In The Williams Companies, Inc. v. Energy Transfer LP, C.A. No. 12168 & 12337, 2022 WL 3650176 (Del. Ch. Aug. 25, 2022), the court held that the fee shifting provision in the parties’ merger agreement permitted plaintiff’s counsel to add its contingent fee to its client’s liquidated damages award in litigation over a busted merger.
The Williams Companies and Energy Transfer had entered into a merger agreement. The Williams Co., 2022 WL 3650176 at *1. That agreement contained a fee-shifting provision allowing the prevailing party to collect its “reasonable” attorneys’ fees and costs in any litigation to enforce the agreement. Id. When Energy Transfer sought to terminate the merger, The Williams Companies sued to force Energy Transfer to complete the deal. Id. The court declined to enjoin Energy Transfer from terminating the merger, and the case became one about damages. Id. At that point, The Williams Companies and their counsel, Cravath, Swain & Moore, agreed to convert their fee agreement from an hourly agreement to a contingent one, giving Cravath a 15% stake in the case. Id. at *2. The Williams Companies prevailed at trial and were awarded $410 million in liquidated damages, plus compound interest. Id. at *2-3.
The court then held that Cravath was entitled to recover—and Energy Transfer was obligated to pay—contingent legal fees totaling about $75 million. The court held that the merger agreement’s fee-shifting provision permitted the shifting of a contingent fee because the parties knew or should have known when they drafted the agreement that Delaware law permitted contingent fee representations in merger litigation. Id. at *3. The parties, who were large corporations represented by sophisticated counsel, could have drafted their fee-shifting provision to exclude contingent fees, but they did not. Id.
The court further determined that the use of a contingent fee in this case was proper. Energy Transfer argued that the fee was unreasonable as a matter of public policy because, unlike prior cases in which Delaware courts had permitted such arrangements, the contingent fee in this case was not necessary for The Williams Companies to be able to afford the litigation. Id. at *4. But the court found that substantial risk remained in the litigation, and the switch to a contingent fee arrangement reflected a reasonable business decision to align the interests of the company and its counsel at a critical stage of the case. Id. The court observed that if the switch had been made at a later stage when victory was all but assured, it might have constituted an unenforceable attempt by the company to punish its adversary. Id.
The court also held that Cravath’s $75 million fee award was reasonable under Delaware law. A 15% contingent interest was reasonable in light of the courts’ prior approval of contingent fees as high as 33%. Id. And the dollar value of the fee constituted a reasonable multiple of 1.7 times Cravath’s lodestar—its blended hourly rate multiplied by the number of billable hours devoted to the case—of roughly $47 million. Id. at *4-5.
This decision could have important implications in the negotiation of merger agreements, and will likely affect how law firms and their clients seek to optimize the allocation of risk at various stages of litigation.