Did the Seventh Circuit Just Sound the Death Knell for Mootness Fees?

For decades, corporate merger and acquisition deals have been plagued by meritless claims asserting, typically, that the companies and their officers and directors have provided insufficient disclosures. Courts have sought to crack down on these lawsuits, but—as in the game of whack-a-mole—the plaintiffs bringing these lawsuits have adjusted their tactics to avoid the judicially imposed barriers.

Defendants and courts pulled unwillingly into this game just received a substantial assist from the Seventh Circuit in opposing efforts to demand mootness fees related to merger disclosures. Judge Frank Easterbrook’s opinion for the court in Alcarez v. Akorn, Inc. might even mark the beginning of the end for the practice of paying fees to plaintiffs’ counsel for dismissing certain insufficient-disclosure claims under the federal securities laws, which has received substantial criticism in the courts and academic circles.¹ This article reviews the evolution of mootness fees and then considers whether the Akorn opinion opens a major new phase in that evolution, as the decision concludes that court review of the suit’s propriety under the Private Securities Litigation Reform Act (“PSLRA”)² and Federal Rule of Civil Procedure 11 is required for both individual stockholder actions—the current predominant practice—and purported stockholder class actions, like those at issue in the Akorn opinion. No matter what the next phase brings, Akorn gives merger-litigation defendants and companies that receive disclosure-related demand letters more leverage to refuse to pay mootness fees.

“NO BETTER THAN A RACKET”: MOOTNESS FEES AND MERGER LITIGATION

Mootness fees are sought by counsel for plaintiff stockholders of a company that is party to a merger who file a complaint or issue a demand letter, typically arguing that the company’s proxy statement omits certain disclosures. Whether or not those disclosures include material information, the company has an incentive to moot the plaintiff’s claims by voluntarily making the demanded disclosures. Plaintiffs’ counsel can then collect fees from the company, often in the range of $50,000 to $300,000, on the theory that they provided a common benefit to the stockholders by prompting the additional disclosures, at a cost to the company far less than that of litigating their claims.³ The ease with which counsel can extract a fee even for immaterial disclosures that do not aid stockholders has made mootness fees controversial.

Mootness fees are one species of the “merger tax” that Delaware and federal courts have sought to limit for years. As stockholder class action litigation expanded in the Delaware courts in the late 2000s, primarily alleging breach-of-fiduciary-duty claims in connection with mergers and acquisitions, corporate defendants commonly sought to settle claims by providing supplemental disclosures and paying fees to plaintiffs’ counsel in exchange for broad releases that bound all members of the stockholder class.⁴ The Delaware courts initially approved these disclosure-only settlements but became skeptical as it grew apparent that “the supplemental disclosures provided no discernable benefit to stockholders, [but] the resulting attorneys’ fees provided meaningful benefits to the plaintiff’s attorneys directly involved in the litigation, thereby increasing the attraction of strike suits.”⁵ In 2016, the Delaware Chancery Court imposed a new standard under which disclosure-only settlements would be approved only if the disclosures were “plainly material.”⁶

Plaintiffs’ counsel responded by shifting merger litigation from Delaware state court into the federal courts, principally alleging claims under the Securities Exchange Act of 1934 (“Exchange Act”) instead of breach of fiduciary duty.⁷ Initially, these actions were filed as class actions seeking disclosure-only settlements, but, by 2018, a majority of resolutions of the cases involved mootness fees instead of formal settlements. This was done as a means of avoiding court approval required for the settlement of class actions and certain requirements of the PSLRA.⁸ As this practice evolved, plaintiffs’ counsel switched from filing purported class actions to filing individual stockholder actions: by 2021, more than 90% of mergers that drew a litigation challenge involved individual actions only, and a mere six M&A class actions were filed in federal court in 2023.⁹

Some federal courts have been resistant to disclosure-only settlements and mootness fees. Even before Trulia drove these cases to federal court, the Seventh Circuit decried “the class action that yields fees for class counsel and nothing for the class” but immaterial disclosures as “no better than a racket.”¹⁰ Since the shift to mootness fees, other courts (such as Delaware and the Southern District of New York) have rejected applications for fees on the ground that the supplemental disclosures extracted were immaterial and did not confer a substantial benefit on stockholders.¹¹

ALCAREZ V. AKORN, INC.

The litigation underlying the Seventh Circuit’s opinion stems from the 2017 proposed acquisition of Akorn, Inc. by Fresenius Kabi AG. Stockholders’ counsel filed five class actions and one individual action to require Akorn to revise its proxy statement issued in connection with the acquisition on the theory that Akorn had violated Section 14(a) of the Exchange Act.¹² Akorn acquiesced and issued supplemental disclosures to moot plaintiffs’ purported disclosure deficiencies, after which all six cases were dismissed by joint stipulations and entry of court orders.¹³ Two months later, all six plaintiffs filed another stipulation stating that they had reached agreement with defendants on a payment of $322,500 in attorneys’ fees and expenses, to be divided among them, and that there were no fee claims to be adjudicated by the court.¹⁴

Within days, Akorn stockholder Theodore Frank, who leads an organization that regularly challenges the fairness of class action settlements, moved to intervene. Frank sought an order to disgorge the mootness fees as unjust enrichment as well as injunctive relief against the plaintiffs’ attorneys to stop them from filing similar “strike” suits.¹⁵ The district court twice denied Frank’s motion to intervene but permitted him to participate as amicus curiae and, by late 2018, required briefing on the materiality of the disclosures from all parties.¹⁶ Having determined that the disclosures were not only not plainly material but actually “worthless” to stockholders, the district court relied on its “inherent authority” to abrogate the mootness fee agreements.¹⁷

On appeal by two of the plaintiffs and Frank, the Seventh Circuit opinion¹⁸ laid out a roadmap for dismissal of merger objection litigation where plaintiffs seek only valueless supplemental disclosures in exchange for mootness fees. Instead of relying on the district court’s concept of its inherent authority, the court looked to Section 21D(c)(1) of the Exchange Act,¹⁹ which reads:

Mandatory review by court[.] In any private action arising under this chapter, upon final adjudication of the action, the court shall include in the record specific findings regarding compliance by each party and each attorney representing any party with each requirement of Rule 11(b) of the Federal Rules of Civil Procedure as to any complaint, responsive pleading, or dispositive motion.

Noting that “[t]his chapter” refers to the entire Exchange Act, the court held that “[t]he district court must make the required findings whether or not a litigant asks” upon dismissal of a case arising under the Exchange Act since such dismissal constitutes a “final adjudication of the action.”²⁰ As a result, even when settlement is the reason for dismissal, district courts must “determine whether each suit was proper at the moment it was filed” under the requirements of Rule 11(b).²¹

The Seventh Circuit agreed with the district judge’s finding that the suits violated all four paragraphs of Rule 11(b).²² In short, the complaint’s allegations that the proxy lacked certain disclosures which were not “plainly material” and were “worthless” to stockholders violated plaintiffs’ counsel’s Rule 11(b) obligations and subjected them to sanction under Rule 11(c)(4). Given the district court’s discretion over the choice of sanction, it would be entitled to “direct counsel who should not have sued at all to surrender the money they extracted from Akorn.”²³

AKORN’S IMPLICATIONS

Although five of the six actions in Akorn were purported class actions, the opinion cannot be cabined to the class action context. Instead, its holding applies to all such Exchange Act disclosure cases, including the currently pervasive individual stockholder actions, and even affects stockholder demands that stop short of filing a complaint in federal court.

As the opinion itself makes clear, mandatory court review under Section 21D(c)(1) applies to “any private action” under the Exchange Act.²⁴ Private actions under the PSLRA are not restricted to class actions but include individual actions as well.²⁵ Courts within the Seventh Circuit must therefore now assess all disclosure-violation actions to determine whether they were brought for an improper purpose (or were otherwise unwarranted under Rule 11(b)) upon stipulated dismissal for mootness. Further, the courts likely must find them in violation of Rule 11(b) where the disclosures were not plainly material and were “worthless” to stockholders.

This requirement not only threatens mootness fees where plaintiffs’ counsel files a class action or individual stockholder complaint asserting Exchange Act disclosure claims but also alters the negotiating leverage between plaintiffs’ counsel and corporate defendants even when the dispute never progresses beyond an initial demand letter.²⁶ Merger parties in receipt of demands to supplement their disclosures with information not plainly material to the stockholder vote now have greater leverage to resist paying mootness fees. After all, defendants can simply supplement their disclosures, and plaintiff’s counsel’s recourse is to file a complaint seeking to collect mootness fees against defendants in follow-on litigation. But an action to collect fees for providing a common benefit to stockholders under the Exchange Act arises under the Exchange Act, too,²⁷ and is therefore subject to the same Section 21D(c)(1) and Rule 11(b) analysis upon adjudication—even if it settles.

Akorn’soverall effect is therefore to strengthen defendants’ hands against merger litigation that raises questionable disclosure-violation claims under the Exchange Act. With the Delaware courts and now an influential federal circuit court turning against mootness fees, the “racket’s” days may be numbered.

¹ 99 F.4th 368 (7th Cir. 2024).

² 15 U.S.C. § 78u-4(c)(1).

³ Matthew D. Cain et al., Mootness Fees, 72 VAND. L. REV. 1777, 1781-82 (2019).

⁴Anderson v. Magellan Health, Inc., 298 A.3d 734, 745 (Del. Ch. 2023) (recounting the history).

⁵Id. at 746. Strike suits yielding disclosure-only settlements drew substantial analysis and critique long before the Delaware courts began to curb them. See, e.g., The U.S. Chamber Institute for Legal Reform, The Trial Lawyers’ New Merger Tax (Oct. 2012), https://instituteforlegalreform.com/wp-content/uploads/2020/10/M_and_A.pdf.

⁶Id. (internal quotations omitted); In re Trulia, Inc. S’holder Litig., 129 A.3d 884, 898 (Del. Ch. 2016).

⁷Anderson, 298 A.3d at 748. See also Cain et al., supra note 3, at 1780; Sean J. Griffith, Frequent Filer Shareholder Suits in the Wake of Trulia: An Empirical Study, 2020 WIS. L. REV. 443, 445 (2020).

⁸ Griffith, supra note 7, at 445; Elizabeth Clark & Courtney Quiros, The Last of Us: Mergers and Acquisitions Lawsuits in Decline, 33 CLASS ACTIONS & DERIVATIVE SUITS [13] (2023).

⁹ Matthew Bultman, Individual Merger Suits Replacing Class Action in Strategy Shift, BLOOMBERG L. (Oct. 13, 2022), https://news.bloomberglaw.com/securities-law/individual-merger-suits-replacing-class-action-in-strategy-shift; see also Cornerstone Research, Securities Class Action Filings: 2023 Year in Review, 4 (2024), https://www.cornerstone.com/wp-content/uploads/2024/01/Securities-Class-Action-Filings-2023-Year-in-Review.pdf (noting only six M&A class action filings in federal court in 2023, in a decline from 18 in 2021 and a high of 198 in 2017).

¹⁰In re Walgreen Co. S’holder Litig., 832 F.3d 718, 724 (7th Cir. 2016) (Posner, J.).

¹¹See, e.g., Serion v. Nuance Commc’ns, Inc., 2022 WL 356695 (S.D.N.Y. Feb. 7, 2022); Sommer v. Sw. Energy Co., 2022 WL 2713426 (D. Del. July 12, 2022); see also Anderson, 298 A.3d at 749 (henceforth, Delaware Chancery Court will only award mootness fees where supplemental disclosures involve material information).

¹²Akorn, 99 F.4th at 372; for further detail, see also Berg v. Akorn, Inc., 2017 WL 5593349 at *1 (N.D. Ill. Nov. 21, 2017), vacated and remanded sub nom. Akorn, 99 F.4th at 368.

¹³Berg, 2017 WL 5593349, at *1.

¹⁴Id.

¹⁵ Akorn, 99 F.4th at 372.

¹⁶Id. at 373; House v. Akorn, Inc., 2018 WL 4579781, at *3 (N.D. Ill. Sept. 25, 2018), vacated and remanded sub nom. Akorn, 99 F.4th at 368.

¹⁷House v. Akorn, Inc., 385 F. Supp. 3d 616, 623 (N.D. Ill. 2019).

¹⁸ Judges Easterbrook and Diane Wood issued a quorum opinion following the death of the third member of the panel.

¹⁹Akorn, 99 F.4th at 376 (citing 15 U.S.C. § 78u-4(c)(1)). Section 21D of the Exchange Act was enacted as part of the PSLRA.

²⁰Id. (internal quotations omitted).

²¹Id. Fed. R. Civ. P. 11(b) requires an attorney certification that a pleading or paper is “(1) … not being presented for any improper purpose, such as to harass, cause unnecessary delay, or needlessly increase the cost of litigation; (2) the claims, defenses, and other legal contentions are warranted by existing law or by a nonfrivolous argument for extending, modifying, or reversing existing law or for establishing new law; (3) the factual contentions have evidentiary support or, if specifically so identified, will likely have evidentiary support after a reasonable opportunity for further investigation or discovery; and (4) the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on belief or a lack of information.”

²²Akorn, 99 F.4th at 377.

²³Id.

²⁴Id. at 376 (citing 15 § 78u-4(c)(1)).

²⁵In re Honeywell Int’l Inc. Consol. S’holder Litig., 2024 WL 492392, at *4 (D. Del. Feb. 8, 2024) (“[T]here is no question that [15 U.S.C. § 78u-4(c)(1)] extends to all 10b–5 claims, and not merely to class actions”) (quoting Inter-Cnty. Res., Inc. v. Med. Res., Inc., 49 F. Supp. 2d 682, 684 (S.D.N.Y. 1999)); Fishoff v. Coty Inc., 634 F.3d 647, 654 (2d Cir. 2011) (affirming district court’s application of 15 U.S.C. § 78u–4(c)(1) and Rule 11 to individual securities action); see also 5A Fed. Prac. & Proc. Civ. § 1338.1 (4th ed.) (Wright & Miller) (though its legislative history shows most attention to abusive class actions, “the plain language of the PSLRA applies more broadly by embracing ‘any private action’ under the statutes, whether in the class action form or not.”)

²⁶ Plaintiffs’ firms now commonly just issue demand letters asserting purported disclosure deficiencies in violation of the Exchange Act without proceeding to file a complaint in federal court.

²⁷See, e.g., Kaplan v. Rand, 192 F.3d 60, 69-70 (2d Cir. 1999) (contrasting availability of attorneys’ fees under common benefit doctrine for litigation stemming from claims “grounded in the Securities Exchange Act” and availability of attorneys’ fees for breach of fiduciary duty and corporate waste, which is governed by state law, and citing Mills v. Elec. Auto-Lite Co., 396 U.S. 375, 390-396 (1970) (permitting collection of attorneys’ fees under common benefit doctrine under Exchange Act § 14(a))).

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