In a recent post, I detailed the latest variant in the merger objection litigation game, in which the plaintiffs’ agree to dismiss their lawsuit in exchange for the defendants’ agreement to make additional disclosures and pay the plaintiffs’ counsel a mootness fee. The absence of any court involvement in this process makes this an appealing business model for the plaintiffs’ counsel. It also makes it difficult for anyone to challenge the procedure, reducing the likelihood of unwanted judicial scrutiny.
However, Northern District of Illinois Judge Thomas M. Durkin, exercising his “inherent authority” and acting at the urging of an objecting shareholder, has “abrogated” the settlement of the litigation arising out of the acquisition of Akorn , Inc. by Frensenius Kabi AG, and ordered the plaintiffs’ lawyers to return to Akorn their $322,000 mootness fee, ruling that the additional disclosures to which the company agreed were “worthless to shareholders” and that the underlying lawsuits should have been “dismissed out of hand.” This welcome development could possibly be the first step into driving a stake in the heart of the merger objection litigation “racket.” Judge Durkin’s June 24, 2019 order can be found here.
The plaintiffs in the underlying lawsuits sued Akorn and its board of directors in connection with the proposed merger, seeking additional disclosure regarding the transaction. After Akorn revised its proxy statement, plaintiffs dismissed their lawsuits in exchange for a mootness fee. Ted Frank, an Akorn shareholder, moved to intervene and object to the fee. Judge Durkin ordered the parties to brief the issue whether he had “inherent authority” to abrogate the settlement in light of the Seventh Circuit’s ruling in the Walgreen case (about which refer here).
The parties also addressed the question whether the agreed-upon additional disclosures were “plainly material, justifying the settlement.” The consideration of this question would of course have been the process the court would follow if the Court were reviewing a class settlement; here, no class was certified nor were any class claims released in the settlement. Judge Durkin nevertheless concluded he had the authority to review the settlement, in light of the statement of Judge Posner’s opinion in the Walgreen’s case that “a class action that seeks only worthless benefits for the class should be dismissed out of hand.”
In order to determine whether the complaints should have been “dismissed out of hand,” Judge Durkin reviewed each of the additional disclosures that the complaints sought. With respect to each, Judge Durkin concluded that the additional matter sought was “not plainly material” and concluded that the additional disclosures were “worthless to shareholders.” Yet, he noted, the plaintiffs’ attorneys were “rewarded” for suggesting “immaterial changes to the proxy statement.” The company paid the fees “to avoid the nuisance of ultimately frivolous lawsuit” disrupting the transaction.
Judge Durkin noted that the settlement provided Akorn’s shareholders “nothing of value”; to the contrary the settlement “caused the company in which they hold an interest to lose money.” The settlement “obviously took place in an effort to avoid judicial review.” This, Judge Durkin said, is the merger objection lawsuit “racket” that Judge Posner identified in the Walgreen case, and that Judge Posner said “must end.”
Since the court “failed” to dismiss the plaintiffs’ complaints out of hand, as it “should” have done, the Court “exercises its inherent authority to rectify the injustice that occurred as a result.” Judge Durkin “abrogated” the settlement agreements and order the plaintiff counsel to return the fees paid under the settlement. He ordered the plaintiffs to report to the court by July 8, 2019 that the fees had been returned.
It is fair to say that Judge Durkin put the wood to the plaintiffs’ lawyers in this case. The fact is that what Judge Durkin said of the process and disclosures in this case could be said for most if not all of the other merger objection lawsuits. The whole game is a shameful racket, all the more regrettable because the plaintiffs’ lawyers are using the threat of judicial process to extract a “go away” payment so that the underlying transaction can be completed. But if the same that was said of this case could be said of so many of the other merger objection lawsuits, will other courts follow Judge Durkin’s lead and consider whether settlements that result in the payment of mootness fees should be set aside?
Judge Durkin’s opinion certainly provides a powerful tool for anyone that would like to try to get another court to set aside a mootness fee settlement. However, there arguably are a number of factors that may make this less likely.
First, for a court to take a look at a mootness fee settlement, somebody has to ask the court to do that. Counsel for the parties aren’t going to ask the court. The defendants just want the case to go away, that’s why the defendants settle in the first place. Unless an objector comes forward, as was the case here, the question about the settlement will never be asked. Ted Frank, the objector here, has appeared as an objector in a number of other cases (including, for example, the Walgreen case) but he is not going to be able to appear in every case.
Second, even if someone comes forward to ask about the mootness fee settlement, the court would have to be convinced that it has the authority to review the settlement. As powerful as Judge Durkin’s opinion is, as the ruling of a federal district court, it has no precedential authority. Judge Durkin probably felt more comfortable taking the steps he did because of the Seventh Circuit’s opinion in the Walgreen case, but outside the Seventh Circuit district judges may be less comfortable relying on the opinion. The problem is that there aren’t as many M&A lawsuit in the Seventh Circuit as there are in, say, the Second, Third, and Ninth circuits. Judges in other circuits may conclude that they do not have jurisdiction or authority to review a private settlement.
Third, Judge Durkin did a lot of work and took a lot of time to examine the various additional disclosures the plaintiffs sought. Not every judge is going to be willing to take that kind of time examining a settlement to which the parties’ counsel agreed.
Fourth, it should be noted before we all get too far ahead of ourselves, that the plaintiffs could appeal Judge Durkin’s ruling. A pending appeal would additional limit the value of Judge Durkin’s opinion. The appeals court could always overturn Judge Durkin’s ruling as well.
Just the same, if one judge can be persuaded to take a look, maybe another can be persuaded as well. It could take some time, but if enough mootness fee settlement are reviewed, maybe this abusive litigation racket can be ended. Judge Durkin’s opinion in this case could be, as Alison Frankel noted in her June 26, 2019 post on her On the Case blog (here), a “milestone” in federal court merger objection litigation. Every who cares about our judicial system certainly hopes so.
Special thanks to a loyal reader for sending me a copy of Judge Durkin’s opinion.