It used to be that nearly every time a merger or acquisition was announced, the plaintiff’s bar was lurking in the shadows to attempt to stop the deal—or be paid off. From 2009 to 2015, on average, 90% of M&A transactions by public companies with a value of over $100 million were being challenged in court, according to Cornerstone.

These came to be known as disclosure-only lawsuits, where plaintiff’s attorneys were awarded legal fees to do nothing more than to force defendants to provide additional (and largely not very useful) stockholder disclosures about an M&A deal.

The defendants would settle these cases to avoid the timely and costly process that comes with merger objection suits. They would also get a broad release from future stockholder litigation around the deal—something defendants found to be very valuable.

That is not to say that none of the suits had merit; additional disclosures could, sometimes, surface problems or useful information about the deal. However, in many cases, the additional disclosures were not all that helpful for shareholders.

The halcyon days of plaintiffs being awarded large fees for disclosure only-suits came to end, however, with the 2016 decision In re Trulia, Inc. Stockholder Litigation. In that case, the Delaware court took a strong stance on disclosure-only settlements: Plaintiffs would not be awarded substantial fees unless the disclosures actually benefited the stockholders. Note that in doing so, the court was also putting an end to what it saw as defendants obtaining overly broad releases.

The result was a significant drop in this type of litigation.

Down, But Not Out: Mootness Fees

The plaintiff’s bar then used its creativity to pursue other avenues. One such avenue was M&A litigation in federal court. The other: mootness fee suits.

Mootness fees were being awarded when plaintiffs demanded improved disclosure around an M&A deal (and in some cases other demands). When defendants complied, plaintiffs would take the position that their concerns had been addressed, rendering the litigation moot.

Since the plaintiffs had provided shareholders with a benefit (whatever the defendants had agreed to do), the plaintiffs asked to be paid a mootness fee.

Unlike disclosure-only settlements where attorney fees climbed into the millions, mootness fees tended to be much smaller (typically $50,000 to $150,000 or so), and defendants did not get a full release against all future M&A-related litigation.

These suits rose in popularity when a Delaware court in In re Xoom Corporation Shareholder Litigation allowed disclosure-only lawsuit settlements when the disclosures were not material to shareholders. In Xoom, the plaintiffs had asked for $275,000. In examining the fee, the court recognized that some of the additional disclosure was “mildly helpful” and, accordingly, awarded a mootness fee of $50,000.

Such an amount was certainly modest; it was also, apparently, compelling enough to plaintiffs that they continued to file M&A objection suits and settle for modest mootness fees.

Nevertheless, it seems that the Delaware court has had enough, as expressed by a case that may spell the end of mootness fee suits: Anderson v. Magellan Health, Inc.

Anderson v. Magellan Health, Inc. Case Review

In Anderson, the plaintiff shareholder of Magellan filed a classic stockholder class action M&A objection suit.

The plaintiff challenged the acquisition of Magellan Health, Inc. by Centene Corporation, asking for more information about the deal, which Magellan provided. Magellan also waived certain confidentiality provisions at the request of the plaintiffs.

The plaintiff agreed that these actions mooted all claims and agreed to dismiss the case. The plaintiff then asked for attorney’s fees and expenses to the tune of $1.1 million, arguing that the additional disclosures and waivers were “corporate benefits.”

The defendants argued that the benefits of the additional disclosures were nominal. They proposed fees in the range of $75,000 to $125,000.

As the opinion in Anderson points out, the demand for such high attorney fees caught the attention of the academic community. The court noted that “professors well known to this court served as amici curiae [impartial advisors] to advocate for reform in this court’s approach to mootness fee petitions.”

The court elaborated that the professors urged the court to “issue a written decision to warn other courts applying Delaware law of these policy dangers, and they made good points.”

In Anderson, the court looked at the value of the supplemental disclosures to determine the fees. It referenced the Trulia case and its standard of disclosures needing to be “plainly material” for settlements to be paid out.

Then the court referenced the Xoom case and how it could be “construed as encouraging plaintiffs’ counsel to pursue meritless claims,” following up by saying, “Delaware policy does not encourage this conduct.”

The court went on to explain its stance:

Given developments in Delaware law and the continued merger tax of deal litigation, a rule that seems to encourage the pursuit of legally meritless disclosure claims does not make sense. At a minimum, mootness fees should be granted for the issuance of supplemental disclosures only where the additional information was legally required. And were Delaware courts to see an uptick in mootness fee petitions for supplemental disclosures, it would be appropriate to respond by adopting the solution of Trulia and screen out disclosures that fall short of “plain” materiality.

Chancellor Kathleen McCormack then decided that Xoom standards would no longer apply in her court moving forward, stating that “unless a higher authority proclaims otherwise, this is my last call for Xoom. I will award mootness fees based on supplemental disclosures only when the information is material.”

As a result, in future cases, Chancellor McCormack will apply the Sugarland factors to award attorney’s fees, which take into account:

(i) the amount of time and effort applied to the case by counsel for the plaintiffs;

(ii) the relative complexities of the litigation;

(iii) the standing and ability of petitioning counsel;

(iv) the contingent nature of the litigation;

(v) the stage at which the litigation ended;

(vi) whether the plaintiff can rightly receive all the credit for the benefit conferred or only a portion thereof; and

(vii) the size of the benefit conferred.

Chancellor McCormack further emphasized: “Of these seven factors, the primary consideration is the benefit achieved.”

Turning to the decision on attorney’s fees for Anderson, however, Chancellor McCormack applied the Xoom factors since that was the current standard when Anderson was filed.

The court decided that the confidentiality waivers by Magellan “had little-to-no value” and the additional disclosures were ultimately only “marginally helpful.” The court noted that the defendant’s proposal of fees in the range of $75,000 to $125,000 was “consistent with the limited set of court-ordered mootness fees awards post-Trulia.”

Therefore, the court decided that the supplemental disclosures were only valued at $75,000 in fees—a far cry from the $1.1 million the plaintiffs had originally requested.

Given that Chancellor McCormack will apply the Sugarland factors in future cases, the next plaintiffs asking to be awarded fees for disclosures that are only “marginally helpful” can expect to do worse.

Takeaways

The good news is that as a result of this decision, we should expect to see a decline in mootness fee litigation in Delaware courts.

Readers of this blog know I’m an advocate for choice of forum provisions in a company’s charter documents to curtail frivolous litigation.

The decision in Anderson is just one more reason that corporations should consider adopting state choice of forum provisions to keep litigation of this sort to Delaware state court. Otherwise, after the Anderson decision, boards selling their companies can expect to be sued in more plaintiff-friendly federal courts rather than in Delaware state court.