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COOPERSTOCK v. PENNWALT CORP.

April 21, 1993

BEN COOPERSTOCK, DANIEL LIFSHITZ, ARA c/o STEVEN ROBINSON, BARNETT STEPAK and GARY GOLDBERG, Plaintiffs,
v.
PENNWALT CORPORATION, et al., Defendants.



The opinion of the court was delivered by: BY THE COURT; ROBERT S. GAWTHROP, III

 Gawthrop, J.

 April 21, 1993

 Petitioners, Stuart H. Savett, Esquire and Stanley R. Wolfe, Esquire, have filed an application for attorneys' fees and reimbursement of expenses in the amount of $ 468,650.27 and an order dismissing the action without prejudice as moot. The fee application stems from a derivative action brought by class action plaintiffs, former shareholders of Pennwalt Corporation ("Pennwalt"), requiring Pennwalt to negotiate with Centaur Partners, a hostile bidder for Pennwalt shares, or to take other steps to maximize shareholder value. Petitioners claim that as a result of pressure upon Pennwalt from plaintiffs' action and the one filed by Centaur Partners, Pennwalt found a "white knight," *fn1" thereby mooting plaintiffs' claims. Petitioners now seek compensation for their role in helping Pennwalt shareholders obtain the ultimate benefit which they received as a result of Pennwalt's merger with Societe Nationale Elf Aquitaine ("Elf").

 Since it is undisputed that the action became moot by the merger between Pennwalt and Elf, I shall grant petitioners' motion to dismiss this action without prejudice. So also shall I grant the motion for attorneys' fees and expenses, upon the following reasoning.

 BACKGROUND

 On December 12, 1988, Centaur Partners announced a hostile cash tender offer, *fn2" starting the next day, for all of Pennwalt's outstanding common stock, at a price of $ 100 per share. *fn3" Three days after the tender offer was announced, class plaintiffs filed this derivative action against Pennwalt and its directors, among others. In their complaint, Count I and II challenged the constitutionality of Sections 611 & 911 of the Pennsylvania Business Corporation Law ("PBCL") and the Pennsylvania Takeover Disclosure Law; *fn4" Count III sought to invalidate Pennwalt's shareholder rights plans (referred to as "poison pills"); *fn5" and Count IV alleged that Pennwalt's directors breached their fiduciary duties by adopting and maintaining the poison pills and refusing to negotiate with Centaur or to take other steps to maximize shareholder value.

 Simultaneous with the announcement of the tender offer, Centaur Partners and related entities (collectively referred to as "Centaur") filed an action against Pennwalt and its directors, among others, asserting, inter alia, similar claims as Pennwalt. In January 1989, Centaur solicited consents from the shareholders, demanding a special meeting for the purposes of removing the current board. In response, Pennwalt filed a motion for a temporary restraining order requesting, inter alia, an order temporarily enjoining Centaur from taking any steps to facilitate solicitation of Pennwalt's shareholders or from calling a special meeting of the shareholders. All parties, including class plaintiffs, appeared before this court. This court denied Pennwalt's motion on February 10, 1989, and allowed the special shareholders' meeting to proceed.

 Pennwalt ultimately found a white knight, Elf, which acquired all of Pennwalt's outstanding common stock at $ 132-per-share. After the agreement between Pennwalt and Elf, petitioners attempted for some time to negotiate with Elf for the payment of their attorney fees. That did not bear fruit, which brings the matter before me.

 DISCUSSION

 I. Standard of Review for Attorneys' Fees

 While the "American Rule" requires that each party to a litigation bear its own legal fees and expenses, these fees may be awarded where the attorney has conferred a benefit on others through undertaking the risks and expense of bringing suit. Mills v. Electric Auto-Lite Company, 396 U.S. 375 (1970); Kahan v. Rosenstiel, 424 F.2d 161 (3d Cir.), cert. denied, 398 U.S. 950 (1970). This well recognized exception, known as the "common benefit" or "common fund" equitable doctrine, is premised upon the rationale that it would be unfair to require one party to bear the entire expense which results in the benefit to a large class of persons. Boeing Co. v. Van Gemert et al., 444 U.S. 472 (1980). To prevent this inequitable result, a court may assess fees against the entire fund and thereby spread the litigation costs proportionally. Id. at 478. The award of attorneys' fees is not limited to circumstances in which there is a monetary fund from which fees may be paid, but extends to any situation in which the litigation has "conferred a substantial benefit on the members of an ascertainable class." Mills, 396 U.S. at 393-394; Kahn, 424 F.2d at 166.

 Where defendant takes steps to moot a derivative action, plaintiffs should be awarded fees if: 1) the action was "meritorious" at the time of filing, 2) a substantial benefit was conferred to an ascertainable class, and 3) a causal connection existed between the action and the benefit. See Mills, 396 U.S. 375 (1970); Kahn, 424 F.2d at 167; Joy Mfg. Corp. v. Pullman-Peabody Co., 729 F.Supp 449, 454 (W.D.Pa. 1989). If plaintiff can demonstrate these two elements - merit and substantial benefit - the burden then shifts to the defendant to prove that the lawsuit did not in any way cause their action which ultimately rendered the suit ...


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