A federal court in New York recently dealt a blow to the common litigation practice of plaintiff’s counsel requesting a “mootness fee” when challenging disclosures made by public companies in mergers and other large transactions.
On February 7, 2022, Judge Paul Oetken in the U.S. District Court for the Southern District of New York issued an order denying a request by a lawyer representing an investor who had challenged the multi-billion dollar acquisition of Nuance Communications, Inc. by Microsoft Corporation. In that case, the plaintiff had filed a complaint alleging violations of Sections 14(a) and 20(a) of the Exchange Act. Specifically, the plaintiff alleged that Nuance had failed to make specific disclosures in its proxy statement, namely detailed financial information for the “peer companies” it selected for a public company trading analysis, as well as price targets from research analysts that followed Nuance.
Shortly after the complaint was filed, Nuance filed a supplement to its proxy statement that included the additional information identified by the plaintiff, thus rendering the plaintiff’s claims moot. Nuance stated in its supplemental disclosure that the additional information was being made to resolve shareholder litigation. It stated that it believed that the litigation was “without merit” and that “no further disclosure” was required under the law, but that it was making the disclosure to “minimize the expense and distraction of defending such actions.”
Nonetheless, the law firm representing the investor filed a motion seeking $250,000 in attorneys’ fees and expenses on the grounds that the supplemental disclosures conferred a “substantial benefit” on Nuance shareholders. This request was based on the “common benefit” doctrine that allows a litigant to obtain reimbursement of attorneys’ fees in cases where the litigation has conferred a substantial benefit on shareholders.
Nuance strongly opposed the request, arguing that the disclosures were meaningless and conveyed no real benefit to shareholders. In its motion, the company pointed out the “strike suit” trend that is increasingly common with disclosures in public company transactions. The typical pattern is that lawyers representing shareholders file suit challenging transactions on the grounds that the proxy statement omitted items of information, the company makes a supplemental disclosure to address the issue, and then the law firm representing the shareholder demands a payment to settle the case.
Here, the court agreed with Nuance, and the fee request in this case was rejected. Although there was no dispute that the supplemental disclosures were prompted by the plaintiff’s counsel, the court concluded that the information did not confer a substantial benefit to shareholders and that the company had no obligation to make the supplemental disclosures.
This is a somewhat unusual case in that the company actually litigated the question of whether a mootness fee would be required. Often, companies simply pay these fees and treat them as an expected cost of completing a transaction. Because many mootness fees are negotiated directly between a company and a shareholder without the need for court approval, courts often do not have the opportunity to approve or reject these fees. We have also noticed a trend of plaintiff’s firm contacting companies informally with disclosure issues, and then requesting a mootness if a supplemental disclosure is made, even if no lawsuit has been filed. While we expect that plaintiff’s firms will continue to request mootness fees, we also expect that companies will become more skeptical of them and increasingly likely to challenge them in court.
