Cravath wins $75 mln contingency fee award in busted merger case

Signage is seen on the exterior of the building where law firm Cravath, Swaine & Moore LLP are located in Manhattan, New York City
Signage is seen on the exterior of the building where law firm Cravath, Swaine & Moore LLP is located in Manhattan, New York City, U.S., August 17, 2020. REUTERS/Andrew Kelly

(Reuters) - Who says contingency fees are only for plaintiffs' firms?

Certainly not Cravath, Swaine & Moore. On Thursday, the firm won a Delaware Chancery Court ruling that Cravath is entitled to a big, fat $74.8 million contingency fee for obtaining a $410 million breakup fee for The Williams Cos Inc after Energy Transfer LP ditched their $33 billion merger. And because the merger agreement between Williams and ETE included a fee-shifting provision, Vice Chancellor Samuel Glasscock ruled, ETE is on the hook for Cravath’s $75 million fee award.

Cravath’s lodestar billings for representing Williams in Delaware Chancery Court over the past five years were about $47 million, according to the firm's fee request. ETE’s lawyers at Vinson & Elkins contended that even those lodestar fees were unreasonable, in light of its own more modest $25 million in legal bills to ETE. (Cravath’s blended hourly rate in the Williams case was $624. V&E’s was $473.) ETE proposed that Cravath deserved just $28 million in fees.

Glasscock said Cravath’s $47 million lodestar was not unreasonable, given that Williams’ evidentiary burden was much heavier than ETE’s in the breakup fee litigation. And — more significantly — the vice chancellor also ruled that Cravath’s 15% contingency fee deal with Williams was reasonable.

Cravath and Williams struck that agreement in 2017, after Williams lost its bid to force ETE to complete the $33 billion merger. At that point, the litigation shifted to a fight over the appropriate termination fee. (Williams had previously defeated an ETE counterclaim for a $1.48 billion breakup fee.) Williams’ then-new general counsel, former federal magistrate judge Lane Wilson, proposed a contingency fee deal with Cravath in order to align the interests of the company and its outside counsel.

ETE apparently tried to cast a cloud over the circumstances of that 2017 agreement. Unfortunately, ETE’s brief opposing the Cravath contingency fee was filed under seal and a public version is not available in the case docket. ETE counsel Michael Holmes and Craig Zieminski of V&E did not respond to my email, which included a request for the opposition brief. But Cravath’s reply brief in support of its contingency fee request recounts – and rebuts – ETE’s speculation that Cravath accepted its client’s fee proposal “to save face with Williams” after failing to force ETE to close the deal. Cravath’s reply brief cited depositions in which the Williams GC and Cravath partner Antony Ryan testified that Cravath agreed to the deal because the firm decided that it made economic sense to assume additional risk. (Alas, the depositions, like ETE’s brief, are under seal.)

Cravath’s risk clearly paid off in Thursday’s decision: The firm’s $75 million contingency fee is nearly $30 million more than its $47 million in lodestar billings.

Ryan said in an email that the firm was pleased with Glasscock's ruling, which also awarded Williams compounded interest dating back to 2016 on the $410 million breakup payment. "The interest and fee awards make Williams whole by putting it in the position it would have been in if ETE had paid the termination fee in June 2016, as the parties contracted,” Ryan said.

Glasscock said his fee decision was dictated by the merger agreement that Williams and ETE signed back in 2015. The agreement included a fee-shifting provision that required ETE to pay reasonable legal fees to Williams if Williams successfully sued for a termination payout. The only restriction, according to the contract, was that Delaware courts deem the fee demand to be reasonable.

The contractual fee-shifting provision did not specifically address the possibility of a contingency fee. And at the time Williams and ETE signed the deal, Delaware courts had not yet addressed whether contingency fees are permissible under fee-shifting contracts. But Glasscock said longstanding Delaware precedent had already established, at the time of the 2015 agreement, that contingency fees can be deemed reasonable under Delaware rules. So Williams and ETE, the judge said, knew that contingency fees were not automatically barred when they agreed to the 2015 fee-shifting provision.

As it happens, Delaware courts have since held specifically that contingency fees are permissible under fee-shifting provisions. In 2021, as I reported at the time, Chancellor Kathaleen McCormick ruled that Shire US Holdings Inc owed more than $20 million to Keker, Van Nest & Peters under Keker’s contingency fee deal with former shareholders of a biopharmaceuticals company who successfully sued Shire for failing to pay a $45 million post-merger distribution. The Delaware Supreme Court affirmed the chancellor’s ruling in a one-sentence order in November 2021.

ETE’s lawyers at Vinson & Elkins tried to distinguish Cravath’s contingency fee deal with Williams from Keker’s agreement in the Shire case. According to Glasscock, ETE emphasized McCormick’s holding that Keker’s contingency fee served public policy interests because the firm’s clients might not otherwise have been able to fund their litigation against Shire. ETE, Glasscock said, argued that Williams and Cravath had no such public policy justification for their deal, since Williams has never suggested that it could not pay Cravath without offloading risk onto the law firm.

Glasscock said that was not a “principled basis” to draw lines between the Cravath and Keker fee deals. “In Shire, the plaintiff made a business judgment to switch to a contingent fee because it could not otherwise fund the litigation,” he wrote. “Here, Williams’ general counsel likewise made a business judgment to switch to a contingent fee to ‘align Cravath and Williams [as] partners in this litigation.’”

Will other M&A litigation firms follow the lead of Keker and Cravath now that it’s clear they can collect big contingency fees from opponents under contractual fee-shifting provisions? I’m sure Cravath’s $30 million windfall will at the very least make other M&A shops think twice about sharing risk with their clients.

One final note: Cravath apparently regards itself as an innovator on contingency fee deals. Its reply brief highlighted the firm’s “extensive experience with similar arrangements,” and Cravath partner Ryan apparently testified in his (sealed) deposition about other cases Cravath has litigated on a contingency basis. I’d sure love to know what those cases were, but the names are redacted from Cravath’s brief.

Read more:

Energy Transfer must pay Williams $410 mln for abandoning $33 bln merger

Chancery Court says Shire owes $20 million in contingency fees to Keker - though deal wasn't with Shire

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Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A Dartmouth college graduate, she has worked as a journalist in New York covering the legal industry and the law for more than three decades. Before joining Reuters, she was a writer and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin.