One of the great curses on our legal system is the merger objection litigation phenomenon, pursuant to which nearly every proposed public company merger inevitably attracts at least one shareholder lawsuit in which the claimant alleges that the proxy statement disclosures regarding the proposed merger were inadequate. These lawsuits almost uniformly are settled after the defendant company voluntarily agrees to make supplemental disclosures, for which the plaintiff seeks a “mootness fee” (for supposedly obtaining the supplemental disclosures, making their lawsuit moot). When they have the chance, courts have uniformly disdained these kinds of shakedown; one prominent jurist described this recurring procedural sequence as “no better than a racket.” Yet plaintiffs’ counsel continue to file these suits and to get away with extracting fees, because the settlements and payment of attorneys’ fees so often evade judicial scrutiny.
In a recent decision, in a federal district court’s review of a mootness fee petition, the court declined to award the requested fees because, the court found, the supplemental proxy statement disclosures did not confer a substantial benefit on shareholders. The court’s ruling reinforces the conclusion that when these kinds of mootness fee requests are subject to judicial scrutiny, the fees sought uniformly are found to be unwarranted. As discussed below, the most recent ruling reinforces continuing calls for securities litigation reform to address the mootness fee “racket.” A copy of the district court’s February 7, 2022 order in the Nuance Communication merger objection lawsuit can be found here. A May 9, 2022 Sidley law firm memo about the ruling can be found here.
In April 21, 2021, Nuance Communications announced that it had entered a $19.7 billion agreement to merge with Microsoft. As is almost uniformly the case these days, the announcement was followed by a raft of federal court lawsuits alleging that the company’s disclosures regarding the proposed merger were inadequate. One of the lawsuits was filed by shareholder Albert Serion, who was represented by Monteverde & Associates PC.
After the lawsuits were filed, the defendant company filed a supplemental proxy statement in which the company provided additional disclosures regarding the nondisclosure agreement between the target and the acquiror and provided more information about the financial advisor’s analysis. These supplemental disclosures mooted the various plaintiffs’ claims in the merger objection lawsuits. In making the disclosures, Nuance stated that while the various merger objection lawsuits were without merit, “in order to minimize the expense and distraction of defending such actions,” Nuance disclosed additional information in the supplemental proxy.
In August 2021, the Monteverde law firm filed a motion for attorney’s fees and expenses. Nuance opposed the request, stating, among other things, that the request was simply a “demand to be compensated lavishly for filing a copy-cat lawsuit.” Nuance also decried the phenomenon of “strike-suit filings” in which “repeat player law firms file suits demanding meaningsless additional details, thereby threatening to hold up the transaction.” These “attorney-driven shakedowns” impose “a tax on corporate transactions” and serve only to “enrich a handful of plaintiffs’ firms.” Nuance specifically noted that the Monteverde firm was among the “prime beneficiaries of this trend,” having filed 66 disclosure complaints in the preceding six months alone, the vast majority of which were voluntarily dismissed.
The February 7, 2022 Order
In a short February 7, 2022 order, Southern District of New York Judge J. Paul Oetken denied the plaintiff’s fee petition, holding that the plaintiff had not shown that the supplemental disclosures conferred a “substantial benefit.”
The Monteverde firm had argued that its suit had prompted Nuance to disclose previously withheld metrics Nuance’s financial advisor had used in doing a comparative analysis of Nuance and its peer companies. Judge Oetkin said that “numerous courts have concluded that prompting disclosure of underlying valuation metrics does not confer a substantial benefit on shareholders and that their disclosure is not required by law.”
The Monteverde firm had also claimed that it had caused Nuance to disclose price targets from research analysts that were previously withheld. Judge Oetkin said that the range of price targets that were already included in the proxy statement “provides a fair summary of [the financial advisor’s] work and quibble with a financial advisor’s work simply cannot be the basis of a disclosure claim.”
Judge Oetken’s rejection of the Monteverde firm’s fee petition is a welcome development, as it underscores the extent to which these merger objection lawsuits that are invariably filed following news of an M&A transaction produce no benefit for the shareholders – and that the plaintiffs’ lawyers ought not to be rewarded simply for filing a lawsuit that has no value and does nothing.
The Sidley law firm’s memo about Judge Oetken’s ruling to which I linked above called the ruling “particularly significant” because Nuance’s supplemental disclosures about its financial advisor’s analysis “are the type of additional disclosures often made in these circumstances to moot disclosure-only lawsuits.” The court’s conclusion that these routine kind of supplemental disclosures do not provide sufficient shareholder benefit to justify the award of fees undermines the demand of plaintiffs’ lawyers that mooting of their disclosure claims warrants the award of fees.
A February 8, 2022 Law360 article about Judge Oetkin’s ruling in the Nuance case quotes Nuance’s counsel as saying about the ruling that “these meritless strike suits are an unnecessary tax on corporate transactions,” and that “we’re hopeful that the result here will help to discourage similar filings in the future.”
The fact is that when these kinds of mootness fee demands are subjected to judicial scrutiny, the fee request are almost uniformly rejected. The judiciary’s disdain for the plaintiffs’ lawyers shakedown “racket” is shown in Judge Richard Posner’s 2016 decision in the Walgreen’s case (discussed here). Similarly, as discussed here, in 2019 a Illinois federal judge revoked a $322,000 attorneys’ fees to be paid to the plaintiffs’ lawyers in connection with a separate lawsuit (also filed by the Monteverde law firm) in connection with Akorn, Inc’s planned merger with Fresnius Kabi AG.
But while it is the case that when subjected to judicial scrutiny, these kinds of mootness fee awards are almost uniformly rejected, the problem is that the payment of mootness fees is almost rarely subject to judicial scrutiny.
The plaintiffs’ lawyers modus operandi is to voluntarily dismiss their suits after the supplemental disclosures, in exchange for the defendant company’s agreement to pay the plaintiffs’ lawyers a modest fee. In effect, it is worth it to the defendant company to pay the plaintiffs’ “go away” money, as incurring costs fighting the fee request would be good money after bad.
The fact is that the plaintiffs’ lawyers are using the availability of judicial processes as a way to extract a fee simply for doing nothing more than filing a complaint. Yet the use of judicial processes to produce a shakedown is almost never subject to judicial scrutiny. Indeed, these days, the plaintiffs’ lawyers routinely file their merger objection lawsuits as individual actions rather than as class actions, to try to further insulate their shakedown racked from judicial scrutiny.
While it is encouraging to see courts stepping forward as Judge Oetken did here and rejecting unwarranted efforts by plaintiffs’ lawyers to try to extract a fee – as if they were some kind of self-appointed toll taker – the absence of judicial scrutiny in most cases means that the plaintiffs’ lawyers likely will be able to continue to pursue their shakedown racket. The only way a stake is going to driven into the heart of wasteful merger objection litigation is through legislative securities litigation reform.
As encouraging as it is to see a federal district court judge say out loud that plaintiffs’ lawyers should not be rewarded for filing lawsuits that do not benefit shareholders, that is not going to be enough. As discussed in greater detail here, we are long past the time that Congress needs to do something to eliminate the curse of merger objection strike suits.