(CN) - The Delaware Supreme Court confirmed a $2.5 million attorney fee award ordered by the Delaware Chancery Court in a case where EMAK Worldwide Inc. shareholders sued the company in order to preserve shareholder voting rights.
The award came after a lengthy, "back and forth" dispute between common and preferred shareholders of EMAK, with former EMAK CEO Donald Kurz, who holds over 1.4 million of EMAK's 7 million plus shares, leading the charge, which ended in EMAK filing for Chapter 11 bankruptcy protection and a reorganization of the company.
"The record supports the Vice Chancellor's factual finding that the voting rights preserved by the litigation were meaningful, and we decline the invitation to fine tune the amount he awarded," wrote Supreme Court Chief Justice Myron T. Steele for the panel.
Kurz filed the suit in Delaware Chancery Court after the company's stock fell from $11 on the NASDAQ to $0.21 under James Holbrook, the company's CEO since 2005. Kurz began his effort to retake the company in 2008, spurring Crown EMAK Partners LLC, which bought EMAK's preferred stock for $25 million in 2000, to demand par redemption of those shares, complete with a threat of litigation, leading to negotiations between EMAK and Crown.
"In 2009, EMAK and Crown negotiated for Crown to exchange its old preferred shares with new preferred shares with no right to appoint unilaterally two directors, but could vote on an as-converted basis on all matters, including directors' elections (Exchange Transaction)," the ruling states.
Kurz sued, looking to rescind and enjoin the exchange transaction, which EMAK and Crown ultimately did on their own, mooting Kurz' claim. Kurz, however, moved forward with other claims.
"Kurz filed an amended complaint, challenging inter alia, EMAK's ratification consent disclosures and the litigation proceeded on these and other claims, counterclaims and third-party complaints," Steele states. "On December 4, 2009, the Vice Chancellor unsealed EMAK's record filings, and Kurz asserted that the information in them corrected EMAK's disclosures."
Crown then moved to shrink EMAK's board from seven members to three, according to the ruling.
"If the Crown consent had succeeded, Crown would have controlled EMAK's board because if could have unilaterally appointed two directors," Steele said. "In his Kurz decision, the Vice Chancellor found that the Crown consent violated the DGCL, and we affirmed, in relevant part. Nevertheless, Crown delivered a second consent to shrink EMAK's board to three members at the annual meeting."
Steele said Kurz's attorney, Bouchard Margules & Friedlander submitted the fee application and were awarded a total of $2.5 million for rescinding the exchange transaction, correcting the ratification consent disclosures and for invalidating the crown consent. The lower court "found that EMAK's rescission of the exchange transaction and the judgment against the crown consent benefited all EMAK shareholders by assuring a free election, and that Crown's control was not inevitable," the ruling states.
EMAK filed for bankruptcy August 6, 2010, but emerged from it June 30, 2011 "with the obligation to pay the award intact, although the plan eliminated the pre-bankruptcy common shareholders and issued Crown all the common and preferred shares in the reorganized company."
All other EMAK operating subsidiaries were excluded from the voluntary bankruptcy, including Equity Marketing, Logistix, its Neighbor and Upshot agencies and its operations in Asia
The Vice Chancellor made the interim judgment final on September 20, 2011 and EMAK appealed, but the Supreme Court upheld the Chancery Court's decision.
"Shareholder voting rights are sacrosanct," the opinion states. "The fundamental governance right possessed by shareholders is the ability to vote for the directors the shareholder wants to oversee the firm. Without that right, a shareholder would more closely resemble a creditor than an owner. Shareholders have limited opportunities to exercise their right to vote. When plaintiff's counsel obtains a corporate benefit by protecting shareholder voting rights, the benefit's size does no depend on the corporation's monetary value. The Vice Chancellor correctly found that the Kurz and Crown litigation produced a corporate benefit by preserving the EMAK shareholders' voting rights."