Gregory Markel And Sarah Fedner Authored An Article In The D&O Diary

• Published date: 24 June 2020
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, M&A/Private Equity, Corporate and Company Law, Class Actions, Securities, Shareholders
• Law Firm: Seyfarth Shaw LLP
• Author: Mr Gregory Markel and Sarah Fedner

As this blog's readers know, a recurring recent topic on this blog has been the need for another round of securities class action litigation reform. In the following guest post, Gregory A. Markel and Sarah A. Fedner of the Seyfarth Shaw law firm explore the possible opportunities for reform with respect two specific areas of concern: duplicative state and federal court litigation in the wake of Cyan and the payment of mootness fees in merger cases. The authors outline the policy objections to these practices and suggest that Congress should intervene to end them. My thanks to Greg and Sarah for allowing me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog's readers. Please contact me directly if you would like to submit a guest post. Here is Greg and Sarah's article.

*****

Despite judicial and congressional efforts to reduce and regulate meritless or unnecessary securities claims, the total number of securities cases increased dramatically in 2017 and that higher level of filings continued in 2018 and 2019. In 2019, there were 428 securities class actions filed in federal and state court, an unprecedented number since 2001.¹ This is almost double the average annual number filings from 1997-2018, which was 215.² Nearly one out of every 11 United States publicly traded companies faced a securities lawsuit in 2019.³ The increase is largely driven by an upswing in merger claims over the last three years, which is attributable to a change in tactics by certain plaintiffs' attorneys as a result of the Trulia decision, as discussed below. The increase in overall filings is also partially attributable to more Securities Act of 1933 (the "1933 Act") claims being filed in merger cases and to a general increase in other (core) securities cases.⁴

Certain plaintiffs' attorneys are regularly developing new and creative ways to increase filings and circumvent unfavorable regulations or court rulings.⁵ Two examples of these strategic practices emerged following the Delaware Court of Chancery's decision in the Trulia case⁶ and the Supreme Court's decision in the Cyan case.⁷ In the aftermath of these two rulings, plaintiffs moved to jurisdictions with more favorable rules to pursue litigation that is detrimental to corporations, their shareholders, director and officer ("D&O") insurers, and wasteful of judicial system resources as a whole. As a result of these frequently meritless claims, defendants are now: (1) paying legal fees to plaintiff's attorneys for non-meritorious merger class actions through "mootness fees" and (2) facing concurrent securities class actions in multiple jurisdictions stemming from initial public offerings ("IPOs"), secondary offerings, and stock issued in mergers. As discussed below, regulatory reform is required to prevent continued abuses from mootness fees and the confusion and overlapping claims arising in the wake of Cyan, and the detrimental impact to corporations and insurers, which ultimately impacts their shareholders and customers. These practices are a privately imposed tax on the United States' economy, which only benefits a small, but determined segment of plaintiffs' firms.

I. MOOTNESS FEES

The Delaware Court of Chancery's 2016 decision in In re Trulia, Inc. Stockholder Litigation led to a new trend in merger litigation. Certain plaintiffs' firms flocked to federal court and filed cases without hopes of meaningful corrective disclosures or recovery, but with the sole intent of obtaining attorneys' fees in exchange for voluntary dismissals and non-material supplemental disclosures. These payments have commonly become known as mootness fees. This practice raises serious policy concerns surrounding frivolous securities litigation, which likely can only be remediated completely through congressional reform of securities law.

A. Background

Beginning in 2009, filings of class action claims challenging mergers increased substantially. These cases generally challenged the sufficiency of shareholder disclosures or the overall fairness of the deals. As of 2015, the year before the Trulia decision, roughly 95% of merger transactions valued at more than $100 million were challenged.⁸ 60% of these challenges were filed in Delaware courts, and more often than not in Chancery Court, while only 19% were filed in federal courts in other states.⁹

These cases were normally resolved in early settlements with corrective disclosures, which provided very broad releases of future class claims for defendants and, like most settlements, were often approved by the courts. Because these corrective disclosures theoretically benefitted shareholder members of a class, plaintiffs' attorneys were also generally awarded attorneys' fees by the courts under the common law corporate benefit doctrine. The disclosures supposedly provided shareholders with information material to making an informed decision. In reality, however, as the volume of cases increased, the added disclosure they provided became much less meaningful and really a makeweight of no value to justify plaintiffs' counsels' attorney fees. In many cases, the corrective disclosures were nearly pointless and did not change shareholder votes. Thus, many class actions seeking supplemental disclosures became a vehicle for plaintiffs' firms to obtain attorneys' fees for little, if any, meaningful benefit for shareholders. Since class actions were created to benefit a class of injured claimants, there was a fairly obvious disconnect between the theoretical purpose and the reality of the motive behind many merger cases that were seeking only largely unnecessary additional disclosures and attorneys' fees.

B. The Trulia Decision

The Delaware Chancery's Court decision in Trulia sought to put an end to this practice by limiting disclosure-only settlements to those that resulted in disclosures that added significant value to class members and provided releases of sensible scope. In that case, the court refused to approve a proposed settlement, which included supplemental disclosures and attorneys' fees in exchange for a broad release, finding that the proposed disclosure was not "plainly material" as defined under Delaware law.¹⁰ a> The court cautioned that, unless there was "a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available," ¹¹ proposed disclosure-only settlements and accompanying attorney's fees would not be approved going forward by the Chancery Court.¹²

C. Federal Merger Litigation Post-Trulia

Trulia came as the culmination of several then recent Delaware Chancery Court decisions and it made clear there was a new regime in Delaware Chancery Court for settlements of merger cases. However, Trulia did not apply in other forums. Certain plaintiffs' firms took advantage of this by challenging mergers in alternative jurisdictions. In 2016, the rate of merger litigation plummeted in Delaware state court by almost 50% and continued to decrease in the years thereafter.¹³ This trend was accompanied by an immediate uptick in merger litigation in federal courts.¹⁴ In 2017, 198 merger-objection lawsuits were filed in federal court, 182 were filed in 2018, and 160 were filed in 2019.¹⁵ These numbers reflect a staggering increase compared to the 34 merger-objection lawsuits filed in federal court in 2015, the year prior to Trulia.¹⁶ As of 2018, only 5% of completed deals were challenged in Delaware Chancery Court, while 92% were challenged in federal court.¹⁷ This evidence is clear that Trulia largely moved most merger claims out of Delaware Chancery Court.

Not only did the rate of filings increase in federal court, but the number of class action cases resolved through voluntary dismissals before a class was certified skyrocketed. Starting in 2016, in many merger cases, there was a voluntary dismissal by plaintiffs and a payment of attorneys' fees to plaintiffs. These mootness fees cases generally did not require court approval of settlements, and were characterized by non-material supplemental disclosures and payment of mootness fees. The...