Deal lawyers deserve rewards for sound judgment

Money talks 20 September 2012 | By Reynolds Holding The Supreme Court of Delaware set a Sept. 24 deadline for filing documents in Grupo Mexico’s effort to avoid paying $304 million in fees to lawyers who won a $2 billion judgment against the mining giant. Grupo Mexico was found liable for abusing its controlling stake in Southern Copper to force that company’s board to approve an excessive purchase price for Minera Mexico, which Grupo Mexico owned. Delaware Chancery Court judge Leo Strine ruled last October that the deal was unfair and based on a questionable valuation by Goldman Sachs, the financial adviser in the deal. The legal fee, one of the largest in Delaware history, is about 15 percent of the total judgment. The state’s Supreme Court upheld the fee in August, and Grupo Mexico on Sept. 11 asked the judges to rehear arguments on whether the payout was properly calculated. Deal lawyers deserve rewards for sound judgment. Delaware’s Supreme Court upheld a whopping $304 million payout to attorneys who wrested $2 billion from Grupo Mexico over a dodgy transaction. The company wants a fresh hearing on the fees, but judges should demur. With weak M&A lawsuits on the rise, monetary incentives should encourage stronger ones. The Grupo Mexico case was especially solid. The mining giant asked Southern Copper, which it controlled, to take another firm off its hands. The valuation came in low, so Grupo Mexico, with the help of Goldman Sachs, goosed it to the desired amount. Southern Copper’s shareholders won a ruling on the company’s behalf after proving the price was wildly excessive. Delaware’s high court affirmed the legal fee as a reasonable 15 percent, rather than the typical one-third, of the $2 billion awarded to Southern Copper. Grupo Mexico argues its 81 percent stake in the company means it will, in effect, be paying most of that money to itself. Only minority shareholders will truly profit, it says, so the legal fee should be based solely on the amount they receive. In this sort of lawsuit, however, Southern Copper gets paid directly. Shareholders may eventually see the money, but legally it’s the company that receives the full “benefit achieved.” The court ruled appropriately. What’s more, the number of state cases questioning deals is soaring, more than quintupling from the volume in 1996 to more than 260 in 2010, according to a recent Lewis & Clark Law School study. To discourage the many dubious ones, Delaware judges are slashing legal fees awarded. For example, a 2008 challenge to National City’s merger with PNC Financial Services produced little more than additional disclosure. So attorneys got two-thirds less than they expected. The stick benefits from a carrot. Granting lawyers substantial payouts in strong cases promotes worthwhile litigation. There may be better ways to enforce good corporate governance, but courts must work with the laws they have. While the Grupo Mexico fee amounts to a heady $35,000 an hour, it nevertheless sends a powerful - and useful - message.