As discussed in prior posts, after the Delaware courts evinced their distaste for the type of disclosure-only settlements that had until then typically resolved merger objection lawsuits, the plaintiffs’ lawyers changed their game. They began filing their merger objection lawsuits in federal court rather than in state court, and then rather than settling the cases, agreed to dismiss their cases in exchange for supplemental proxy disclosures, after which the plaintiffs would seek to recover a so-called “mootness fee.” At least one federal judge recently questioned this “racket,” but the question remained whether more courts would take steps to scrutinize this process and discourage what has become nothing more than the plaintiffs’ lawyers’ extraction of a “go away” payment.
In a positive sign suggesting that court may indeed become more involved in policing this process, a District of Delaware judge recently rejected merger objection lawsuit plaintiffs’ mootness fee petition on the ground that the plaintiffs failed to carry their burden of showing that the supplemental disclosures produced a substantial benefit for the acquired company’s shareholders.
The Delaware litigation arose out of the $5.4 billion acquisition of DST Systems, Inc. by SS&C Technologies. Shortly after DST filed a proxy statement describing the transaction, shareholders filed three lawsuits alleging that the preliminary proxy statement omitted material information in violation of Sections 14(a) and 20(a) of the ’34 Act. DST voluntarily issued a supplemental disclosure to moot the pending lawsuits. The plaintiffs’ agreed the supplemental disclosures mooted their lawsuits, and sought recovery of their attorneys’ fees.
In response to the plaintiffs’ attorneys’ fees petition, the Court requested supplemental briefing. The Court’s supplemental briefing request reflects a palpable skepticism about the fee request. For example, in the Court’s question number 2, the court asks “The Parties request fees for three virtually identical lawsuits. Why should three plaintiffs receive attorneys’ fees for the same supplemental disclosure?” The Court’s question 4 notes “Dennis Pratt, a plaintiff in a now-settled Missouri suit, has not entered an appearance in either case, but is requesting that I award him attorneys’ fees. What legal authority supports the propriety of Mr. Pratt’s request?”
As far as I can tell from the record, the defendants opposed the plaintiffs’ fee petition, which is somewhat unusual in these kinds of cases. To the extent the defendants did indeed oppose the petition, I cannot tell why. However, the defendants’ response to the court’s request for supplemental briefing – particularly with respect to the prevalence of this type of merger objection litigation and the near uniformity of outcomes for these kinds of cases (that is, supplemental disclosures and a request for mootness fees) – makes for interesting reading.
The August 23, 2019 Opinion
In an August 23, 2019 opinion (here), District of Delaware Judge Richard G. Andrews denied the plaintiffs’ fee petition, finding that the plaintiffs had failed to carry their burden in establishing that the supplemental disclosures produced a “substantial benefit “on DST shareholders. The Court said a review of the supplemental disclosures “reveals that Plaintiffs have failed to carry their burden on materiality of the information.” The Plaintiffs, the Court said, “have not established that they provided the stockholders with a substantial benefit so as to warrant an award of attorneys’ fees.”
In making this determination, the Court noted that the plaintiffs did not develop a factual record or proffer expert opinion in support of their contention that the supplemental disclosures had conferred a substantial benefit on DST’s shareholders. Essentially, the court noted, the plaintiffs argued that the information was so plainly material that its disclosure was a substantial benefit as a matter of law – about which the Court said, “I do not find Plaintiffs’ position persuasive.”
To the contrary, the Court said, “it is far from clear, as a factual matter in this case, that the information disclosed by Defendants was material.” The various arguments, opinions from other cases, and law review articles on which the plaintiffs relied “do not carry the weight Plaintiffs put on them.”
The Court concluded that “absent evidence that the information was material, there is no basis in the record to find that Plaintiffs conferred any benefit on DST stockholders.” Simply put, the Court said, “there is no basis in the record to find that Plaintiffs conferred any benefit on DST stockholders.” Thus, the Court said, “I will deny Plaintiffs’ motion for attorneys’ fees.”
The most positive thing about this decision is the Court’s willingness to become actively involved in assessing the merits of the fee petition. The truth is that what Judge Andrews said about the supplemental disclosures in this case could be said in virtually every single one of these merger objection lawsuit mootness fee cases. The point of this racket is not to produce an actual benefit for shareholders. The point is to provide a pretext for the plaintiffs’ lawyers’ to extract a fee, which the defendants pay just to make the plaintiffs’ lawyers go away.
It is particularly significant that the Court applying the scrutiny to this fee request was the District of Delaware. Although plaintiffs’ lawyers have been filing their merger objection lawsuits in a very wide range of federal district courts, there have been a plethora of these lawsuits filed in the District of Delaware. For example, of the 101 federal court merger objection lawsuits filed year-to-date this year, 65 were filed in the District of Delaware. If the outcome of this fee petition can be interpreted to signal that the judges in the District of Delaware are going to more closely scrutinize petitions for mootness fees more closely, the attractiveness to the plaintiffs’ lawyers for filing these cases in the District of Delaware could be significantly undermined.
To be sure, Judge Andrews only said that these plaintiffs in this case did not carry their burden of showing a substantial benefit to shareholders. There is nothing about the opinion to suggest that another plaintiff in another case might not be able to carry its burden – or even that these plaintiffs might not have been able to meet their burden if they had done a better job marshalling the evidence to support their petition. The court said only that the plaintiffs had failed to come forward with evidence to support their argument that their lawsuit provided a substantial benefit to shareholders.
Moreover, even if it is the case that the court’s ruling on the plaintiffs’ fee petition here can be interpreted to suggest greater fee petition scrutiny by the judges in the District of Delaware, the plaintiffs’ lawyers can always try to file their lawsuits in another federal district court, where mootness fee petitions might not face the same level of scrutiny.
That said, it certainly is a welcome development to see a court take a close look at a mootness fee case resolution. We can only hope that more judges in more of these cases become similarly involved; the fact is that these kinds of lawsuits are an embarrassment to our entire legal system. If enough courts scrutinize enough of these suits, pretty soon the plaintiffs’ lawyers will have to find another way to make a living. To paraphrase Hamlet, it is a consummation devoutly to be hoped for.
Special thanks to a loyal reader for providing me with a copy of Judge Andrews’s opinion.