a court to reimburse plaintiffs for fees and expenses if “(1) the suit was meritorious when filed, (2) the defendants took an action that produced a corporate benefit before the plaintiffs obtained a judicial resolution, and (3) the suit and the corporate benefit were causally related.”  The appeal did not call into question the first element.  The court explained the second element was met because protecting shareholder rights is an enormous corporate benefit and the rescission of the Exchange Transaction achieved this.  In addition, the mootness rule satisfied the third requirement since the rule created a rebuttable presumption that a suit and corporate benefit were causally related in situations where the defendant’s actions after suit was filed make the claim moot.  

The court also affirmed the award for correcting the Ratification Consent disclosures.  The lower court used the following factors to determine the award:  “(1) the results achieved, (2) the time and effort of counsel, (3) the complexity of the issues, (4) whether counsel [worked] on a contingency fee basis, and (5) counsel’s standing and ability.”  Since the benefits were sizable, the case involved complex and novel legal issues, counsel worked on a contingency basis, and counsel had good standing and ability, the Delaware Supreme Court determined the award should stand. 

Finally, the Delaware Supreme Court affirmed the award for invalidating the Crown Consent because the finding that Crown’s control of EMAK was not inevitable is supported in the record.  Crown expressed concern that Kurz might win the proxy contest which indicates Crown was not the inevitable controller of EMAK. 

The primary materials for this case may be found on the DU Corporate Governance website.

Kathryn Thomas