Delaware Court Of Chancery Clarifies Heightened Standard For Recovery Of Attorneys' Fees In Disclosure-Based Deal Litigation

• Published date: 19 July 2023
• Subject Matter: Corporate/Commercial Law, M&A/Private Equity, Shareholders
• Law Firm: Sheppard Mullin Richter & Hampton
• Author: Mr John Stigi, Alejandro Moreno and Eugene Choi

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In Anderson v. Magellan Health, Inc., No. 2021-0202, ' A.3d '-, 2023 WL 4364524 (Del. Ch. July 6, 2023) (McCormick, C.), the Delaware Court of Chancery addressed the circumstances under which the Court will award a shareholder plaintiff attorneys' fees in disclosure-based deal litigation. In particular, Anderson analyzed the history of disclosure-based deal litigation in Delaware and the Court's evolving standard for awarding fees where shareholder action has caused a company to issue additional pre-merger disclosures "mooting" pending deal litigation. Prior to the decision in Anderson, the state of the law was unsettled. The first line of cases would award fees as long as the shareholder plaintiff secured additional disclosures that were "helpful" such that they provided "some benefit" to shareholders. The second line of cases, however, adopted a stricter standard requiring that the supplemental disclosures be "plainly material." In an effort to combat the so-called "deal tax" associated with disclosure-based merger litigation, Anderson comes out in favor of the stricter standard. Going forward, the Court will only award disclosure-based mootness fees when the complaining shareholder obtains additional disclosures that are "plainly material" to the shareholders. Companies, boards and advisors engaging in M&A transactions should pay attention to this decision as it will weigh on the proper strategy for approaching a shareholder challenge to an M&A transaction.

In Anderson, a shareholder plaintiff filed suit in the Delaware Court of Chancery to enjoin Magellan Health, Inc. (the "Company") from merging with Centene Corporation (the "Acquirer"). The plaintiff alleged that confidentiality agreements from a prior deal process contained "don't ask don't waive" standstill provisions, which tainted the negotiation and approval process of the merger with the Acquirer. Ten days later and before any discovery, the Company agreed to waive some of the offending provisions and issued supplemental disclosures. The plaintiff, in turn, dismissed its lawsuit as moot and sought $1.1 million in alleged fees and costs for procuring the disclosures and waivers of the confidentiality provisions. The Company opposed the plaintiff's request for fees arguing that plaintiff was entitled to no more than $75,000 to $125,000 because the disclosures were not material. The Court sided with the Company and awarded fees of $75,000.

The Anderson decision provides an...