One of the most significant phenomena in the world of corporate and securities litigation has been the rise of merger objection litigation. As has been well-documented, merger objection litigation reached the point in recent years that virtually every public company merger transaction drew at least one lawsuit. The circumstances surrounding merger objection litigation began to change after the Delaware courts evinced their displeasure with this kind of litigation in a series of rulings that culminated in the 2016 decision in Trulia, in which the court rejected the kind of disclosure only settlement that had characterized the resolution of these kinds of cases. Since then, the merger objection lawsuits have shifted to federal courts. Moreover, these cases, now in federal court, increasingly are not settled; rather, they are dismissed in exchange for the defendants’ willingness to pay the plaintiffs’ counsel a so-called “mootness fee.”
In a May 29, 2019 paper entitled “Mootness Fees” (here), Matthew Cain and Steven Davidoff Solomon of UC Berkley Law School, Jill Fisch of Penn Law School, and Randall Thomas of Vanderbilt Law School take a look at the recent rise of mootness fee dismissals in merger objection litigation. Their paper documents that the rise of mootness fee settlements has turned merger objection litigation into a process for a small number of lower tier plaintiffs’ firms to in effect extract a toll from companies involved in M&A transactions, largely without court scrutiny or even minimal disclosure requirements. The authors suggest a number of procedural mechanisms to try to provide some scrutiny and transparency over these kinds of settlements.
In order to support their research, the authors built a database of all merger transactions between 2013 and 2018 that involved public companies and with a deal size over $100 million. The database contains 2,320 unique deals, of which 1,536 (roughly 66%) involved litigation. However, over the time period reflected in the database, the percentage of deals attracting litigation changed significantly, to the point that in 2013, 96% of all deals involved at least one lawsuit. However, following the Delaware Chancery Court’s 2016 Trulia decision, the percentages began to fluctuate, and the case filings shifted away from Delaware courts to federal court. In 2018, 83% of all completed deals attracted at least one lawsuit; of these lawsuits, 92% were filed in federal court.
Along with the shift of merger objection lawsuits from state to federal court was a shift in the way that these kinds of cases are resolved. The typical pattern in the past, in which the case was settled for an agreement by the defendant company to make additional deal disclosures in exchange for a full release and an agreement to pay plaintiffs’ attorneys fees, has changed to one in which the plaintiffs’ voluntarily dismiss the lawsuit in exchange for the payment of a mootness fee. In prior to 2016 very few cases involved the payment of a mootness fee; in 2018, not only were 100% of all merger objection cases involving completed deals dismissed, but 63% involved the payment to the plaintiffs’ counsel of a mootness fee.
The authors also document that these merger objection cases by and large are being filed by a very small number of plaintiffs’ law firms. (Refer in particular to Table 6 in the authors’ paper on page 22.) During the period 2017 through January 2019, these firms managed to extract a mootness fee in roughly two-thirds of the cases they filed, while on the other hand actually settling only a very small percentage of cases (between 1% and 4%).
The authors note that based on their prior research, the median mootness fee during the period 2014 to 2017, the average mootness fee ranged from $200,000 to $450,000, but that in more recent periods the average fee may have declined to the range of $50,000 to $100,000. Mootness fee cases, the authors contend impose “real costs” both on the judicial system and companies; the authors estimate that the low range estimate of the aggregate in mootness fee paid in 2017 alone is $23.32 million.
The authors conclude that “these law firms appear to be more interested in collecting mootness fees than in actively litigating the cases they filed.” More to the point, the authors assert that the merger objection lawsuits “are not being filed with the expectation of obtaining a meaningful recovery for the plaintiff class but rather in order to obtain a quick disclosure and mootness fee.”
Of significant concern, from the authors’ perspective, because these cases typically are dismissed prior to class supervision, federal courts have “almost uniformly failed to oversee, approve, or even require disclosure of, these fees.” The lack of supervision is, the authors assert, the reason that “why merger litigation rates remain at high levels.” The failure of oversight and disclosure “raises the possibility that plaintiffs’ attorneys are receiving mootness fees for valueless disclosures or disclosures that were not causally related to the filing of the complaint.”
This dynamic, the authors suggest, raises “the potential for a form of blackmail.” The fact is, the defendants pay the mootness fee in exchange for the dismissal because it is less costly to pay the fee than to challenge the complaint on the merits. The authors quote a judicial source as saying that “the very point of the lawsuit was simply to get paid – by the shareholders – to go away. This is a pernicious motive for a lawsuit.”
In order to address these ills, the authors suggest a number of measures. First the propose amending relevant law and pertinent Federal Rules of Civil Procedure, providing that courts should require that a mootness fee payment provides a threshold level of benefit before such fees can be paid, and requiring disclosure of the payment of mootness fees. Court approval should be required even if a class has not been certified. Court approval should entail both notice to the putative class and an opportunity for objectors to be heard. The authors also propose that fees should be awarded only where the additional disclosure provides a material benefit to shareholders.
Alison Frankel has an interesting discussion of the authors’ paper in a June 5, 2019 post on her On the Case blog (here), including a more detailed discussion of the authors’ suggested remedial proposals.
Merger objection litigation has been a curse on the system and has operated as a tax on M&A activity for several years now. As the courts and legislatures have adopted measures to try to eliminate what one Delaware chancellor once called “junk litigation,” the plaintiffs’ bar has adapted. The federal court lawsuit mootness fee racket is the latest variant of this game, with defendant companies paying plaintiffs’ lawyers “go away” money so that they parties to the M&A transaction can complete their deal without getting bogged down in the deal litigation. The authors’ paper provides an excellent public service in describing just how pervasive and pernicious these problems are.
As the authors put it in describing the evils of the current mootness fee extraction system, mootness fees amount to “an inappropriate tax on the judicial system. Mootness fees and the accompanying litigation not only impose costs on parties to the judicial sphere, they also do not appear to provide appreciable benefits to shareholders.”
The situation is in fact worse – much worse—than the authors’ paper documents. In assessing the costs associated with this type of litigation, the authors look only at the costs associated with the amounts paid as mootness fees. The fact is that these cases, even if they are settled, have to be defended. Because this kind of litigation is often on a fast-track due to the requirements of the deal involved, defense fees incurred in defending these cases can be quite substantial. Moreover, these costs are increasing, as is well documented in a report I discussed in a prior post (here). When the defense costs are taken into account as well as the costs associated with the mootness fee payments, the costs associated with this type of litigation is even more significant. The fact is that this kind of litigation imposes significant costs on the parties and their insurers, with negligible social benefit of any kind.
The result – as anyone who studies litigation trends – has been a wave of federal court merger related securities suits, which have swelled the numbers of federal securities class action lawsuits that are being filed. When commentators in other jurisdictions refer to the excesses in the U.S. litigation system, this is the kind of thing they are talking about – that is, litigation that exists without regard to the merits or even to the presence of an aggrieved claimant, but solely in order for the plaintiffs’ lawyers to extract a fee.
Whether or not the proposals the authors suggest are the right solution, this is clearly an abuse of the legal system that needs to be addressed. From my perspective, increased judicial oversight, and especially increased transparency, will go a long way to discouraging the current litigation flood of pointless and costly merger-related litigation.