Seyfarth Synopsis: Following Delaware's lead in Trulia, an Illinois District Court judge refused to approve a mootness fee settlement as "worthless to the shareholders." The judge noted that such settlements amounted to a plaintiffs' bar "racket" with the goal of obtaining fees in cases that should be "dismissed out of hand." Specifically, Judge Thomas M. Durkin exercised his "inherent authority" to abrogate the settlement of shareholder litigation arising out of the proposed acquisition of Akorn, Inc. In ordering Plaintiffs' counsel to return the $322,000 mootness fee paid in connection with the settlement, the Court signaled that this decision should mark the beginning of the end for the merger objection litigation "racket," which recently shifted from Delaware Chancery Court to federal court following Delaware's 2016 Trulia decision, which cracked down on merger litigation in Delaware. A recent study1 about mootness fees found that in 2018 alone at least 65% of federal merger litigation filings resulted in a settlement after supplemental disclosures were made accompanied by the payment of a mootness fee to Plaintiffs' attorneys. These mootness fee settlements generally occur without meaningful judicial oversight, and the negotiated supplemental disclosures often provide little or no value to shareholders.
Presumably, the decision in Akorn will further deter the filing of merger litigation now that several courts have reprimanded plaintiffs' counsel for bringing meritless claims in order to obtain a quick pay day. Indeed, based on Judge Durkin's ruling, plaintiffs' counsel should no longer assume they can avoid judicial review of mootness fee settlements or assume they can keep fees paid pursuant to those settlements. If the case is appealed, it will be closely watched and if upheld could have important effects in the Seventh Circuit and elsewhere. Moreover, as a policy matter this decision should further raise the profile of this issue and hopefully result in legislation which will curb the abuse present here.
Plaintiff shareholders sued Akorn, Inc. and its board of directors in connection with its proposed acquisition. After Akorn revised its proxy statement and issued a Form 8-K, Plaintiffs voluntarily dismissed their lawsuits and settled for a $322,000 mootness fee. Following the settlement, one shareholder filed a motion to intervene to object to the settlement. The Court denied that motion, but in light of the shareholder's arguments ordered the parties to brief the issue of whether the Court should abrogate the settlement agreements in light of a recent Seventh Circuit's decision, Judge Richard Posner overturned the district court's approval of a disclosure only settlement and referenced Chancellor Bouchard's decision in Trulia, wherein the Chancery Court held that disclosures made in this context must be "plainly material . . . mean[ing] that it should not be a close call that the . . . information is material." In re Trulia, Inc. Stockholder Litig., 129 A.3d 884, 894 (Del. Ch. 2016). Because no class was certified in this case and no class claims were released in the settlement, the Court determined that it must assess whether "a class action that seeks only worthless benefits for the class should be dismissed out of hand." The Court then reviewed each of the disclosures that Plaintiffs sought in their complaints and ruled that they were not "plainly material" and instead were "worthless to the shareholders" and "caused the company in which they hold an interest to lose money." Because "[t]he quick settlements obviously took place in an effort to avoid the judicial review this decision imposes," the Court declared that "this sharp practice 'must end.'"
1. Other Federal Judges May Start Scrutinizing Mootness Fee Settlements.
Judge Durkin's decision has paved the way for other judges, particularly in the Seventh Circuit, to exercise their inherent authority to abrogate mootness fee settlements that they in the past may have concluded they don't have the authority to review.
2. Reaffirms High Bar To Finding That Supplemental Disclosures Are Plainly Material.
The Court deemed all of Plaintiffs' additional sought-after disclosures as "not 'plainly material'" and "worthless to the shareholders." These included the following:
- GAAP reconciliation of the proxy's projections because the applicable SEC regulation requiring GAAP reconciliation does "not apply to . . . a disclosure relating to a proposed business combination."
- Certain components of financial advisor's analysis because (i) the information was already provided in the original proxy; (ii) shareholders can make their own determination as to whether a growth rate range is reasonable in light of prior performance; and (iii) courts find that only a "fair summary" of data underlying a financial advisor's opinion must be disclosed.
- Financial advisor's compensation from Akorn because (i) that information was disclosed in the original proxy, and (ii) the fact that the fee was contingent on consummation of the merger could be inferred from other language in the proxy and, moreover, is plainly not material.
- Financial advisor's compensation from the buyer because the exact historical payments were deemed not material and the proxy, in any event, did not indicate that the financial advisor was continuing to receive payments from the buyer.
- Potential upside in stand-alone strategic plan because the "upside" was readily apparent in that avoiding the merger means avoiding the costs and the relinquishment of control inherent to the merger and that it was sufficient to disclose in the proxy that the plan involved significant risks in light of the industry and competitive pressures the Company faced. The Board additionally translated those concerns into financial projections that were provided in the proxy. Moreover, Plaintiff settled the case without receiving this information, which cast significant doubt on whether information was truly material.
- Substance of the March 2017 projections because (i) "completeness" is not the standard for disclosure; (ii) Plaintiff did not identify what information in particular was necessary to evaluate the merger; and (iii) Plaintiff settled without receiving this information, which again cast doubt on its materiality.
- Other potential buyers and the reason for their rejection because the Board had disclosed that it determined "it was highly unlikely that any of those counterparties would be interested in an acquisition of the Company at that time due to competing strategic priorities and recent acquisitions in the industry" and detailed information about potential buyers that weren't actually considered is not material.
- Pending litigation because (i) the lawsuits were public record prior to issuance of the original proxy, and (ii) the allegation that the Board had ulterior motives related to absolving themselves of liability arising from pending litigation is unfounded speculation and, moreover, does not seek information relevant to the merger.
For a copy of the opinion, click here.
1 Matthew D. Cain, Jill E. Fisch, Steven Davidoff Solomon & Randall S. Thomas, Mootness Fees, Vanderbilt Law Review, Forthcoming; U of Penn, Inst. for Law & Econ. Research Paper No.
19-26 (May 29, 2019).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.