CURRENT MONTH (April 2024)

Merger Objection Lawsuits Are a “Racket” Benefiting No One but Plaintiffs’ Lawyers

By Yelena Dunaevsky, Esq., SVP & Partner, Transactional Insurance

In an April 15, 2024, decision, the United States Court of Appeals for the Seventh Circuit took up the question of “mootness fees,” which companies in the middle of a merger or acquisition typically pay to make the plaintiffs’ lawyers who are threatening that merger or acquisition go away. The case came about when Akorn, Inc., asked its shareholders to approve a $4 billion merger with Fresenius Kabi AG. Six shareholders sued Akorn, claiming insufficient disclosure in the 226-page proxy statement. Akorn adjusted the disclosure, all the time stating that the supplemental disclosure demanded by plaintiffs was not at all additive to the original proxy statement. However, it paid $322,500 in plaintiffs’ attorney fees to make the lawsuit go away and to allow the merger to proceed as planned with the support of 99.9 percent of Akorn’s shareholders.

One of the shareholders, finding out about the $322,500 payment, asked the district court to “require counsel to disgorge the money as unjust enrichment (since they had not achieved any benefit for the investors). He also asked the court to enjoin the lawyers who represented the six plaintiffs to stop filing what” he called “strike suits,” whose only goal was to extract money for counsel. Setting aside a few interesting procedural and standing questions discussed in the appellate decision, it was interesting to read through the court’s reasoning on the merits and history of “mootness fees” cases.

The district court in its decision referred to the supplemental disclosure in Akorn as being “worthless to the shareholders.” It proceeded to state that the $322,500 settlement “provided Akorn’s shareholders nothing of value, and instead caused the company in which they hold an interest to lose money.” It is somewhat telling perhaps that even before the district judge could rule, “counsel for three of the six plaintiffs disclaimed their portions of the $322,500.”

When the case got to the Seventh Circuit, the appellate court cited its previous decision from 2016 when it “remarked that litigation ‘that yields fees for class counsel and nothing for the class is no better than a racket. It must end,’” but it noted that such litigation has not ended and cited some interesting data. Referencing a law review article from 2019, the court credited some cases from the Delaware Court of Chancery that took a hard stance on M&A mootness fees litigation with reducing the instance of lawsuits brought against $100 million plus deals from 96 percent to 74 percent of such deals in 2016. The court lamented, however, that instead of these suits going away entirely, all that happened was that their location changed from most of them being filed in Delaware to 92 percent of them being filed in federal courts, which do not follow the Delaware Court of Chancery.

The appellate court remanded the case with instructions to, among other things, decide what relief, if any, would be appropriate. The court also dismissed appeals by the original plaintiffs for lack of jurisdiction “because they have not explained how, if at all, the district court’s orders adversely affect them, as opposed to [their] counsel.”


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