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Shareholder Precluded from Recovery of Attorneys’ Fees under the Substantial Benefit Doctrine in First California Case to Apply Presuit Notification Requirement in the Context of a Shareholder Action

February 8, 2010

Pipefitters Local No. 636 Defined Benefit Plan v. Oakley, Inc.

— Cal.Rptr.3d —-, 2010 WL 106499

Cal.App. 4th Dist., 2010.

January 13, 2010

In this recent decision pertaining to a plaintiff shareholder’s attempt to recover attorneys’ fees, the California Court of Appeal held plaintiff was not entitled to attorneys’ fees under the substantial benefit theory because plaintiff (1) failed to give presuit notification of the alleged wrong-doing, and (2) failed to establish that plaintiff conferred an actual and concrete gain to the company’s shareholders.  This is the first case applying the presuit notification requirement in the context of an action by a shareholder.

Eric Waxman and Peter Morrison at Skadden, Arps, Slate, Meagher & Flom LLP represented the defendants and respondents. 

Factual and Procedural Background

In 2007, defendant Oakley, Inc., (“Oakley”) announced a proposed sale of Oakley to Luxottica Group at a sizeable premium above Oakley’s average trading price. 

Less than a week after the announcement, plaintiff filed a shareholder class action lawsuit to enjoin the acquisition as unlawful and unenforceable.  Plaintiff alleged that the directors breached their fiduciary duty by failing to take all reasonable steps to maximize shareholder value and by failing to disclose all material facts concerning the proposed acquisition.  Oakley demurred and the trial court sustained with leave to amend. 

Thereafter, Oakley filed a preliminary proxy statement with the SEC.  One week later, plaintiff filed an amended complaint alleging that the proxy misstated and omitted material facts.  Once again, Oakley demurred.  Plaintiff then sent Oakley a letter discussing plaintiff’s proposed changes.  In an effort to moot plaintiff’s unmeritorious claims, Oakley made some of plaintiff’s proposed changes.  Subsequently, plaintiff dropped the lawsuit while Oakley’s demurrer was still pending. 

After Oakley filed its final proxy statement and the acquisition was approved, plaintiff filed a motion for attorneys’ fees in the range of $325,000 to $375,000.  Plaintiff claimed it produced a substantial benefit to Oakley shareholders in the form of the disclosure of additional material information related to the Acquisition.  The trial court did not agree with plaintiff and denied its motion. 

The California Court of Appeal affirmed, holding plaintiff (1) failed to give presuit notification of the alleged wrong-doing, and (2) failed to establish that plaintiff conferred an actual and concrete gain to the company’s shareholders.

Plaintiff’s Failure to Give Pre-Suit Notification Precluded Recovery of Attorneys’ Fees under The Substantial Benefit Doctrine

Here, the Oakley court explained that a “plaintiff’s fee claim arises under a catalyst theory, which allows for attorneys’ fees ‘even when litigation does not result in a judicial resolution if the defendant changes its behavior substantially because of, and in the manner sought by, the litigation.’” (citing Graham v. DaimlerChrysler Corp. (2004) 34 Cal.4th 553, 560).  However, in order to recover under this theory, “not only must the lawsuit have some merit but also ‘the plaintiff must have engaged in a reasonable attempt to settle its dispute with the defendant prior to litigation.’” (Id.).

The Oakley court extended the reasoning in Abouab v. City and County of San Francisco (2006) 141 Cal.App.4th 643, in which the Court of Appeal specifically applied Graham to fee claims under the substantial benefit doctrine.   In doing so, the Oakley court rejected plaintiff’s argument that Abouab be limited to lawsuits against public entities.

Here, plaintiff waited four weeks after filing its amended complaint to send Oakley a letter outlining its proposed changes.  Plaintiff never suggested revisions to Oakley before filing its complaint.  Thus, the Oakley court held that plaintiff did not satisfy the presuit notification requirement of the substantial benefit doctrine.

Plaintiff Did Not Confer Sufficient Benefits for Equitable Fee Shifting under The Substantial Benefit Doctrine 

Separate and apart from the lack of presuit notification, the Oakley court also affirmed the trial court’s order based on plaintiff’s failure to establish that the new material included in the proxy report warranted equitable fee shifting under the substantial benefit doctrine.  Plaintiff claimed to have secured a substantial benefit to Oakley shareholders by providing information to be used in the proxy statement.  The trial court disagreed, as did the court of appeal.  Upon review, the Oakely court did not find an abuse of discretion by the trial court.  Rather, the Oakley court noted that the changes to the final proxy statement came “by dint of nuisance and threat of expense.” (citing Graham, supra, 34 Cal.4th at 575).  Further, even if the changes to the proxy were material, that would not necessarily equate to a substantial benefit for purposes of equitable fee shifting.  Here, the court found the changes immaterial, but suggested that even material changes may not result in a fee award unless the changes constitute concrete benefits.


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