The Delaware Court of Chancery fundamentally altered the M&A litigation landscape when it expressed its skepticism of disclosure-only settlements in the case of In re Trulia, Inc. Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016). There has subsequently been much written about Trulia and the relative scarcity of disclosure-only settlements in its wake. Of significantly lesser renown, the Court of Chancery further observed in Trulia that adversarial motions for attorneys’ fees, following a corporation’s “mooting” of plaintiff-stockholder disclosure claims through supplementary disclosures, are free of the conflicts of interest that plague disclosure-only settlements because the adversarial process fleshes out the benefit or value conferred on stockholders by the supplemental disclosures.
When a corporation moots the plaintiff-stockholder’s claims through disclosures, Delaware law makes clear that “a fee can be awarded if the disclosure provides some benefit to stockholders.” In re Xoom Corp. S’holder Litig., Civ. A No. 11263-VCG, 2016 WL 4146425 (Del. Ch. August 4, 2016). In fact, the Court of Chancery provided that merely producing even “helpful” disclosures can support a fee award.
Maryland law, however, stands in contrast. In Maryland, courts will not award attorneys’ fees for mootness disclosures made during stockholder litigation if the case is not “meritorious when filed.” This higher standard should encourage Maryland corporations faced with spurious stockholder litigation to simply moot even non-material claims to spare the corporation and stockholders the time and expense of litigating questions of materiality. At the same time, the board of directors need not fear an exorbitant fee award if the litigation was not meritorious when filed.
Dexter v. ZAIS Financial Corporation is illustrative. 24-C-16-004740 (Md. Cir. Ct. Dec. 8, 2016). In Zais, a putative class of stockholders asserted direct claims against ZAIS and individual director defendants following the company’s announcement that it would acquire Sutherland Asset Management Corporation in a reverse merger. The claims were based on familiar allegations in M&A litigation; specifically, that the registration statement did not disclose supposed conflicts of interest by certain director defendants who had approved of the transaction and did not disclose certain other information concerning the price of the reverse merger.
After the complaint was filed, the company issued supplemental disclosures. The plaintiff later made a request for attorneys’ fees, arguing that his lawsuit had “caused” the company to make supplemental disclosures for the purpose of mooting the stockholder claims. The plaintiff argued that the supplemental disclosures constituted a “corporate benefit,” conferred by his lawsuit. Under the corporate benefit rule, courts may award attorneys’ fees and expenses to a plaintiff when a defendant moots one or more of the plaintiff’s claims by satisfying the plaintiff’s demands. The rationale is that the plaintiff conferred a benefit upon the corporation by causing the corporation to act to address the plaintiff’s concerns.
Maryland follows the test enunciated in Wittman v. Crooke, 120 Md. App. 369, 707 A. 2d 422 (1998) when assessing the propriety of an award of attorneys’ fees based on mootness disclosures. Under the Wittman test, the plaintiff’s claim for attorneys’ fees must satisfy three conditions: (1) the suit was “meritorious when filed”; (2) the action producing the alleged corporate benefit was taken by the defendant prior to judicial resolution; and (3) the resulting corporate benefit was causally related to the lawsuit. A claim is considered meritorious “if it can withstand a motion to dismiss on the pleadings.” Wittman, 120 Md. App. at 379, 707 A.2d at 426).
Applying the Wittman test, the ZAIS court concluded that the stockholder claims were not “meritorious when filed” under Maryland law. Specifically, because the reverse-merger was not a “cash-out” merger, but was instead a cash-stock election merger, the individual stockholders lacked standing under Maryland law to assert direct claims for breach of common law duties. See Shenker v. Laureate Education, Inc., 411 Md. 317, 983 A.2d 408 (2009). Because the claims would not have withstood a motion to dismiss, they were not “meritorious when filed,” and thus any award of attorneys’ fees based on the mootness disclosures was precluded.
The ZAIS decision has significant implications for Maryland corporations and practitioners, and stands in contrast to corresponding Delaware law. [1] Whereas Delaware courts allow consideration of whether supplemental disclosures are merely “helpful” based on Delaware law’s presumption that post-litigation disclosures are caused by the litigation, Maryland courts instead impose a more demanding standard than Delaware by requiring that the action be “meritorious when filed” before awarding attorneys’ fees based on mootness disclosures.
Consequently, unlike in Delaware, Maryland practitioners and corporate defendants should not fear that making mootness disclosures will give rise to an award of attorneys’ fees, even if the disclosures are “helpful,” provided that the corporate defendant is able to successfully argue that the action was not “meritorious when filed.”
[1] The principle that an attorneys’ fees award is only appropriate if the plaintiff’s claims would have withstood a motion to dismiss was reaffirmed in the case of Small v. Bennett, et al., Case No. 24-C-16-006020 (Md. Cir. Ct. Feb. 5, 2018). In Small, although the plaintiff had not responded to the motions to dismiss at the time the court’s decision was rendered, the court observed that the plaintiff-stockholder’s “ability to withstand judicial analysis of the dismissal Motions might have proved problematic.”
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