Judge Posner Called It A "Racket"

• Published date: 20 June 2022
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, M&A/Private Equity, Corporate and Company Law, Class Actions, Shareholders
• Law Firm: Seyfarth Shaw LLP
• Author: Mr Gregory Markel, Sarah Fedner, Giovanna A. Ferrari, Andrew R. Escobar, Daphne Morduchowitz and Meryl A. Hulteng

In a recent decision from the United States District Court for the Southern District of New York, a federal Judge pushed back against the common but abusive practice of "mootness fee" payoffs in public M&A deals. In the February 2022 opinion, Judge Oetken denied a $250,000 attorneys' fee demand by plaintiff's counsel in an investor challenge to Microsoft's $19.7 billion acquisition of Nuance Communications. The decision is by latest court to have the opportunity to both consider and reject what some call a meritless shakedown or transaction tax on public M&A deals. This decision is significant in that it is increasingly rare for mootness fee payments to be subject to court scrutiny given the increasing trend of voluntary dismissals by plaintiffs in this type of case. For more information about the history of mootness fee payments and the need for reform click here.

The Delaware Court of Chancery's 2016 decision in In re Trulia, Inc. Stockholder Litigation, which criticized so called "disclosure only settlements" paid to plaintiffs' counsel in exchange for supplemental disclosures that do not provide any material additional information, led to a steep decline in filings of merger litigation in the Delaware Court of Chancery.¹Trulia decision, there was a sharp increase in merger challenges filed in federal court. A number of plaintiffs' firms filed cases in federal court very similar to the ones criticized in Trulia with the apparently sole purpose of obtaining attorneys' fees in exchange for voluntary dismissals and non-material supplemental disclosures. These voluntary dismissal cases, because they are dismissed prior to class certification, generally are not subject to court approval.

Background

Beginning in 2009, filings of class action claims challenging mergers increased substantially. As of 2015, the year before the Trulia decision, roughly 95% of merger transactions valued at more than $100 million were challenged.²3

These cases were typically resolved in early settlements with corrective disclosures and broad releases of future class claims for defendants that required court approval. Plaintiffs' attorneys' fee requests were often approved by the courts under the common law, corporate benefit doctrine. The disclosures supposedly provided shareholders with information material to making an informed investment decision. In reality, however, the added disclosure they provided was not meaningful and most often a makeweight to justify plaintiffs'...