From Trulia to Akorn: a ride on the Roller Coaster of M&A litigation.
By Pierluigi Matera and Ferruccio Maria Sbarbaro.
The complete Article is published in 44 Delaware Journal of Corporate Law 61 (2020).
In recent years, M&A litigation has experienced a dramatic increase, culminating with a peak in 2015, when over 96% of publicly announced mergers were challenged in a shareholder lawsuit. A large number of these lawsuits were frivolous and vexatious, since most claims were filed by plaintiffs' attorneys just to extract some fees with little effort. Some abusive practices emerged, signalling an alarming exploitation of the system. One scheme that plaintiffs' attorneys put in place was the disclosure-only settlement. There, the stockholders obtained some modest supplemental disclosures, the plaintiff's attorneys got significant fee awards from the defendant directors and the defendant directors secured some blanket class releases from future claims. The scheme relied upon courts' routine practice of approving any settlement, even when there is no benefit for the corporation or its stockholders. A correction became critical. At the beginning of 2016, the Delaware Court of Chancery with In re Trulia marked a doctrinal shift in the standard of judicial review for disclosure-only settlements, by requiring that supplemental disclosures deliver a “plainly material benefit” to stockholders and that any releases from liability be “narrowly circumscribed.” But the approach in Trulia is not without some limitations. While federal courts have soon followed Trulia with In Re Walgreen, other states have been slow and sometimes reluctant to do so.
Even if Trulia succeeds in restricting disclosure-only settlements, another tactic has arisen to replace it: the mootness dismissal – that is a voluntary dismissal coupled with the payment of mootness fees to plaintiffs' attorneys by the defendant. Data on merger litigation show that, like on a roller coaster, after a decline post Trulia, the number of litigated deals rose again in 2017. Notably, 87% of these claims were brought in a federal court and only 10% in Delaware. This trend is becoming more pronounced. A few of these lawsuits were settled; most cases were voluntarily dismissed, and plaintiffs' attorneys received a mootness fee. Clearly, plaintiffs' attorneys developed an adaptive response to the Trulia standard and devised the new scheme to replace the old stratagem. Unlike in the disclosure-only settlement cases, the mootness dismissal is without prejudice for the class since the defendant obtains no release from future claims. Mootness fees are also on average much lower than the attorneys' fees granted in a typical disclosure-only settlement. But, apart from that, the scheme is not less detrimental to corporations and stockholders. What is more, the Federal Rules of Civil Procedure do not explicitly allow a court to review mootness fees. Hence, in federal courts the new scheme can bypass any judicial scrutiny. This results in an additional opacity in the practice and explains the migration of cases to federal courts.
In June 2019, in House v. Akorn, a U.S. District Court in Illinois invoked its equitable powers and scrutinized the mootness fees. The judge extended the Trulia-Walgreen standard and, accordingly,ordered the plaintiffs' attorney to return the fees to the corporation. An appeal is pending before the 7thCircuit, and a landmark decision could be in the offing. We predict that the appellate court will affirm the district court's decision. Yet, the affirmation may not be enough to halt overlitigation. On the face of it, it would discourage plaintiffs' attorneys from starting a lawsuit just to extract mootness fees. But plaintiffs' attorney could continue in mootness fee practice, exploiting the lack of transparency. In fact, courts could apply Akorn only if they become aware of the mootness fee. Plaintiffs' attorneys could also revert to the scheme of disclosure-only settlements and file claims in those jurisdictions that have a more tolerant standard for these agreements.
Trulia, Walgreen and Akorn (as well as other decisions) prove that the courts are reacting and correcting the abuse of litigation. Nevertheless, these decisions need to be confirmed, implemented and complemented. A failure by Trulia and Akorn to adequately address the issues could call into question the regulation-by-litigation model adopted by U.S. corporate law. The challenge cannot be underestimated, since some commentators are already advocating for a radical shift to a pure regulatory approach, such as the Anglo-Irish code and panel-based model.
Overlitigation, with its significant costs and non-existent benefits for corporations and shareholders, is the manifestation of the crisis of a litigation system which has devolved into a non-adversarial process. We argue that such devolution is the outcome of the delayed and ineffective management – by legislatures and courts – of some conflicts of interest and of some incentives to collude in the process. But we also contend that the courts are currently addressing those conflicts, collusions and procedural gaps. The roller coaster of M&A litigation is likely to continue but, hopefully, it will be a gentler ride.
A short version is available https://clsbluesky.law.columbia.edu/2019/11/29/trulia-akornand-the-roller-coaster-of-ma-litigation/