In In re Nine Systems Shareholders Litigation, (Del. Ch. May 7, 2015), the Delaware Court of Chancery faced the difficult task of deciding an appropriate fee award where the defendants engaged in disloyal, bad-faith conduct, but the plaintiffs failed to prove damages. The plaintiffs proved at trial that the defendants breached their duty of loyalty to plaintiffs by conducting a self-interested recapitalization. Among other things, the defendants “utterly failed” to understand their fiduciary relationship with the plaintiffs, employed a “grossly inadequate process” and sought to avoid full and fair communications with the company’s stockholders. Based on this wrongdoing, the court found the defendants engaged in bad-faith pre-litigation conduct that warranted fee-shifting in the amount of $2 million.
Analysis
The plaintiffs, who were minority stockholders, sought damages related to a 2002 recapitalization of the company (Streaming Media Corp., later known as Nine Systems) that increased the equity of certain defendants (officers and directors of the company) and correspondingly diluted the plaintiffs’ equity. The plaintiffs alleged that, at the time of the recapitalization, the company was worth $30.89 million. In 2006, the company was sold for approximately $175 million, and the plaintiffs sought damages of over $130 million. Although, as noted above, the court found that the defendants breached their duty of loyalty to the plaintiffs, no damages were awarded, as the equity value of the company at the time of the recapitalization was $0.
