In re Genentech, Inc. Shareholders Litigation; Settlement; Objection to Fee Request by Class Counsel

I'm all in favor of generously compensating lawyers since I'm one, but the fee request of class counsel for plaintiffs in the Genectech/Roche litigation, for up to $24.5 million, strikes me as over the top. As a modest shareholder of Genentech I received notice of the settlement of the class actions (some 30 were filed the day of or shortly after Roche's initial announcement on July 20, 2008 of its intent to acquire the 45% of Genectech's shares it didn't own) and class counsels' application for an award of fees and expenses. The hearing will be held July 9, 2009, before Vice Chancellor Strine. Given Vice Chancellor Strine's close study of these types of fee requests--see his opus In re Cox Communications, Inc. Shareholders Litigation, 879 A.2d 604 (Del. Ch. 2005)--his reception of counsel's fee request will be closely watched.

I have commented on the fee application, and reprint my letter to the Court here (deleting information on my stockholding in Genentech):

"In response to the Notice of Pendency of Class Action, Proposed Class Action Determination, Proposed Settlement of Class Action, Settlement Hearing, and Right to Appear, dated May 4, 2009 (the “Notice”), I comment on one aspect of the Notice, plaintiffs’ counsels’ request for an award of up to $24,500,000 in attorneys’ fees and expenses, to be paid by Roche or Genentech. Based upon the history of the negotiations between Roche and Genentech, as laid out in Roche’s Offer to Purchase, as amended, and Genentech’s response, set forth in its Schedule 14D-9, as amended, an award of counsel fees of this magnitude would be excessive.

. . . .

A. Why Object at All?

Any award of attorneys’ fees made by the Court will be paid by Roche and/or Genentech. As a former shareholder of Genentech, I received cash for my shares. Accordingly, the economic burden of any award of counsel fees will not be borne by me (and I am not a shareholder of Roche). So what’s the point of objecting?

This question was addressed by Vice Chancellor Strine in his thorough consideration of a like fee application In re Cox Communications, Inc. Shareholders Litigation, 879 A.2d 604 (Del. Ch. 2005). The objectors to counsels’ fee application in that case likewise had no economic stake in any award of counsel fees. Nevertheless, the Vice Chancellor concluded that they did have standing to comment on the fee application:

“This is not to go to the other extreme and to say that the objectors have no standing to comment on the requested fee at all. They, of course, do. Stockholders have a cognizable interest in the integrity of the representative litigation process and in ensuring that it functions in a manner that generates benefits for its intended beneficiaries, and not windfalls to attorneys.”

Id. at 639.

B. What Benefits Did Counsel Achieve for Genentech’s Stockholders?

Where a fee award will not be borne by the plaintiff class, the factors to be considered in assessing a fee application are those listed in Sugarland Industries, Inc. v. Thomas, 428 A.2d 142 (Del. 1980). The first and most important factor, and the one I want to address here, are the “benefits achieved in the action.” Based upon the record of negotiations presented by Roche and Genentech, the benefits achieved by plaintiffs’ counsel were modest.

1. The Final Enhancement of Roche’s Offer from $93 to $95

The casual reader could be forgiven for concluding, based upon the background description in the Notice, that plaintiffs’ counsel played a significant role in the final enhancement of Roche’s offer from $93 to $95 a share (an increase that generated in excess of $1 Billion for the non-Roche shareholders of Genentech).

“After the Second Stipulation was approved [on March 11, 2009], during the late evening on March 11, 2009 and early morning on March 12, 2009, counsel to Roche and Co-Lead Counsel again discussed possible grounds on which to settle the Action. Co-Lead Counsel again expressed their view that the optimal outcome for Genentech’s stockholders was for Roche and Genentech to enter into a negotiated merger agreement, pursuant to which all Genentech stockholders would receive the same price per share. Co-Lead Counsel also expressed their view that Roche should increase its offer price from $93.00 per share. Co-Lead Counsel also indicated that, if Roche increased its offer to $95.00 per share, Co-Lead Counsel would support an amendment to the Affiliation Agreement to exclude such a merger from the Affiliation Agreement, so as to ensure that all Genentech stockholders would receive the same price per share, without affecting their appraisal rights under section 262 of the Delaware General Corporation Law.”

Notice at 7.

In their discussion of the settlement and their “participation in the settlement,” class counsel list, as one of the actions taken by Roche (impliedly at the behest of class counsel):

“G. During conversations with counsel to Roche during the late evening on March 11, 2009 and early morning on March 12, 2009, Co-Lead Counsel indicated that, if Roche increased its offer to $95.00 per share, Co-Lead Counsel would support an amendment to the Affiliation Agreement to exclude such a merger from the Affiliation Agreement, so as to ensure that all Genentech stockholders would receive the same price per share, without affecting their appraisal rights under section 262 of the Delaware General Corporation Law.”

Notice at 9.

But a review of the record as stated by Genentech and Roche paints a different picture. What broke the dam on this deal was Roche’s unilateral increase in its offer from $86.50 per share to $93.00 per share, announced on March 6, 2009. That significant increase in the offer price led Genentech’s Special Committee (headed by Dr. Sanders, Genentech’s Lead Director, and advised by Goldman Sachs and Latham & Watkins) to conclude it was time to cut a deal. And a deal quickly followed:

“On March 8, 2009, Drs. Sanders and Humer [Roche’s CEO] had a series of telephone conversations in which they discussed a price at which the Special Committee would recommend a transaction with Roche pursuant to a negotiated agreement. Dr. Sanders stated his belief that the Special Committee would be willing to support a transaction at a price in the high $90s. At the end of these conversations, Drs. Sanders and Humer agreed that Roche and the Special Committee would be prepared to enter into a transaction pursuant to which Roche would offer to acquire the Shares held by the Company’s public stockholders at a price of $95.00 per Share.”

Genentech’s Schedule 14D-9 (Amendment No. 5), dated March 12, 2009, at 6.

Roche’s description is more succinct:

“On March 8, 2009, Dr. Franz B. Humer, Chairman of Roche, received a call from Dr. Charles A. Sanders, Chairman of the Special Committee. They discussed a range of possible transaction prices and agreed to pursue negotiations concerning a transaction at $95 per Share.”

Roche’s Second Supplement to Offer to Purchase for Cash, dated March 12, 2009, at 7.

If Genentech’s and Roche’s recitations are to be believed, then Roche’s offer price was set at $95 per share on March 8, 2009, making counsel’s discussions with Roche’s counsel over price on March 11 and March 12 irrelevant to the final agreement. Plaintiff’s counsel, therefore, should be given no credit or “benefit” for the $95 per share offer price.

2. The Affiliation Agreement

Genentech and Roche were parties to an Affiliation Agreement, entered into in 1999. The Agreement imposed certain conditions upon any Genentech/Roche merger or like combination, including (i) that the transaction receive the favorable vote of a majority of the Genentech shares not held by Genentech, and (ii) in the event that such a favorable vote were not obtained (or no vote were required, such as in a short-form merger), then the consideration to be paid to the Genentech shareholders would “be equal to or greater than the average of the means of the ranges of fair values for the Shares as determined by two investment banks of nationally recognized standing appointed by a committee of independent directors.” Genentech’s Schedule 14D-9, dated February 23, 2009, at 2.

This provision created a speed bump for any Roche/Genentech short-form merger, both by reason of the delay that would be inherent in securing the bankers’ valuations, and because, theoretically, those valuations could be below or greater than the consideration paid by Roche for Genentech’s other shares pre short-form merger. Presumably (I have not reviewed the Affiliation Agreement), the Affiliation Agreement, being a two-party agreement, could be amended to remove this speed bump. And this is what the parties did, in order to provide speed and certainty as to the consideration payable to the Genentech shareholders in any short-form merger following Roche’s tender offer (and Genentech granted Roche a top-up option, at Roche’s insistence, to ensure that Roche got the 90% of Genentech’s shares after completion of its tender offer (assuming it were accepted by a majority of Genentech’s unaffiliated shareholders). As Genentech acknowledged in its March 12th Amendment to Schedule 14D-9, the amendment to the Affiliation Agreement did carry the risk of depriving the Genentech shareholders in any short-form merger of the possibility of a price higher than $95:

“While the Special Committee recognized that a non-tendering stockholder could potentially receive more than $93.00 per Share if Roche owned 90% or more of the Shares following consummation of the $93.00 Offer, it concluded that the higher price of $95.00 per Share and the certainty that it would be received by all of the public stockholders (assuming a majority of the Shares held by the company’s public stockholders were tendered into the Revised Offer) provided by the Merger Agreement was in the best interest of the Company’s stockholders, other than Roche and its affiliates.”

Id. at 8.

From the get-go, Roche promised, if it secured 90% or more of Genentech’s outstanding shares, to proceed to a short-form merger and pay the same offer price to the remaining Genentech shareholders that it offered to the other non-affiliated Genentech shareholders, “subject to compliance with the Affiliation Agreement between us and Genentech.” Roche Offer to Purchase for Cash, dated February 9, 2009, at 3.

Plaintiffs’ counsel’s objections to the Affiliation Agreement appear to be quibbles, namely, that the provision above quoted from the Affiliation Agreement could delay payment and did not provide assurance of the same price to the remaining stockholders as offered to the other Genentech stockholders. This was solved by the amendment agreed to by Roche and Genentech, an amendment clearly predictable once a deal was cut, given the sophistication of the Roche and Genentech advisors and their experience and competence in doing deals.

3. Other Purported Benefits

The other benefits achieved by plaintiffs’ counsel appear to be trivial or unnecessary. Thus, plaintiffs’ counsel secured in the First Stipulation acknowledgements from Genentech that it had either publicly stated or were noncontroversial, such as that the Affiliation Agreement and Genentech’s Certificate of Incorporation did not limit the Genentech board’s liability for breaches of the duty of loyalty (cf. Del. GCL § 102(b)(7)(i)), or that the Affiliation Agreement did not “eliminate or limit any statutory or common-law requirements for the consummation of a business combination involving Roche and Genentech; . . .” Notice at 5.

_________________________

Genentech’s board of directors, particularly the Special Committee, and the Special Committee’s advisors, demonstrated considerable skill and savvy in their negotiations with Roche. Through their efforts, the Roche Offer was increased from $86.50 per share to $95.00 per share. With respect to these negotiations, plaintiffs’ counsel played the role of sidewalk superintendents. For this role an award of $24,500,000, or anything approaching it, would be clearly excessive."