STATE OF NORTH CAROLINA

In Re Wachovia S’holders Litig., 2003 NCBC 10

STATE OF NORTH CAROLINA		IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION
FORSYTH COUNTY
In Re Wachovia Shareholders Litigation 01 CVS 4486 [Consolidated with 01 CVS 4810; 01 CVS 4748; 01 CVS 4868; 01 CVS 5163; 01 CVS 6893; 01 CVS 10641; 01 CVS 10075]
COUNTY OF GUILFORD
HARBOR FINANCE PARTNERS, derivatively on behalf of Wachovia Corporation, Plaintiff, v. JAMES S. BALLOUN, PETER C. BROWNING, W. HAYNE HIPP, LLOYD U. NOLAND, III, DONA DAVIS YOUNG, LESLIE M. BAKER, JR., THOMAS K. HEARN, JR., ELIZABETH VALK LONG, MORRIS W. OFFIT, JOHN C. WHITAKER, JR., F. DUANE ACKERMAN, JOHN T. CASTEEN, III, GEORGE W. HENDERSON, III, ROBERT A. INGRAM, GEORGE R. LEWIS and FIRST UNION CORPORATION, Defendants, and WACHOVIA CORPORATION, Nominal Defendant.		01 CVS 8036

ORDER AND OPINION

{1} These two related cases, a class action (In Re Wachovia Shareholders Litigation) and a derivative suit (Harbor Finance Partners, derivatively on behalf of Wachovia Corporation v. James S. Balloun et al.), arise out of litigation commenced when First Union Corporation (“First Union”) and Wachovia Corporation (“Wachovia”) announced a proposed merger. The consolidated class action cases have been dismissed on a Consent Motion To Dismiss All Consolidated Actions As Moot. The shareholder plaintiffs in that action have filed a Motion For An Order Granting Their Application For Counsel Fees and Expenses.

{2} Defendants have moved to dismiss the Harbor Finance action for failure to comply with N.C.G.S. § 55-7-42. Counsel for Harbor Finance requested that the case not be dismissed without giving them the opportunity to apply for attorney fees and expenses. With the Court’s permission, they filed a fee petition after the hearing on Wachovia’s motion to dismiss.

{3} The pending motions, together with the motion for attorney fees in the In Re Quintiles Transnational Shareholder Litigation decided today, raise fundamental questions of corporate governance and require the Court to consider how best to balance the conflicting needs to protect shareholder interests and maintain rational transaction costs in mergers and acquisition litigation. The Court concludes that the fairest, most efficient and economical procedure is close judicial management of the class action process coupled with a recognition that attorney fees may be paid in connection with those cases. However, the Court recognizes that there is legitimate contention that its decision to award attorney fees where there is no common fund may represent a departure from existing common law rules. Accordingly, the Court urges the North Carolina Supreme Court to grant discretionary review to determine the important questions of law presented by these motions if presented with a petition. The Court also believes that its determination of the standard for determination of attorney fees is a subject ripe for review by the appellate courts. The two determinations are interdependent to the extent that the criteria for awarding attorney fees impacts the transaction costs the trial court considers in determining the best method of protecting shareholder rights in merger and acquisition cases. The Court dismisses the Harbor Finance case both for failure to comply with the statutory procedure and for failure to prosecute what are now moot claims. This Court declines to award any attorney fees or expenses to counsel for Harbor Finance in the derivative action for the separate reasons set forth below.

Wilson & Iseman, L.L.P., by G. Gray Wilson (Co-Lead Counsel) and Linda L. Helms; Abbey Gardy, LLP, by Arthur N. Abbey, Stephen T. Rodd (Co-Lead Counsel) and Stephanie D. Amin; McDaniel, Anderson & Stephenson, LLP by L. Bruce McDaniel; Cauley Geller Bowman & Coates, LLP, by Howard K. Coates, Jr. and Jonathan M. Stein; Schriffrin & Barroway, LLP by Marc A. Topaz and Gregory Castaldo; Chitwood & Harley by Martin D. Chitwood, Jeffrey H. Kronis and M. Krissi Temple; Kantrowitz, Goldhamer & Graifman, P.C.; Malcolm & Schroeder, L.L.P. by John G. Malcolm and Robert F. Schroeder; Finkelstein, Thompson & Loughran by Burton Finkelstein and Jessica F. Whitehurst; The Finnell Firm by Robert Finnell; Clark, Bloss & McIver, P.L.L.C., by John F. Bloss; Kirby McInerney & Squire, L.L.P., by Ira M. Press; Bernstein, Liebhard & Lifshitz, LLP: for Wachovia shareholder plaintiffs.

Donaldson & Black, P.A. by Arthur J. Donaldson and John T. O’Neal; The Brualdi Law Firm by Richard B. Brualdi and Kevin O’Brien: for Plaintiff Harbor Finance Partners.

Robinson, Bradshaw & Hinson, P.A. by Robert W. Fuller and Katherine G. Maynard; Deputy General Counsel Francis Charles Clark: for Defendant First Union Corporation, n/k/a Wachovia Corporation.

Bell, Davis & Pitt, P.A. by William K. Davis; Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P. by James T. Williams, Jr.: for Defendants Wachovia Corporation, Leslie M. Baker, Jr., James S. Balloun, Peter C. Browning, W. Hayne Hipp, Lloyd U. Noland, Dona Davis Young, Thomas K. Hearn, Jr., Elizabeth Valk Long, John C. Whitaker, Jr., F. Duane Ackerman, John T. Casteen III, George W. Henderson, III, Robert A. Ingram and George R. Lewis.

Kilpatrick Stockton, L.L.P. by J. Robert Elster and Richard S. Gottlieb for Defendant Morris W. Offit.

{4} These motions raise the question of how the North Carolina courts will control the agency costs, including litigation expenses, associated with the merger or sale of the modern American corporation which has a large and dispersed shareholder base. The control of those agency costs has been the focus of much study by corporate law scholars for many years, most recently in a comprehensive work paper prepared by Robert B. Thompson and Randall S. Thomas for the Columbia Center for Law and Economics.[1] They postulate the question this way:

The key policy question is how to properly balance the positive management agency cost reducing effects of shareholder litigation against the often-maligned litigation agency costs. Some tradeoffs between the two are inevitable, but where the proper balance should be struck is important if litigation is to be a significant force in bringing about good corporate governance.[2]

{5} These cases present a unique opportunity for our courts to address that balance. They arise at a time when the importance of sound corporate governance to the health of our capital markets is a matter of national concern.[3] The juxtaposition of the class action, the derivative action and a suit by a competing bidder in the setting of one merger transaction, combined with the attorney fees sought by counsel for both class and derivative plaintiffs, sharply focuses the Court’s attention on the competing interests and costs. Nowhere is the cost balancing more difficult than in a merger transaction challenged by a third party bidder for the company to be acquired. In those situations, as here, the third party bidder (here, SunTrust) usually mans the laboring oar in the litigation. In those cases, as here, the goal is not to create a common fund or pool for recovery but to obtain the best offer in an open market for shareholders who are not coerced to sell. While no fund is created, maximization of shareholder value is the goal. The typical case, as here, involves a challenge to deal protection devices that the plaintiffs, including the third party bidder, claim prevent a fair vote on the merger proposal or unfairly restrict competitive bidding. The deal protection devices become more important in a “merger of equals” because the premium to be paid for the acquired company is low. Such deals can frequently attract third-party bidders. They also attract shareholder litigation. Where a subsequent bidder prevails, it is often difficult, if not impossible, to determine how much of the increased offering price was attributable to the litigation as opposed to increased value generated by the market. [4]

{6} If we start from the premise that shareholders have three basic rights—to vote, sell and sue for breach of fiduciary duty [5]— the right to sue becomes more important if the shareholders’ abilities to vote or sell are at risk. Accordingly, the court should be careful in adopting rules or procedures that unduly restrict the tools available to shareholders to protect their fundamental rights to sell and vote their shares. Deal protection devices inherently involve one of those rights. Concomitantly, the trial courts must control the litigation costs associated with providing that protection and assure that the interests of the lawyers and their clients (shareholders) are properly aligned.

{7} These issues fit within the following factual and procedural context.

{8} On April 15, 2001, First Union and Wachovia announced their planned merger. Almost immediately, plaintiffs' counsel began filing lawsuits, starting with the Bennett and Leser suits on May 1. Five more suits followed, each featuring allegations substantially identical to those in the first two:

Plaintiff Plaintiff's Counsel Date Filed

Bennett Law Firm of Harvey Greenfield May 1, 2001

01 CVS 4486 Wilson & Iseman

Kantrowitz, Goldhamer & Graifman

Leser Clark, Bloss & McIver May 1, 2001

01 CVS 5163 Kirby, McInerney & Squire

Heaney McDaniel, Anderson & Stephenson May 14, 2001

01 CVS 4748 Schriffrin & Barroway

Wachsman Brown & Assoc. May 17, 2001

01 CVS 4810 Bernstein, Liebhard & Lifshitz

Drucker Ferguson, Stein, Wallas, Adkins, May 29, 2001

01 CVS 10641 Gresham & Sumpter

Morris & Morris

Rosenburg McDaniel, Anderson & Stephenson June 1, 2001

01 CVS 4868 Cauley, Geller, Bowman & Coates

Hrobar Abbey Gardy June 6, 2001

01 CVS 0006893 Chitwood & Harley

McDaniel, Anderson & Stephenson

Seven separate complaints (the “Shareholder Suits”)were filed by 17 different law firms for eight named plaintiffs; twelve firms, representing seven of the named plaintiffs, joined in the fee petition at issue here.

{9} On July 6, 2001, this Court entered an order consolidating the above individual actions into one action, In re Wachovia Shareholder Litigation, 01 CVS 4486.

{10} First Union filed suit against SunTrust in Mecklenburg County Superior Court on May 22, 2001 (01 CVS 10075). The action was filed shortly after Wachovia’s board started its meeting to consider SunTrust’s proposal to merge with Wachovia. The next morning, First Union filed an amended complaint, and Wachovia joined the action as a co-plaintiff. Less than an hour later, SunTrust sued both Wachovia and First Union in the Superior Court of Fulton County, Georgia. SunTrust immediately moved to consolidate its Georgia action with a previously filed shareholder suit in Georgia and asked for a hearing in Georgia (01 CV 38062). Anticipating a classic "forum fight," on May 24, 2001, First Union and Wachovia obtained a temporary restraining order (“TRO”) prohibiting SunTrust from moving forward with its second-filed action in Georgia. SunTrust subsequently removed the Mecklenburg County action to the United States District Court.

{11} Judge Lacy Thornburg granted First Union and Wachovia’s emergency motion to remand on May 30; the Superior Court set a hearing on the motion for preliminary injunction for June 1, 2001. At this point, SunTrust conceded in the forum fight and agreed during the night of May 31/June 1 to have this Court hear the First Union/Wachovia/SunTrust case (hereinafter the "SunTrust Case"). A few shareholder suits filed in Georgia were voluntarily dismissed by the plaintiffs. None of the counsel seeking fees here had a role in the forum dispute.

{12} On June 14, 2001, Harbor Finance[6] joined the fray by filing a derivative action pursuant to North Carolina Gen. Stat. § 55-7-40 et seq. The Harbor Finance action (01 CVS 8036) was assigned to the Business Court on July 9, 2001. For efficiency’s sake, the Court ordered Harbor Finance’s attorney to cooperate with SunTrust and the Shareholder plaintiffs in conducting discovery.

{13} After a conference with counsel, this Court set a schedule for the SunTrust Case. The Shareholder Suits and Harbor Finance essentially “tagged along” as a consolidated action. The Court appointed Wilson & Iseman and Abbey Gardy as co-lead counsel for the Shareholder Suits and ordered that a consolidated amended complaint be filed by these counsel. Counsel filed the consolidated amended complaint on July 5, 2001 two business days before the conclusion of all discovery.

{14} During June and the first three weeks of July, the SunTrust Case proceeded at an extremely expedited pace on the following schedule:

(a) On June 18, this Court heard the motions to dismiss SunTrust’s counterclaims filed by Wachovia and First Union and ordered that the Main Case proceed (other than dismissing a Georgia antitrust claim). Wachovia and First Union filed 43 pages of briefs supporting these motions. SunTrust filed 26 pages of briefs opposing the motions. Counsel in the Shareholder Suits filed nothing, not yet having filed their consolidated amended complaint.

(b) After expedited document production from Friday, June 29, through Monday, July 9, counsel in the SunTrust Case took 16 depositions. SunTrust, Wachovia, and First Union decided who would be deposed. Counsel in the Shareholder Suits attended 15 of these depositions. Except for the deposition of Eric Heaton in New York, where Shareholders’ counsel asked questions for approximately one hour, the questions of Shareholders’ counsel appear on only 23 transcript pages, in total, for all 15 depositions they attended.[7] The derivative plaintiff, Harbor Finance, attended three depositions. It offered the following information regarding its participation: “Due to timing limits on the depositions imposed by the Court, Harbor’s participation in depositions generally consisted of attending depositions and suggesting questions to counsel for SunTrust, which that counsel almost always asked.”

(c) On Friday, July 13, and Monday, July 16, counsel for SunTrust, Wachovia, and First Union filed extensive briefs (totaling 233 pages) in support of and opposing motions for preliminary injunction and summary judgment. Counsel for the Shareholders filed a single four-page brief that joined in the initial SunTrust brief.

{15} SunTrust did not appeal this Court’s order, and counsel for the Shareholders did not pursue an appeal independently. At the time it considered SunTrust’s motion for preliminary injunction (and the tagalong motions of Harbor Finance and the Shareholder Plaintiffs), the Court reserved the issue of whether Harbor Finance could properly maintain a derivative action on behalf of Wachovia. See Plaintiff’s Preliminary Injunction Br. at note 3. In October 2001 defendants answered the Amended Complaint and moved to dismiss plaintiff’s claims on multiple grounds.

{16} On July 20, this Court issued its opinion, holding that the challenged cross-options were valid but determining that the termination provisions of the merger agreement tied the hands of Wachovia’s board in an impermissible manner. The Court denied all of SunTrust’s motions (and the tagalong motions of the Shareholders’ counsel), holding that, with the opinion in hand, Wachovia shareholders could vote on the merger in an informed manner, thus obviating any need for affirmative relief. Wachovia and First Union promptly and voluntarily amended the termination provisions in the merger agreement in a manner that conformed to the Court’s opinion. First Union’s shareholders approved the merger on July 31, and Wachovia’s shareholders approved the merger on August 3. The merger was consummated on September 1.

{17} Except for the voluntary dismissal of the SunTrust Case, there was no litigation activity at all for over a year after the Court issued its opinion. On September 13, 2002, the Court signed a Consent Order tendered by the parties dismissing all the Shareholders’ cases with prejudice and granting the Shareholders’ counsel 30 days after entry thereof in which to file a fee petition (with Wachovia reserving its rights, in full, to argue that no fees should be awarded).

{18} During the April 9, 2003 oral arguments on the Shareholder Plaintiffs’ motion for fees and costs and the motion to dismiss Harbor Finance’s derivative claims, this Court requested that Harbor Finance submit a detailed affidavit regarding its costs and fees. The Court also asked the Shareholder Plaintiffs to submit more detailed time records in support of their motion for fees and costs. In the interests of efficiency and in order to present a fuller record for appellate review, the Court is entering one order that will contrast the class action and derivative action and the costs and fees associated with those actions.

II.

{19} The Court turns first to the questions raised in the derivative action.

{20} The North Carolina statutory procedure is set forth in section 55-7-42 of the North Carolina General Statutes as follows:

No shareholder may commence a derivative proceeding until:

1) A written demand has been made upon the corporation to take suitable action; and

2) 90 days have expired from the date the demand was made unless, prior to the expiration of the 90 days, the shareholder was notified that the corporation rejected the demand, or unless irreparable injury to the corporation would result by waiting for the expiration of the 90-day period.

N.C.G.S. § 55-7-42 (1995).

{21} This case and other cases challenging deal protection devices demonstrate the difficulties of the derivative action as a means to protect shareholder rights in the fast- paced deal environment under North Carolina law. [8] Companies desiring to consummate a merger will generally move as swiftly as possible to complete the transaction. There are sound business reasons for the rapidity with which companies act. The financial markets, commercial markets and employees all look for certainty. Once a deal is announced, many things can intervene between announcement and closing which could derail the transaction. The clearest threat is the intervention of another bidder. However, there are limitless other possibilities: natural disaster, financial market changes, strikes and government intervention, just to name a few. Each side naturally wants the transaction to move promptly to closing.

{22} Our derivative statute does not adequately or specifically address the time pressure created in the merger of publicly traded companies. It is designed to substitute for litigation by and on behalf of the corporation when management or directors are conflicted or refuse to act in the best interest of the corporation. The derivative claim belongs to the corporation, and any recovery belongs to the corporation. The shareholders may not recover individually in a derivative action.

{23} The ninety-day waiting period embodied in the statute does not provide a realistic time frame within which to deal with challenges to proposed mergers. The speed with which transactions are completed requires that the ninety-day period be shortened. However, the mechanism for shortening the ninety-day waiting period is unclear. It is the failure of Plaintiff Harbor Finance to take action to shorten that response period which defendants rely upon for dismissal of this action.[9] The ninety-day waiting period is generally designed to give the board of directors sufficient time to consider and act upon any request for action. It is normally a rational period, since the board must make some factual inquiry in connection with the action it is being asked to take, and boards do not meet frequently. The board may take corrective action on its own, thus avoiding the cost of litigation. It may select a committee of independent directors to decide if it is in the best interest of the corporation to pursue the action demanded, or it may ask the court to appoint an advisory committee to act on behalf of conflicted directors.[10] The purpose is twofold: first, to give the corporation the option to pursue its own claims, and second, to hold down litigation costs.

{24} In the context of a proposed merger containing deal protection devices, the derivative statute does not work particularly well. In the first instance, the ninety-day waiting period is too long. Allowing the board a full ninety days to consider the demand in connection with a pending merger is unrealistic and does not provide the certainty required in the acquisition environment. On the other hand, simply waiving the ninety-day period without providing an opportunity for the company to act defeats the purpose of the statute. The demand requirement has benefits in the merger context.[11]

{25} For those reasons, this Court has interpreted the statute to require that an adequate demand be made and that the plaintiff move to shorten the response time based upon a showing of irreparable injury as required by the statute.[12]

{26} In the acquisition environment, the board, in all probability, has considered the deal protection devices incorporated in the merger agreement at some length and, after consultation with counsel and investment bankers, has determined that to include those protections in the merger agreement would be in the best interest of the corporation. It would not be logical to reassign that responsibility to a court-appointed advisory committee. Deal protection devices are carefully negotiated components of an overall business agreement.[13] The advisory committee could not unilaterally take action without renegotiating the deal. Deals would never get done.

{27} While the derivative claim technically fits in the merger situation, it misses the mark to a certain extent by couching the claim as one that the corporation has against its directors. Shareholder rights and interests are central considerations at stake in this type of litigation. It is more logical to litigate the claims in the context of shareholder rights than in the context of a corporate claim for breach of fiduciary duty. In most cases, the relief sought is injunctive relief designed to alter or eliminate a deal protection device that allegedly unfairly impacts the shareholder voting process.

{28} The derivative action also does not afford the trial court the degree of supervision it might exercise in the class action setting. In the derivative action, the client may have selected the lawyer and may even be a professional plaintiff with an ongoing relationship with the law firm—factors more limiting than the options the court may have in a class action with several potential class representatives and counsel from which to choose. There is less flexibility in a derivative action than in a class action, where the court can define the class and the claims to be pursued.[14]

{29} In most jurisdictions complaints based upon breach of fiduciary duty in the acquisition context are brought as class actions.[15] The derivative action is generally reserved for conflict of interest claims in the non-acquisition context. However, some challenges to deal protection devices do arise in the derivative context.

{30} Turning to the case at hand, there are several factors that demonstrate the difficulties and inefficiencies associated with the use of derivative actions in acquisition situations. In this case, the derivative action was filed after the class action litigation had begun and after the SunTrust/Wachovia litigation had commenced. Plaintiff’s counsel wrote a demand letter and sent it via Federal Express. Wachovia declined receipt of the FedEx package. Plaintiff’s counsel subsequently sent the letter by first class mail addressed to the board of directors. Plaintiff then commenced suit. At no time did plaintiff make an attempt to shorten the time for response to the demand letter.

{31} As a result of the late filing of the derivative action and its assignment to the Business Court there was no time to address the deficiencies of the derivative process. The Court permitted Harbor Finance to participate in the SunTrust case and the shareholder suits with the clear understanding that is was without prejudice to defendants’ right to raise any defenses to the derivative action.

{32} The decision to use the derivative action as opposed to a class action could not have been an inadvertent selection by this plaintiff. Harbor Finance clearly fits the description of a “professional plaintiff.” In their study of Delaware cases, Thompson and Thomas found two partnerships at the top of the class action list of most frequent plaintiffs: Harbor Finance and Crandon Capital.[16] The study also showed:

The plaintiffs law firms that bring the largest number of class actions, shown in Table 12, are much less frequently involved in derivative suits. In the 83 lead derivative cases, the repeat law firms are involved in only 27 (32%) as compare to 76% of all class actions. As for the plaintiffs themselves, the only plaintiffs with more than two filings are two partnerships that were at the top of the list in the class action area: Harbor Finance with five suits and Crandon Capital with four. We note that the derivative cases these entities filed were never the only suit filed and were often associated with class actions or federal litigation against the same company.[17] (Emphasis added)

{33} The Thompson study speculates that there is a relationship between Crandon Capital Partners and Harbor Finance.[18] This Court’s research indicates that Crandon Capital Partners is the general partner of Harbor Finance Partners, Ltd.[19] The Court’s research further disclosed that Harbor Finance has been involved in at least 35 suits based upon a claim of breach of fiduciary duty, and the majority of those cases involved mergers or acquisitions.[20] That number does not include three cases brought under the name of Breakwater Partners since August of 2002, when Harbor Finance changed its name.[21] One of those cases was filed in North Carolina and is assigned to this Court. See In re Quintiles Transnational Litigation.[22] In that litigation, counsel for Breakwater Partners (The Brualdi Law Firm) was the first to file a class action suit alleging breach of fiduciary duty in a tender offer situation. Other lawyers were designated lead counsel in that litigation.

{34} A review of the pleadings and demand letter reveals that there were no claims asserted by Harbor Finance not already at issue in the class action litigation and the third-party litigation filed by SunTrust, a conclusion readily apparent to a plaintiff with Harbor Finance’s experience in merger and acquisition litigation.

{35} Given the sophistication of plaintiff and its counsel and the timing of their actions, as well as the duplicative nature of the claims asserted, the Court is led to the disturbing conclusion that the demand and subsequent derivative suit were filed solely to get a piece of the litigation fee pie. Counsel’s fee request, discussed in more detail below, supports that conclusion. An efficient system should not reward or encourage that conduct.

{36} The lack of clarity in the statute with respect to how the time for board response gets shortened highlights the court’s role in managing merger and acquisition litigation efficiently. The court must have the opportunity to review and rule on assertions of irreparable injury. In this instance, had a motion and supporting papers been filed, the Court could have addressed two aspects of the irreparable injury inquiry. First, the Court would have been required to determine if the issues raised in the demand were of a sufficiently urgent nature that they required determination before a shareholder vote. In this case it was clear that the deal protection devices being challenged had the potential to impact the vote, and a preliminary injunction hearing was necessary to determine their viability. If the derivative action had not been an add-on to the preexisting litigation, the Court might well have determined it necessary to shorten the response time or eliminate it altogether. However, the Court could also have considered the existence of the prior pending litigation in which the shareholders’ interests were adequately represented. Accordingly, the Court might have determined that there was no irreparable injury to the corporation and that the corporation should not have to incur the additional costs and expenses of dealing with separate claims in a derivative action that were identical to claims already at issue. Each case will be fact specific. In this instance the Court never had the opportunity to make the necessary determinations because the statutory procedure of waiting 90 days or having the period shortened was not followed.

{37} Failure to comply with the demand requirements of N.C.G.S. § 55-7-42 constitutes an “insurmountable bar” to recovery. Allen v. Ferrera, 141 N.C. App 284, 540 S.E.2d 761, 764 (2000); see also Winters v. First Union Corp., 2001 NCBC 08 (No. 01 CVS 5362, Forsyth County Super. Ct. July 13, 2001) (Tennille, J.); Garlock v. Hilliard, 2001 NCBC 10 (No. 01 CVS 01018, Mecklenburg County Super. Ct. November 14, 2001) (Tennille, J.); Greene v. Shoemaker, 1998 NCBC 4 (No. 97 CVS 2118, Wilkes County Super. Ct. October 24, 1998) (Tennille, J.). The Harbor Finance case is subject to dismissal for failure to comply with the statutory process.

{38} Defendants have also moved to dismiss under the statute for failure to make demand “with sufficient clarity and particularity to permit the corporation . . . to assess its rights and obligations and what action is in the best interest of the company.”

{39} The Court first addresses the method of conveying the demand. Simply put, it must be done in a fashion that insures that the Company receives the demand so that it can act on it. It must be addressed to a responsible official, for example the corporate secretary or general counsel. It must be delivered in a manner that shows that it has been received and when; personal delivery or certified mail are two examples. Where the company is on notice of the contents of the letter or of a forthcoming demand, it avoids dealing with the issue at its peril. It may not simply refuse to accept what it knows is a demand letter and then deny that it has rejected the demand.

{40} This Court has held that the statutory requirement of sufficient specificity must be met. See Garlock, 2001 NCBC 10 at 14-19; Greene 1998 NCBC at 15-25. In this instance, the demand letter dated June 1, 2001 brought to the attention of the board of directors four aspects of the transaction which Plaintiff Harbor Finance believed were potential violations of fiduciary duty. First, plaintiff asserted that the board was obligated to shop or auction the company. Second, plaintiff found objectionable the provisions of the agreement that reserved nine board seats on the new board for Wachovia directors and that insured that Leslie M. Baker, Jr. would be chairman of the new board. Third, plaintiff objected to the including the termination fee as a deal protection device. Fourth, plaintiff objected to including the non-termination provision in the merger agreement as a deal protection device. The first two claims were never seriously pursued, with good reason.

{41} The two deal protection devices were the focus of the litigation. In the context of merger and acquisition litigation, the letter was sufficient notice of the provisions of the agreement which plaintiff claimed to be unreasonable. The Court notes that Wachovia’s investment bankers had already informed the board that the termination fee was on the outer edges of an acceptable range. In this sophisticated world, all the parties understood the implications and importance of the deal protection devices and the fact that they would be subject to challenge. To impose any greater degree of specificity than that contained in the demand letter would be unreasonable in this context.

{42} The actual action to be taken by the corporation is unclear and again demonstrates the limitation of the derivative action in this context. It is difficult to impose upon a plaintiff the obligation to specify how the merger should be renegotiated. It is sufficient to point out the deal protection devices are alleged to be coercive, preclusive or in violation of a fiduciary duty and to request that something be done about them. In the unlikely event the board agrees, it should have the flexibility to address the problem. In the shareholder focused class action, the deal protection devices can be more directly addressed as limitations on the right to vote or sell, and thus the relief requested can be tailored to protect the shareholders’ rights and secure a market vote free of coercion or preclusion.

{43} In summary, the demand letter was sufficiently specific with respect to the challenged deal protection devices, and the plaintiff delivered it in an acceptable manner. The instant case demonstrates the difficulty of using the derivative action in the context of certain kinds of merger and acquisition litigation.

{44} Finally, the Court notes that the Harbor Finance claims are subject to dismissal as moot. After this Court’s decision on the preliminary injunction motions was entered on July 20, 2001, no party appealed that decision. Subsequently, the shareholder vote proceeded as scheduled, and the shareholders of both Wachovia and First Union approved the merger. The merger is complete. All Wachovia shares have been transferred. No claim for monetary damages has been pursued. No discovery has taken place and no motions have been filed. The only requests for action this Court has received (other than to dismiss a Georgia antitrust claim) are the current motion to dismiss by defendants and the request for attorney fees by counsel for Harbor Finance. Plaintiff has not moved to amend the complaint or take any further action. Plaintiff rode the coattails of SunTrust and abandoned the case when those coattails were no longer a means of transportation. The Court never found Harbor Finance to be a suitable representative for the corporation’s interest.

{45} At the hearing on the motions to dismiss the following exchange took place between the Court and Mr. Brualdi:

The Court: I think the obvious reason that they didn’t move to dismiss it gives them the best argument that no attorneys’ fees ought to be paid.

Mr. Brualdi: Well, that may well be the case, your honor. In fact, I suspect that your honor is right

Your honor had asked why—where we thought the case would go from here, and I think that sort of explains why nothing has really happened for a year and that there are arguments that the case is moot under Delaware law. As your honor pointed out, there’s not much left that your honor can do.

Transcript of April 9, 2003 hearing, p. 34.

{46} Plaintiff’s claims are moot.

{47} Accordingly, the claims of Harbor Finance are dismissed.

{48} The Court next turns to the fee request filed by plaintiff’s counsel. The North Carolina statute governing derivative actions clearly provides that plaintiffs may be awarded attorney fees in derivative actions where they perform some service of value to the corporation or the shareholders. The award of such fees is in the discretion of the Court.[23] In this instance, the Court finds that neither Plaintiff Harbor Finance nor its counsel provided services of value to the corporation. Piling on after litigation is already in progress which adequately protects the interests of shareholders should not be encouraged and does not promote the right balance between the incentives and agency costs the courts must consider.

{49} As the Court has previously noted, at the time the derivative claim was made, SunTrust had already challenged the deal protection devices in the litigation between it and Wachovia. Numerous class actions had been filed challenging the same deal protection devices, and the Court had already appointed capable and experienced lead counsel in those consolidated cases. The Court permitted Harbor Finance to file a short brief and appear at oral argument in connection with the hearing on the motion for preliminary injunction based solely on the late entry of Harbor Finance into the litigation. Harbor Finance had not even been determined to be a proper representative for the corporation.

{50} Neither the brief nor oral argument advanced any position different from or in addition to the arguments made by SunTrust and lead counsel for the class action plaintiffs. Nor does there appear from the record to be any significant contribution of counsel during the discovery process. The issues were hotly contested between SunTrust and Wachovia, and the validity of the deal protection devices was squarely before the Court. If Harbor Finance had not filed its action, the outcome of this case would have been exactly the same. There is an argument discussed below that shareholders cannot always rely on a third party bidder to protect their interests. In this instance, there was already a backup plaintiff, ably represented in the litigation. The existence of an additional shareholder representative in a different cloak added nothing of value to the protection of the shareholders or the corporation. Plaintiff’s counsel brought no skills or abilities to the litigation that were not already provided by experienced counsel for SunTrust and the other shareholders. Harbor Finance’s suit did not create synergies or efficiencies. Rather than providing economies, the addition of the derivative action only increased the cost of the litigation. No shareholder value was created to justify the additional cost of the derivative action. Harbor Finance has not shown any tangible or intangible benefit to the shareholders that would not have occurred but for the actions of Harbor Finance or its counsel or as a direct benefit of the actions of Harbor Finance. The fact that counsel for Harbor Finance has taken no action to prosecute this case since SunTrust withdrew is a fairly strong indication that the derivative action was filed solely to ride the coattails of SunTrust’s counsel.

{51} For the foregoing reasons, the Court, in its discretion, denies counsel’s request for attorney fees in its entirety.

{52} Were the Court called upon to award attorney fees in its discretion, those fees would have been in the amount of $25,000 to Brualdi and $5,000 to Donaldson and Black. Those fees would have been determined by the same criteria discussed below. Harbor Finance’s quantum meruit claim as the third representative of the shareholders is extremely weak. The shareholders interests were already ably represented by counsel for SunTrust and class counsel appointed by the court. The hourly rate claimed by New York counsel is astonishingly out of line with market rates and includes a risk premium far in excess of any this Court has seen approved. Given the insignificant contribution of counsel upon their late arrival, the size of their fee request is a further indication that New York counsel’s interest and those of the shareholders they did not represent were not necessarily aligned.

III.

{53} The Court next turns to the fee issues in the class action litigation. In those cases, because the parties agreed to a consent dismissal of the cases as moot th

In Re Wachovia Shareholders Litigation 01 CVS 4486