By Tom Hals and Jonathan Stempel
WILMINGTON, Delaware (Reuters) -Five law firms should receive $267 million in legal fees for obtaining a $1 billion settlement for shareholders of Dell Technologies (NYSE:DELL), the Delaware Supreme Court ruled on Wednesday, rejecting arguments that the payment was a windfall.
The fee is one of the largest ever for U.S. shareholder litigation.
A Delaware trial court is weighing two other requests for huge legal fees, both in cases involving Tesla (NASDAQ:TSLA), and the ruling contained language that might be seen as helpful for the carmaker's efforts to fight those fees.
Plaintiffs in the Dell case alleged that they and other shareholders were short-changed in a controversial $23.9 billion transaction in 2018 that marked Dell's return as a publicly traded company.
The settlement was announced in November 2022, averting a trial scheduled to begin the next month.
Last year, a Court of Chancery judge awarded the $267 million fee paid from the settlement to the five law firms that brought the lawsuit, including Labaton Keller Sucharow and Quinn Emanuel Urquhart & Sullivan, finding it in line with Delaware legal precedent.
But a group of large investors led by Pentwater Capital Management asked Delaware's top court to reduce the fee and base it on a model used in federal courts.
As settlements of federal securities litigation grow in size, the percentage awarded in attorneys' fees generally declines.
In the 10 largest federal securities cases, lawyers collected on average less than 10% of the recoveries as fees, compared with 27% in the Dell case, according to Pentwater.
Chief Justice Collins Seitz said the potential for large fees gives lawyers an incentive to take tough cases, and risk getting paid nothing if they lose.
“It was a highly contentious litigation, spanning two and a half years, with nearly 100 lawyers entering appearance for the defense,” Seitz wrote. ”The underlying transaction was complex, and counsel achieved an excellent settlement for the class on the eve of trial.”
The fee in the Dell case is the second largest in Delaware and would rank fifth largest in federal securities litigation, according to data from Stanford Law School cited in Pentwater's court filings.
Delaware is the legal home to a majority of U.S. publicly traded companies.
This in part reflects the predictability of its court system, which relies on specialized judges instead of juries in shareholder litigation, but the courts' approach to legal fees has been a point of contention for business groups.
Seitz warned that huge fee awards can become windfalls. He said it was legitimate to ask "whether the public would ever believe that lawyers must be awarded many hundreds of millions of dollars in any given case to motivate them to pursue representative litigation or to discourage counsel from settling cases for less than they are worth."
Tesla is fighting fee requests for $230 million in a case that alleged its directors were overpaid and around $7 billion in a case challenging CEO Elon Musk's $56 billion pay package.
Those fee requests work out to hourly rates of $10,690 and more than $280,000, according to the attorneys that requested the payments.
The hourly rate in the Dell case came out to $5,000, which Seitz described as "at the high end."
The judge in the Tesla cases, Chancellor Kathaleen McCormick (NYSE:MKC), has not said when she will rule on the fee requests.
The shareholder law firms in the Dell case are Labaton Keller Sucharow, Quinn Emanuel Urquhart & Sullivan, Friedman Oster & Tejtel, Andrews & Springer, and Robbins Geller Rudman & Dowd. The defendants were represented by nine law firms.