As I have detailed in prior posts, in the latest variant in the merger objection litigation game, the plaintiffs agree to dismiss their lawsuit after the defendant companies make additional disclosures and agree to pay the plaintiffs’ counsel a “mootness fee.” The absence of any court involvement in the case resolution makes this an attractive alternative for the plaintiffs’ lawyers. However, at least one court recently intervened in order to upset this cozy game.
As discussed here, in a blistering June 2019 opinion, Northern District of Illinois Judge Thomas Durkin, exercising what he called his “inherent authority,” acted to “abrogate” the parties’ settlement in 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.”
Now, in the brief to the Seventh Circuit filed on their appeal of Judge Durkin’s order, the plaintiffs argue that Judge Durkin’s order was “void” because Judge Durkin lacked jurisdiction, had “no authority to continue” after the parties’ settlement, and that he “drastically overstepped the bounds of [the court’s] inherent authority.” The plaintiffs brief sets the stage for what may prove to be a very interesting appellate decision.
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).
Judge Durkin concluded he had the authority to review the settlement, in light of the statement of Judge Posner’s opinion in the Walgreen 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.
Since it had “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. The plaintiffs appealed to the Seventh Circuit.
The Plaintiffs’/Appellants’ Brief
In their recently filed brief, the plaintiffs argue that Judge Durkin’s ruling in the district court is “unprecedented” and “riddled with a series of critical and fundamental errors, and it warrants reversal.”
As grounds for reversal, the plaintiffs first argue that the order was “void because it lacked jurisdiction” as it “acted after the controversy was over” and under the Federal Rules of Civil Procedure the court “had no authority to continue.” The court’s decision to “abrogate” the parties’ settlement “is directly at odds with settled law.”
The plaintiffs further argue that by litigating the merits of the parties’ settled and dismissed claims, the district court “drastically overstepped the bounds of its inherent authority,” arguing that reliance on inherent authority may not be used to “side-step applicable rules, statutory regimes, and established principles of law.”
The plaintiffs also contend that the Walgreen opinion on which the district court placed so much weight gave the court no authority to review the mootness fee. In Walgreen, the plaintiffs argue, the Seventh Circuit was reviewing fees awarded in connection with a settlement on behalf of a shareholder class. In the Akorn case, the district court was not reviewing a class settlement; instead, the court inserted itself to assess a private agreement between the parties in the underlying dispute, an agreement that did not need court approval, and about with respect to which the court had no authority.
Finally, the plaintiffs argue that even if the Court had the authority to act, the Court’s review of the settlement was “fundamentally flawed,” as the Court failed to properly apply the judicial standard for reviewing a mootness fee and failed to properly consider the additional disclosures plaintiffs’ complaint prompted.
The merger objection lawsuit phenomenon is a curse on our judicial system that effectively imposes a process tax on the parties to the merger transaction. In recent years, these lawsuits have been filed in connection with the vast majority of claims. As one recent academic study showed, in 2018 alone, over 80% of all merger transactions valued over $100 million were the subject of at least one merger objection lawsuit.
Following the Delaware Chancery Court’s January 2016 decision the Trulia case (discussed here), which evinced the Delaware court’s disdain for the type of disclosure-only settlement by which these merger objection suits were resolved, the plaintiffs lawyers began filing the merger objection lawsuits in federal court rather than in state court, and in recent years, began resolving the cases based on mootness fee settlements. These settlements are costly. The academics in the recent study put the low range estimate of the aggregate in mootness fee paid in 2017 alone at $23.32 million. The federal court merger objection lawsuit continue to be filed at a torrid pace; of the 340 2019 YTD federal court securities class action lawsuit filings, 133 (or 39% of all year to date securities suit filings) are merger objection lawsuits.
Given the egregiousness of the problems surrounding merger objection litigation, I applauded Judge Durkin’s opinion at the time. I hoped that the opinion might signal the “beginning of the end” of the merger objection lawsuit phenomenon. However, I did also note that in order for Judge Durkin’s ruling to have any impact on the merger objection litigation racket, other courts would have to be persuaded that they had the authority to review mootness fee agreements as Judge Durkin did.
The plaintiffs’ brief goes to the heart of the question of whether or not district courts have any authority to review these kinds of agreements. The brief uses rather vivid language to suggest that Judge Durkin overstepped the bounds of his authority in “abrogating” the settlement and setting aside the agreed mootness fee.
How the appellate court will rule remains to be seen. Ted Frank, the Akorn shareholder who appeared to object to the mootness fee in the district court, has filed a motion to be allowed to appear as an amicus curiae before the Seventh Circuit, in order to argue in favor of Judge Durkin’s district court rulings.
Ultimately, this appeal may require the Seventh Circuit to address some fundamental questions about the reach of the court’s authority. Depending on how it plays out, this appeal could result in some very interesting discussion of the extent of district court’s authority.
But while the outcome of this appeal remains to be seen, I am rooting for Judge Durkin’s decision to be affirmed. Not because I have strong views about the inherent authority of district courts but rather because I would like to see his ruling on the mootness fee issue validated. Anything that might help to drive a stake in the heart of the merger objection litigation curse should be encouraged.
For my recent discussion of the plaintiffs’ firms who are filing these lawsuits and walking off with the mootness fees, please refer here.