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Category: Mootness Fees

Judge Denies Attorney Fees for ‘Mooted’ Disclosure Case

February 5, 2024

A recent Law 360 story by Katryna Perera, “Volta Investor Denied Fees For ‘Mooted’ Disclosure Case”, reports that a New York federal judge has declined to award fees to lawyers who represented a Volta Inc. investor who sued the electric vehicle company over allegedly inadequate disclosures related to a potential acquisition, saying the disclosures the company later provided because of the suit didn't give the investing public any new or useful information.  U.S. District Judge Jed S. Rakoff issued an opinion and order denying a request for attorney fees from Wohl & Fruchter LLP, which represents plaintiff David Belcher.

Belcher launched his suit in February 2023, claiming that a preliminary proxy statement Volta issued concerning a potential acquisition by Shell USA Inc. was misleading because it didn't include "specific details" about Shell's relationship with Goldman Sachs and Barclays.  According to the order, Volta had asked the banks for advisory services in connection with the potential sale to Shell.

However, Volta ended up supplying the information Belcher requested in advance of the shareholder vote to approve the sale, so the case became moot. Belcher then moved for attorney fees, arguing that his suit "created a common benefit for Volta shareholders by causing Volta to provide those supplemental disclosures."

But Judge Rakoff disagreed, saying that while there is no doubt that Belcher's suit "played a substantial role in the defendant's decision to take corrective action," Belcher has not identified any false or misleading statements in the preliminary proxy statement that needed correction to begin with.  The judge added that the supplemental disclosures consisted of publicly available information and were, therefore, not material.

Delaware Chancery Grants Full $18M ‘Mootness’ Fees

November 17, 2023

A recent Law 360 story by Tom Zanki, “Chancery Grants Full $18M ‘Mootness’ Fees to Politan Counsel”, reports that a Delaware judge granted an activist fund's legal team its full request for a nearly $18 million "mootness" fee as reimbursement for legal expenses, ruling that its closely watched suit challenging medical technology company Masimo Corp.'s allegedly harmful control arrangements produced changes that benefited shareholders.

Vice Chancellor Nathan A. Cook's ruling stems from an October 2022 lawsuit filed in Delaware Chancery Court by Politan Capital Management LP that sought to invalidate Masimo's adoption of bylaw amendments and a "poison pill" after Politan acquired a nearly 9% stake in the company.  Masimo later revoked various bylaw amendments targeted by the hedge fund, rendering moot much of Politan's complaint.  "I don't think it would be an exaggeration to say that Politan blew this case out of the water in terms of achieving pretty much all of the very substantial corporate benefits that it set out to achieve by filing this litigation," Vice Chancellor Cook said while delivering his ruling during a conference call.

The vice chancellor's decision followed oral arguments.  Politan's counsel sought $17.75 million to cover attorney fees, arguing that they incurred vast costs before Masimo in February rolled back control changes that prompted Politan to later voluntarily dismiss its claims.  "Zero question, they would never have done that had we not sued them," said Schulte Roth & Zabel LLP partner Michael Swartz, representing Politan during oral arguments.

Five other firms have committed hours to representing Politan at various stages of the litigation, according to court filings: Morris Nichols Arsht & Tunnell LLP, Cadwalader Wickersham & Taft LLP, Young Conaway Stargatt & Taylor LLP, BLA Schwartz PC and Ashby & Geddes PA.  Masimo lawyers argued that Politan's fee request was "staggering" and had no reasonable comparison to other corporate law disputes.  Politan's request was also excessive, Masimo's counsel argued, because the company revoked its contested bylaws to defuse a high-profile proxy contest underway in early 2023 rather than because of Politan's suit.

Counsel for Masimo argued that Politan's team should receive no fees, or at most $3.5 million, which represented the company's estimate of what remained after removing fees Politan spent on claims that it later abandoned and other items that should not be compensated for, according to their legal briefs.  "This was really a self-interested litigation designed to benefit Politan and not the stockholders at large," Hueston Hennigan LLP partner John Hueston said, representing Masimo in oral arguments.

Vice Chancellor Cook disagreed.  He determined that Politan's suit opened the path for Masimo shareholders to control the company's board of directors and removed costly provisions that would have compensated Masimo CEO Joe Kiani in the event of a change in control.  "This court recognizes the obvious fundamental benefit of preserving stockholders' right to vote and elect directors of their choosing — even if litigation to enforce that right ends up benefiting the plaintiff," Vice Chancellor Cook said.

Software Investor Wins Mootness Fees in Delaware

October 31, 2023

A recent Law 360 story by Rose Krebs, “Software Investor Gets $100K ‘Mootness’ Fee For Attys in Del.”, reports that a vice chancellor in Delaware's Chancery Court has awarded $100,000 in attorney fees and expenses to a Unity Software Inc. investor who filed a lawsuit over disclosures related to the company's $4.4 billion merger with ironSource Ltd., far less than the $850,000 sought.  In a letter decision, Vice Chancellor Lori W. Will awarded a "mootness fee" to investor plaintiff George Assad, represented by Block & Leviton LLP and Friedman Oster & Tejtel PLLC, saying his suit led to "minimally helpful rather than material" disclosures about a transaction intended to help finance the merger.

Initially, Assad sued to enjoin the merger "because of purportedly deficient disclosures," but a proxy statement was then filed that mooted the suit, according to the vice chancellor's opinion.  Assad then filed an amended suit with "additional disclosure challenges" but "supplemental disclosures were then issued to moot the amended claims," the vice chancellor said.  Assad asked for an $850,000 attorney fee and expense award, arguing that two supplemental disclosures the company issued in response to his litigation conferred a "substantial benefit" to Unity's stockholders.

"Plaintiff's counsel expended meaningful time and effort to achieve the benefit provided by the initial and second supplemental disclosures, including fully briefing a preliminary injunction motion, which was not mooted until the eve of the hearing," the fee request said.  Assad filed suit in August 2022 against the company's directors, alleging that they had failed to disclose conflicts of interest surrounding a proposed $1 billion issuance of convertible notes to the company's two largest stockholders, Silver Lake and Sequoia Capital Fund LP.

Silver Lake and Sequoia's proposed investment in Unity, structured as a "private interest in public equity" deal, was intended to help finance the ironSource merger.  Stockholders were not asked to vote on the PIPE deal itself, but were asked to approve an issuance of Unity common stock in connection with the transaction.  Assad alleged that Unity failed to provide sufficient details in a proxy to stockholders about how Morgan Stanley & Co. LLC and Goldman Sachs & Co. LLC were involved in the deal and how they had been paid. Both companies provided financial advice to Unity about the merger and the PIPE deal.

A few weeks after Assad sought to expedite the Chancery Court case, Unity amended the proxy, partly mooting the complaint by disclosing that Unity had agreed to pay Goldman Sachs $2 million on consummation of the deal, the fee request said.  After discovery produced documents "revealing additional, undisclosed banker conflicts," Assad amended the complaint, his fee request said.

Then, on the day before a preliminary injunction hearing was scheduled to take place, Unity filed a second supplemental disclosure, fully mooting the plaintiffs' claims.  Vice Chancellor Will dismissed the case as being moot last year.  Unity disclosed three categories of information in the second supplemental disclosures that rendered the case moot, Assad's fee application said.

First, Unity disclosed that Morgan Stanley had been concurrently representing Silver Lake, Sequoia and ironSource's largest stockholder, CVC Capital Partners and its affiliates.  Unity also disclosed millions in fees that Morgan Stanley and Goldman Sachs received for their work with ironSource, CVC, Sequoia and Silver Lake in the two years prior to the merger.  Unity also disclosed what Assad called a "fair summary" of Morgan Stanley's financial analyses of the convertible note transaction.

Assad's attorneys spent 271.55 hours on the case and incurred almost $10,000 in expenses, the fee request said.  The $850,000 fee award was an all-in request that includes both fee and expenses.  The defendants had argued that the supplemental disclosures "were immaterial," and that the attorney fee awarded shouldn't exceed $75,000, Vice Chancellor Will's ruling said.

"They largely relate to a separate transaction that was not the subject of a stockholder vote," the decision said.  "There are two exceptions.  It is reasonably conceivable that omissions of the compensation paid to and a potential conflict of one of the company's financial advisers would give rise to a meritorious claim.  A mootness fee of $100,000 is awarded for these material — and unremarkable — disclosures."

Article: Judge Posner Called It a ‘Racket’

August 3, 2022

A recent article, “Judge Posner Called It a ‘Racket’” by Gregory Markel, Daphe Morduchowitz, and Sarah Fedner reports on mootness fees in federal merger litigation.  This article was posted with permission.  The article reads:

In a recent decision from the United States District Court for the Southern District of New York, a federal Judge pushed back against the common but abusive practice of “mootness fee” payoffs in public M&A deals. In the February 2022 opinion, Judge Oetken denied a $250,000 attorneys’ fee demand by plaintiff’s counsel in an investor challenge to Microsoft’s $19.7 billion acquisition of Nuance Communications. The decision is by a court which took the opportunity to both consider and reject a widespread phenomenon that many call a meritless shakedown or transaction tax on public M&A deals. This decision is significant in that it is fairly rare for mootness fee payments to be subject to court scrutiny despite the increasingly common voluntary dismissals by plaintiffs in this type of case. For more information about the history of mootness fee and disclosure only settlements and the need for reform click here. 

The Delaware Court of Chancery’s 2016 decision in In re Trulia, Inc. Stockholder Litigation, which criticized so called “disclosure only settlements” paid to plaintiffs’ counsel in exchange for supplemental disclosures that do not provide any material additional information, led to a steep decline in filings of merger litigation in the Delaware Court of Chancery.[1] Following the Trulia decision,  there was a sharp increase in merger challenges filed in  federal court. A number of plaintiffs’ firms filed cases in federal court very similar to the ones criticized in Trulia with the apparently sole purpose of obtaining attorneys’ fees in exchange for voluntary dismissals and non-material supplemental disclosures. These voluntary dismissal cases, because they are dismissed prior to class certification, generally are not subject to court approval.

Background

Beginning in 2009, filings of class action claims challenging mergers increased substantially. As of 2015, the year before the Trulia decision, roughly 95% of merger transactions valued at more than $100 million were challenged.[2] 60% of these challenges were filed in Delaware courts, and more often than not in Chancery Court, while only 19% were filed in federal courts in other states.[3]

These cases were typically resolved in early settlements with corrective disclosures and broad releases of future class claims for defendants that required court approval. Plaintiffs’ attorneys’ fee requests were often approved by the courts under the common law, corporate benefit doctrine. The disclosures supposedly provided shareholders with information material to making an informed investment decision. In reality, however, the added disclosure they provided  was not meaningful and most often a makeweight to justify plaintiffs’ counsels’ attorneys’ fees. In many cases, the corrective disclosures were nearly pointless and did not affect many shareholder votes. Thus, many class actions filed in connection with M&A deals became a vehicle for plaintiffs’ firms to obtain attorneys’ fees with little, if any, meaningful benefit for shareholders. Since class actions were created to benefit a class of injured claimants, there was a fairly obvious disconnect between the theoretical purpose and the reality of the motive behind many merger cases. Judge Posner of the Seventh Circuit referred to this practice by plaintiffs as “no better than a racket.” [4]

The Trulia Decision

The Delaware Chancery’s Court decision in Trulia sought to put an end to this practice by limiting disclosure-only settlements to those that resulted in disclosures that added significant value to class members and provided releases of sensible scope. The Trulia court refused to approve a proposed settlement, which included supplemental disclosures and attorneys’ fees in exchange for a broad release, finding that the proposed disclosure was not “plainly material” as defined under Delaware law.[5] The Trulia court cautioned that, unless there was “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available,”[6] proposed disclosure-only settlements and accompanying attorney’s fees would not be approved going forward by the Chancery Court.[7]

Federal Merger Litigation Post-Trulia

Trulia came as the culmination of several then recent Delaware Chancery Court decisions and it made clear there was a new regime in Delaware Chancery Court for settlements of merger cases. However, Trulia did not apply in other forums. As a result, certain plaintiffs’ firms took advantage of this by challenging mergers in alternative jurisdictions. In 2016, the rate of merger litigation plummeted in Delaware state court by almost 50% and continued to decrease thereafter.[8] This trend was accompanied by an immediate uptick in merger litigation in federal courts.[9] As of 2018, only 5% of completed deals were challenged in Delaware Chancery Court, while 92% were challenged in federal court.[10]

Not only did the rate of filings increase in federal court, but the number of class action cases resolved through voluntary dismissals before a class was certified skyrocketed. Starting in 2016, many merger case filings were followed by voluntary dismissals and a payment of attorneys’ fees to plaintiffs. By 2018, 92% of the federal merger challenges resulted in  voluntary dismissals and payment of mootness fees.[11]

These mootness fees cases generally do not require court approval as the cases are generally dismissed prior to class certification, and therefore without a requirement of court approval, and the fees are infrequently challenged by defendants who often elect to pay the mootness fee demands, even in  the often frivolous cases, in order to avoid delays in completing merger transactions and the costs of  fully litigating  a case on the merits.

Serion v. Nuance Communications, Inc.

In the recent Nuance decision, Judge Oetken denied plaintiff’s counsel’s fee petition, finding that  plaintiff’s counsel had not shown a “substantial benefit” to shareholders from the supplemental disclosures finding that the additional disclosure which was provided of  underlying metrics for data already disclosed did not confer a substantial benefit.” The holding is notable because the supplemental disclosures demanded by plaintiffs are typical of the truly marginal information added in connection with most cases involving mootness fee dismissals.

Conclusion

The payment of plaintiff's baseless fee demands, which individually are not large but in total are much more than trivial, to end frivolous deal challenges continues despite the Trulia decision that criticized a nearly identical practice. The cost of this frivolous deal tax is borne not just by the companies who pay them but also are passed along to consumers and other companies who do business with the payor company and the practice provides little or no benefit to shareholders in most instances. The Nuance ruling is an exception to the more common result of no court review of mootness fee settlements.  Plaintiffs, because of the procedural posture, were required to petition for court approval of the fee. Because mootness fees are not typically reviewed by the courts,  there is a strong need for legislative reform to deal with this practice. In the meantime, the “racket”  in Judge Posner’s terms likely will continue.

Gregory Markel and Daphne Morduchowitz are partners and Sarah Fedner is a senior associate at Seyfarth LLP in New York.  Partners Giovanna Ferrari, Andrew Escobar and associate Meryl Hulteng also contributed to this article.

Counsel Awarded $250K in Mootness Fees in EZCorp Investor Suit

April 7, 2022

A recent Law 360 story by Rose Krebs, “Attorneys Will Get $250K For Mooted EZCorp Investor Suit” reports that counsel for an EZCorp Inc. investor who alleged that officers of the Texas-based pawnshop operator oversaw the unauthorized distribution of more than $16 million worth of company shares will get a $250,000 fee award for a now-mooted Delaware Chancery Court suit.  Chancellor Kathaleen St. J. McCormick approved a stipulated order voluntarily dismissing a derivative suit filed in January by stockholder Jerry Edelman and directing the company to pay $250,000 to his counsel Levi & Korsinsky LLP and Bielli & Klauder LLC for attorneys' fees and expenses.

In the suit, Edelman accused a group of current and former EZCorp directors and executives of unlawfully granting themselves and others more than 2.7 million nonvoting shares of the company between May 2020 and October 2021.  Although EZCorp and the other defendants "deny any and all allegations of the complaint that defendants engaged in wrongdoing in any way," they agreed to pay attorneys' fees "to avoid the potential costs, risks and distraction associated with the defense of a fee application by plaintiff's counsel," the order said.

The stipulated order was filed and signed off on by the chancellor soon after.  It was filed less than 24 hours after attorneys from Richards Layton & Finger PA entered their appearance on behalf of EZCorp and the directors and officers.  At issue in the suit was a long-term incentive plan authorized by EZCorp shareholders in May 2010 that granted company shares to officers, directors and employees.  The plan expired in May 2020, and no new deal had been reached at the time of the suit's filing, Edelman claimed.

Despite that, board members awarded 2,757,293 shares to themselves and others between May 2020 and October 2021, according to the lawsuit.  The suit said shares were distributed six times during that period.  After the suit was filed, the company's board and Phillip Cohen, the company's executive chairman and sole holder of its voting class of common stock, ratified the granting of the stock awards and issuance of company shares, according to the order.

The company's incentive plan was amended effective April 30, 2020, "to allow for the grant of awards under the plan until December 31, 2021 and to increase the number of shares of the company's Class A non-voting common stock authorized for issuance under the plan," the order said.  On March 2, Cohen approved a new equity incentive plan to replace the previous one, "provided that the plan continues to govern awards made under the plan that were outstanding as of December 31, 2021 and that the authorized shares under the 2010 plan remain available to satisfy such awards," the order said.

Parties in the litigation "agree that the ratification of the grant of the awards, the issuances, and the plan amendment, and the adoption of the company's new equity incentive plan mooted the claims set forth in the complaint," the order said.  Edelman's now mooted suit had asserted breach of fiduciary duty, waste of corporate assets and unjust enrichment claims and sought damages and a court order rescinding the awarded shares.