In a prior post, I noted recent academic research detailing the rise of mootness fee dismissals in federal court merger objection litigation. In these merger-related lawsuits, the plaintiffs agree to dismiss their suit based on the defendants’ agreement to make changes to the merger documents – thus, making the merger suit moot – and to pay the plaintiffs’ attorneys a mootness fee. An October 4, 2019 Law 360 article entitled “Plaintiffs Firms Follow Easy Merger Money to Federal Court” (here, subscription required) takes a look at the small group of plaintiffs’ law firms that the most active in filings these kinds of cases and obtaining mootness fees, in a process that at least one federal district judge has characterized as no better than a “racket.”
The current merger objection lawsuit practice in which plaintiffs’ voluntarily dismiss their suit based on defendants’ changes to the deal-related proxy statement and the payment of a mootness fee has its roots in the Delaware Chancery Court’s January 2016 decision in the Trulia case in which the Court rejected a disclosure only settlement of a merger objection suit.
That Chancery court ruling has led the plaintiffs’ lawyers to shift their merger suit filings from state court to federal court. Before Trulia, 97% of the merger objection lawsuits were filed in state court (during the period 2009 to 2015). However, in 2018, only 34% of mergers that resulted in merger litigation faces state court suits, while 91% were challenged in federal court . (Some mergers were challenged in both state and federal court.)
The Trulia decision is also arguably the source of the current mootness fee phenomenon. In his Trulia opinion, one of Vice Chancellor Bouchard’s concerns about the disclosure only settlements in merger objection suits is that the defendants extracted as part of the settlement a total release of all claims, even those that had not been asserted. Bouchard suggested voluntary dismissals with the payment of a mootness fee; this approach would not involve the problems he perceived with respect to comprehensive claims releases, and he assumed the defendants’ incentives would motivate them to police the amount of the fees paid to the plaintiffs’ attorneys.
In practice, the defendants are not policing the mootness fees because it is easier and less bother just to pay the plaintiffs lawyers to go away. As the Law 360 article notes these dismissals and fee payments face “little scrutiny from judges” as a result of which the practice surrounding these mootness fee cases “amounts to a shakedown with little benefit beyond lining attorneys’ pockets.” It is a practice that, as one of the authors of the academic paper cited below notes, amounts to “blackmail,” noting that the defendant companies are paying the fees “just to make these cases go away.”
The Plaintiffs’ Firms
The interesting thing about the Law 360 article is that it details which plaintiffs’ firms are the ones whose pockets are being lined. There are, in fact, only a very small number of plaintiffs’ firms that are responsible for the vast majority of merger objection lawsuit filings in recent years and also in collecting mootness fees. The law firm information in the article comes from the 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, about which I previously reported in the blog post to which I linked at the top of this post.
The academic paper’s authors note that mootness fees generated more than $23 million in mootness fee payments for plaintiffs’ law firms in 2017. The amount of fees in any given case in the past has ranged between $50,000 and $300,000, but more recently the range has narrowed to between $50,000 and $150,000.
According to the information in the Law 360 article, three law firms – Monteverde, Ridgorsky & Long, and RM Law – are “driving the shift” of merger objection cases from state court to federal court. Ridgorsky & Long has filed 163 federal district courts YTD in 2019, all but one involving mergers and other transactions. RM law has served as co-counsel to Ridgorsky & Long in 106 of the complaints. The Monteverde law firm has filed 76 federal district court complaints so far this year, all but five involving a corporate transaction.
For these firms and others active in this space, the majority of the cases they file are voluntarily dismissed with the payment of mootness fees. For the Monteverde law firm, a whopping 80% of merger objection suits the firm filed between 2017 and January 2019 were voluntarily dismissed with the payment of a mootness fee. For the Ridgorsky & Long firm, 68% of the merger objection suits it filed were dismissed with the payment of a mootness fee. For the RM Law firm, the figure is 65%.
This practice has become pervasive among the small number of plaintiffs’ firms active in this space. According to the academics’ research, none of the six plaintiffs firms most active in this area reached court-approved settlements in more than 4% of these cases. Instead, the plaintiffs’ firms are avoiding judicial scrutiny through the voluntary dismissal and mootness fee approach. Each of the six most active firms dismissed their lawsuits and negotiated mootness fees at least 65% of the time.
Earlier this year, when Northern District of Illinois Judge Thomas Durkin ordered the plaintiffs’ attorneys in the Akorn merger objection lawsuit to return the $322,000 mootness fee they had negotiated in exchange for what Judge Durkin characterized as “worthless” additional disclosures, I was hopeful that the ruling might represent “the beginning of the end” of the merger objection lawsuit mootness fee racket. And indeed other courts have rejected merger objection plaintiffs’ mootness fee requests.
However, by and large, the mootness fee racket continues unabated. Plaintiffs’ lawyers are simply avoiding the jurisdictions where the process might face questions. As one commentator quoted in the Law 360 article notes, “plaintiffs’ lawyers [are] going throughout this country picking jurisdictions or picking courts that they believe they’ll get a higher fee.”
The fact that this practice is permitted to continue or even to exist is an embarrassment to our entire legal system. The plaintiffs’ lawyers have found a way to set themselves up as toll takers, where they extract a payment from merger parties for doing nothing except filing a complaint. When commentators in other legal systems talk about abuses in the U.S. system of litigation, they are talking about practices like this mootness fee racket. Worse still, if these practices are, as one academic notes in the Law 360 notes, “blackmail,” it is blackmail achieved by use of the courts.
It may be that over time enough judges will find their way to the same conclusions about these kinds of cases as Judge Durkin did in the Akorn lawsuit. Even if that ever happens, it will likely take a considerable amount of time. It may be that legislative measures are required.
As I have noted in several prior posts, there are efforts afoot to initiate another round of securities class action litigation reform. The efforts include, for example, suggestions to try to address the unfortunate side effects resulting from the U.S. Supreme Court’s March 2019 decision in Cyan. Many of the proposed reforms have significant merit, and should be pursued. As these initiatives progress, I hope the litigation reform dialog also includes a discussion of ways to squash the merger objection litigation racket.
The federal courts in this country should not be the instrument for the extraction of blackmail payment. Litigation that has absolutely no socially redeeming value and does nothing except enrich a very small number of plaintiffs’ lawyers must be eliminated.