From Trulia to Akorn: The Chess Game of M&A Litigation (Notes on the Decline of Disclosure-only Settlements, on the Rise of Mootness Fees and on the Future of Delaware’s Dominance in Corporate Law)
57 Pages Posted: 23 Aug 2019
Date Written: July 24, 2019
The doctrinal shift in the judicial review standard on disclosure-only settlements in merger objection lawsuits set by the Chancery Court of Delaware in 2016 with In re Trulia might appear prima facie reasonable. It was to a certain extent predictable, given the exorbitant increase in M&A litigation of last years, culminating with challenges to 95% of ≥ $100,000,000 deals in 2014. Indeed, not only it is evidently implausible that 95% or more of large public company merger deals could involve a wrongdoing; but the pattern mostly followed by those cases clearly suggests the frivolous and vexatious nature of those claims: shortly after the announcement of a merger, quick-triggered plaintiff attorneys file a case against the deal and, as rapidly as they file it, they settle it on non-monetary terms. The agreement typically provides modest supplemental disclosures in exchange for blanket class releases and attorney fee awards – relying upon courts’ practice to routinely validate any settlement. Thus, by requesting that disclosures deliver a «plainly material benefit» to stockholders and that the related release is «narrowly circumscribed» in order to grant a settlement the approval, Trulia’s Court intended to neutralise just those collusive dynamics; dynamics that entail significant costs with no benefit for shareholders and that undermine the basic mechanism of regulation-by-litigation model.
Yet, a closer look can cast doubt on the legal grounds of the new standard and also on its effectiveness in addressing the issue of nuisance litigation. Some commentators have argued that materiality is just the enforcement of a pre-existing legal duty of directors; and its performance cannot be the consideration for a settlement. In addition, the materiality requirement could paradoxically become even an incentive for directors to withhold information in the transaction, in prediction and for the sake of a prospective settlement.
Moreover, as anticipated even in Trulia, the success of the solution rests on the premise that Delaware’s companies would constrain merger lawsuits to the Delaware courts by adopting the forum-selection bylaws, now expressly allowed by that State legislation; or that other jurisdictions would follow the shift on settlement countenance. Should the standard not be adopted by sister courts and should the companies not introduce in their bylaws forum-selection provisions, it would be possible, to a certain extent even easy, for plaintiffs’ attorney to file the case before a court of another State, with a resulting migration of the litigation.
Indeed, even if a federal Court (In Re Walgreen) promptly and decisively followed Trulia, in other states’ jurisdictions Trulia’s authority seems to be less persuasive than expected; and its take-up appears to be rather slow and sometimes uncertain. It could be the result of the non-adversarial process, as parties submitting disclosure settlements outside of Delaware have little interest to cite newer Delaware authority. Nevertheless, another possible reason cannot be ignored: namely, the lure presented by the different policy of attracting corporate litigation and challenging Delaware’s dominance by deliberately persisting in a less strict standard on disclosure settlements’ validation.
Furthermore, forum selection bylaws – although widely implemented by Delaware’s corporations after the mentioned codification – fell short of expectations. They are not automatically executing, and the defendant corporation is supposed to enforce them; in the sense that if not invoked by the defendant, the court cannot apply these clauses. The board of directors may opt to waive the application of forum selection provisions and accept a lawsuit before a non-Delaware forum in order to negotiate a broad release on terms that currently would not be approved in Delaware under Trulia. Defendant could then get a broad release, proceed with the transaction and secure the transaction.
The decline in disclosure-only settlement is just an apparent achievement, as correspondingly a new, abusive and disturbing tactic has risen: the mootness dismissal, i.e. a voluntary dismissal coupled with the grant of a mootness fee for plaintiffs’ attorney by the defendant. The scheme is pretty simple: the allegation that just the filing of the case persuaded defendants to provide increased disclosures, inducing the plaintiffs to voluntarily dismiss the case, justifies the payment of mootness fee to plaintiff’s attorney by the defendant.
It is true that, in this case, the dismissal is without prejudice for the class and the defendant obtains no release from future claims. And it is true that mootness fees are on average much lower than the attorney’s fees granted in a typical disclosure-only settlement – and on these grounds, mootness fees are subject to the more lenient standard set forth in Trulia (a court does not need to weigh the «get» of the supplemental disclosures against the «give» of a release when determining whether to grant an award of fees).
Though, by this way plaintiff and defendant move the collusive agreement out of the court and set a new routine pattern that eludes the judicial oversight, especially in federal jurisdiction, where the mootness dismissal and the related fees are not even subject to court’s approval and to a potential denial under Rule 23, Fed. R. Civ. P.
Empirical data on mootness dismissal in the context of M&A litigation for the last 2 years confirm that these concerns are not groundless: mootness dismissal cases have displaced and substituted disclosure-only settlements. And this is also the evidence of the effectiveness and obstinacy of plaintiffs’ attorneys’ adaptive response.
Thus, it comes as no surprise that on 24th June 2019, with House v. Akorn, the Northern District of Illinois has scrutinised an out-of-court agreement to pay a mootness fee to plaintiffs’ counsel – following to some supplemental disclosures that caused plaintiffs to voluntarily dismiss their claims without prejudice. In Akorn, Judge Durkin invoked «its inherent authority» and extended Walgreen. Accordingly, finding the disclosure not material, he abrogated the agreement and ordered the plaintiffs’ attorneys to return the fees to Akorn. Indeed, by reviewing the agreement under the same materiality standard set for disclosure-only settlements and related releases, the federal Court has even applied a stricter standard than the one applicable to mootness fees under Trulia. An appeal is currently pending.
Yet, the sequence of events and the broad dissatisfaction for the solutions set by Trulia go well beyond the criticism on the doctrinal and policy defects of Trulia’s materiality. They question both the ability of the litigation system to perform an effective response to the tactics conceived by plaintiffs’ attorneys operating like professional bounty hunter; and Delaware’s dominance in corporate law, that apparently has been experiencing a persistent and relentless Autumn. Finally and consequently, they can bring into question even the sustainability of the permanent litigation model regulating American corporate law.
An analysis following this path and upholding this conclusion points to the exploration of other solutions, such as a private ordering solution consisting in the adoption of no pay bylaws to impede corporation and their directors to compensate plaintiff’s attorney. And, on a more general perspective, new models of regulation should be considered, like the Anglo-Irish code and panel-based model.
Keywords: securities law, corporate law, mergers, M&A litigation, Takeovers, In Re Trulia, In Re Walgreen, House v. Akorn, Corwin , Delaware, disclosure-only settlements, mootness fees, voluntary dismissal, fee-shifting, forum selection bylaws, appraisal, Federal Rules of Civil Procedure, FRCP
JEL Classification: G34, K20, K22, K41
Suggested Citation: Suggested Citation