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Commonly, the announcement of a public company merger can invite shareholder litigation that challenges the acquired company’s disclosures under Section 14(a) of the Securities and Exchange Act of 1934. In these “merger objection” suits, the defendant company will make additional disclosures, and then plaintiffs’ lawyers will agree to dismiss the suits in exchange for payment of a so-called “mootness fee.”
It was eight years ago that the Seventh Circuit of the United States Court of Appeals chastised such suits, remarking that litigation “that yields fees for class counsel and nothing for the class is no better than a racket. It must end.”1 Now in 2024, the Seventh Circuit has again made statements highly critical of such litigation in Alcarez v. Akorn, Inc., 2024 U.S. App. LEXIS 9070 (7th Cir. 2024).
In Alcarez, the plaintiffs in the underlying lawsuits sued Akorn and its board of directors in connection with a proposed merger, seeking additional disclosure regarding the transaction. After proxy revisions, plaintiffs dismissed their lawsuits in exchange for a mootness fee. An Akorn shareholder moved to intervene and object to the fee on unjust enrichment grounds and to have the mootness fee disgorged back to Akorn. After rejecting the shareholders’ attempts to intervene, the district court ordered the return of the mootness fee based on the court’s “inherent authority.”
On appeal, the Seventh Circuit found that the shareholder should have been permitted to intervene. Further, while not directly contradicting the district court’s ultimate decision to order the return of the fee award – the Seventh Circuit explained that under the Private Securities Litigation Reform Act, the voluntary dismissal of each suit was a “final adjudication of the action,” and therefore, the district court was obligated to “determine whether each suit was proper” under Rule 11(b) (which prohibits the filing of a lawsuit for improper purposes, including needlessly increasing the cost of litigation)2 “at the moment it was filed.” The Seventh Circuit “agree[d] with the district judge’s analysis,” which in substance had found that the complaints violated Rule 11(b). The Seventh Circuit, in remanding the action to the district court, explained, “(b)ecause Rule 11(c)(4) gives the district judge discretion over the choice of sanction, the court would be entitled to direct counsel who should not have sued at all to surrender the money they extracted from Akorn.”
While it remains to be seen if the Seventh Circuit’s highly critical decision slows down the tide of mootness fee claims, it is important to ensure that a company’s directors and officers insurance policy contains broad coverage and obtains coverage for mootness fee, where available. If you have questions or are interested in obtaining coverage, please contact your Aon broker.
1 - In re Walgreen Co. Stockholder Litigation, 832 F.3d 718, 724 (7th Cir. 2016)
2 - Federal Rules of Civil Procedure §11(b)
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