Academic journal article Vanderbilt Law Review

Mootness Fees

Academic journal article Vanderbilt Law Review

Mootness Fees

Article excerpt

Introduction

The recent history of merger litigation-shareholder lawsuits challenging a merger-can best be described as schizophrenic.1 Starting in 2009, merger litigation rates climbed markedly. At the peak, in 2013, over 96% of publicly announced mergers were challenged in shareholder litigation.2 During this time period, merger litigation also extended to multiple jurisdictions, with the average deal in 2011 attracting five lawsuits.3 Delaware courts attracted a substantial proportion of these lawsuits; in 2015, 60% of all deals were challenged by a lawsuit filed in the Delaware Chancery Court.4

This picture of merger litigation began to change about five years ago. Issuers adopted forum selection bylaws to prevent plaintiffs from filing litigation challenges in multiple states, and these bylaws were upheld first by the Delaware courts5 and subsequently by the legislature.6 The Delaware courts also responded in a series of decisions restricting the scope of merger litigation both substantively and procedurally.7

The decisions limiting the scope of merger litigation culminated in In re Trulia Inc. Stockholder Litigation in 2016. In Trulia, the Delaware Chancery Court held that the Delaware courts would no longer approve merger litigation settlements that provided for a release and an award of attorneys' fees if they did not achieve meaningful benefits for shareholders.8 The Trulia court specifically rejected a proposed settlement which offered to provide plaintiffs with additional nonmaterial disclosures in exchange for a broad release and a fee award to plaintiffs' counsel.9 The court noted in dicta that, rather than resolving merger litigation through a court-approved settlement and fee award, the defendant could voluntarily make supplemental disclosures in response to the plaintiffs' challenge, rendering the case moot.10 Six months later, in In re Xoom Corp. Stockholder Litigation, a Delaware court awarded a $50,000 mootness fee.11 The Xoom court stated that the Trulia requirement of materiality did not apply to mootness dismissals and that "a [mootness] fee can be awarded if the disclosure provides some benefit to stockholders, whether or not material to the vote."12

These substantive changes in Delaware law, coupled with the Trulia decision, reduced the attractiveness of merger litigation in Delaware. Delaware's crackdown did not put an end to merger litigation, however. Instead, the changes resulted in the flight of merger litigation filings from Delaware to the federal courts.13 These federal suits repackaged state-law claims based on fiduciary duty into antifraud actions under section 14A and Rule 14a-9 thereunder.14 By 2017, merger litigation rates, which had dipped to 74% of deals in 2016, rose to 83%, but only 10% of litigated deals faced a challenge in Delaware, while 87% faced one in federal court.15 By 2018, the numbers were even more dramatic-5% of litigated deals were challenged in the Delaware courts, and 92% gave rise to a federal court lawsuit.16

In prior work, we identified the shift to federal court and posited that the change was due to Trulia and other Delaware decisions.17 We document here an additional component of the shift to federal court: the increased and distinctive use of mootness dismissals. Although some commentators expected the move to federal court to result in greater scrutiny of plaintiffs' allegations of disclosure violations-scrutiny that would result in the outright (and involuntary) dismissal of cases-that outcome has not yet materialized.18 Almost all of the federal court mootness dismissals take place without an adversarial process, meaningful judicial oversight, or an evaluation of whether the complaint even states a colorable claim.

Based on what we can ascertain from public filings, post-Trulia cases filed in federal court are almost invariably terminated through a voluntary dismissal coupled with the payment of a mootness fee to the plaintiffs' attorney. …

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