Some may think it’s the resurrection of disclosure-only settlements: mootness fees—fees sought out by plaintiffs’ attorneys in M&A litigation where the plaintiffs demand and the defendants agree to improve disclosure around a deal, and as a result, the litigation is rendered moot.
Unlike disclosure-only settlements, however, mootness fees tend to be much smaller and defendants do not get a full release against all future M&A-related litigation.
And unlike disclosure-only settlements, which the Delaware courts have curtailed, mootness fees are finding their way into corporate M&A litigation.
This should surprise no one. If plaintiffs believe they can get good money for very little work regardless of the merits of their case, they will certainly continue to sue companies over their M&A deals.
To better understand the Delaware Court of Chancery’s position on disclosure fees, let’s first revisit the Zillow-acquisition-of-Trulia case (In re Trulia, Inc. Stockholder Litigation), where the court took a strong stance on disclosure-only settlements to plaintiff attorneys:
If approved, the settlement will not provide Trulia stockholders with any economic benefits. The only money that would change hands is the payment of a fee to plaintiffs’ counsel … For the reasons explained in this opinion, I conclude that the terms of this proposed settlement are not fair or reasonable because none of the supplemental disclosures were material or even helpful to Trulia’s stockholders, and thus the proposed settlement does not afford them any meaningful consideration to warrant providing a release of claims to the defendants. Accordingly, I decline to approve the proposed settlement.
In other words, plaintiffs will not be awarded substantial fees unless the disclosures actually benefited the stockholders.
Then there’s the court’s stance on mootness fees, which is more forgiving to plaintiffs, but not a total pass. In 2016, with the case of In re Xoom Corporation Stockholder Litigation, the Delaware Court of Chancery did grant mootness fees to plaintiff attorneys—though at a greatly reduced award from the original request (more on that later).
In this case, plaintiff attorneys “alleged insufficient and misleading disclosures in addition to price and process deficiencies in connection with the merger; the corporation made some of the disclosures demanded, in response to the litigation, thereby mooting those claims; and subsequently, the Plaintiffs voluntarily dismissed the action with respect to the 2 individual plaintiffs only. The Plaintiffs now seek an award of attorneys’ fees for the benefit worked on all stockholders …”
When it comes to mootness fees in this case in particular, the court wanted to ensure there was, in fact, value to the stockholders from the additional disclosures:
The theory under which a mootness fee is awarded is a subspecies of the common-benefit doctrine, which recognizes that, where a litigation provides a benefit to a class or group, costs necessary to the generation of that benefit should also be shared by the group or its successor. Here, the Plaintiffs generated four additional disclosures, which the Defendants concede resulted from the litigation. The question is whether those disclosures added value to the stockholders, and, if so, how much of Plaintiffs’ costs should thus be borne by the Defendants, in equity.
The court analyzed each of the four disclosures and concluded that “none of the four is particularly strong.” But that cumulatively, the supplemental disclosures “represent a modest benefit to the stockholders.” Mootness award fees were set at $50,000—down from the $275,000 requested.
Even if the plaintiff’s attorneys had been awarded $275,000, it’s a more reasonable amount compared to some of the disclosure-only settlements we’ve seen, which typically range from about $600,000 to $1.2 million in a typical case.
However, while it’s nice to pay much less in mootness fees than disclosure-only settlements, without the full release of the defendants for future claims, directors will still have to look over their shoulders until all statute of limitations periods have expired.
So will the granting of mootness fees become a trend in Delaware? Maybe not, as the Delaware Court of Chancery seems to be skeptical of these fees as well, and has denied mootness fees in other cases like In re Keurig Green Mountain Inc. Stockholders Litigation.
What can you expect on the insurance front for these types of cases? When the mootness fees are low and cases move swiftly, many of them are going to settle under the self-insured retention of a D&O insurance policy.
Where litigation goes on longer, or there is a lower self-insured retention, it’s my expectation that these fees will be treated in a similar fashion to the way carriers have treated plaintiff’s fees, which is to say covered by the policy after the self-insured retention.