Shareholders said corporate reforms merit millions in fees. Now they must prove it -Breaking
© Reuters. FILE PHOTO – This illustration, taken July 13th 2021, shows the Pinterest app on a smartphone. REUTERS/Dado Ruvic/Illustration
(Reuters) – When plaintiffs lawyers in a derivative suit against Pinterest (NYSE:) Inc board members asked for approval of their $5.4 million fee request last April, they told the judge they deserved twice their lodestar bills because they’d obtained significant corporate governance reforms that would make the company more diverse and inclusive, enhancing its long-term value for shareholders.
U.S. district judge William Alsup from San Francisco gave an order to the firms on Thursday directing them to produce it.
Alsup granted final approval to the settlement, in which Pinterest has agreed to commit $50 million to several diversity initiatives that vest the board with ultimate responsibility for both improving Pinterest’s corporate culture and assuring that the online image sharing service offers users more diverse responses to their search queries. The judge awarded Cohen Milstein Sellers & Toll, Renne Public Law Group, Bottini & Bottini, and Weiss Law $2.5 million in fees – about $200,000 less than their lodestar billings and less than half of what they requested.
However, the award could be increased if the plaintiffs’ attorneys can prove to Alsup that Pinterest has been living up to its settlement agreement over the next 2 years and that shareholders have received a real benefit from the revisions made in the derivative arrangement.
To that end, the approval order requires Cohen Milstein and the other firms to appoint lawyers “to enforce the settlement terms and police the corporation.” Alsup directed shareholders to file biannual reports documenting “how much progress has actually been made (or not made)” in attaining the goals laid out in the settlement agreement. Alsup stated that if he is satisfied with the results of shareholder counsel over these two years, he would increase fees.
I reached out to both plaintiffs’ lawyer Julie Reiser of Cohen Milstein and Pinterest counsel Boris Feldman of Freshfields Bruckhaus Deringer but neither offered comment on the extremely unusual approval order – the first, as far as I know, in which a judge has partially conditioned fees in a derivative case on the success of corporate governance reforms.
(Feldman said the same thing at a May 26 final approval hearing https://tmsnrt.rs/3xNQVBL, telling Alsup that he was not aware of any other derivative case in which the fee award was “contingent on future events.”)
Alsup has been leery of the value of the Pinterest governance reforms since shareholder lawyers first asked for preliminary approval of the settlement – billed as the first derivative deal to require a corporate board to oversee audits of the company’s diversity and inclusion efforts — last November. My Reuters colleague Jody Godoy covered the preliminary approval hearing Alsup oversaw last January, in which the judge said shareholder lawyers too often tout “cosmetic improvements” and then ride “into the sunset” without assuring that they’ve achieved any real change.
Alsup was particularly concerned in this case because Pinterest’s board had already adopted several policies intended to improve corporate culture before shareholders settled the derivative suit. In 2020, the board hired Wilmer Cutler Pickering Hale and Dorr as internal investigators after several high-ranking employees made claims of gender and pervasive discrimination. After a six month investigation, the company stated that it will revamp its training and set new diversity goals. It also plans to partner with NAACP in order to establish an inclusive advisory council.
Shareholder lawyers persuaded the judge to grant preliminary approval in February, arguing that their proposed settlement added considerably to the board’s own initiatives by, for instance, requiring the company to invest $50 million in diversity programs and imposing oversight responsibility on the board itself. In April, the plaintiffs’ lawyers raised similar issues when they sought a $5.4million fee award. They claimed that this amount was just 10.75% of $50 million Pinterest promised to invest in corporate governance.
The judge stated at the last approval hearing that fees would be based on billings from lodestars and not the $50 million allocated for reforms.
“There’s no money changing hands here,” he told Reiser of Cohen Milstein. “That’s what concerns me. They say that they will allot $50 million over the next 10 years. We have no way of knowing whether that’s going to happen.”
Pinterest lawyer Feldman told Alsup that the company considered the shareholders’ fee request reasonable. Feldman also objected to the proposal of a 10-year monitoring plan that would permit him to track the compliance of his client.
That would be “inappropriate,” Feldman said. “You shouldn’t retain 10 years of jurisdiction over a consensual settlement between private parties with no — no one died here. No towns were burnt down,” he continued. “The court, respectfully, should not be our corporate overseer for the next 10 years.”
Alsup stated at the end of the May 26 hearing, that he had still doubts about approuving the settlement. He said that there was no mechanism to help him evaluate the effectiveness of governance reforms. “The easy thing to do would be to rubber-stamp this,” he said. “ () I’ve seen too many derivative cases, and I know the abuse.” He advised the two sides to add a monitoring component to the settlement.
In a post-hearing brief, plaintiffs lawyers said they’d reached a deal with Pinterest to allow them to police the settlement for two years, with regular reports to the judge on the company’s progress.
Alsup groused in the final approval order that the settlement gave Pinterest 10 years to invest $50 million in diversity programs, so the two-year monitoring feature would leave the company “unpoliced” for eight years. He nevertheless approved the settlement.
According to Alsup’s own admission, he is more strict than many judges about shareholder settlements. We will see how other courts respond to his request for proof of corporate reforms’ accomplishments before rewarding plaintiffs attorneys who obtain them.