The path to a mootness fee is well-worn. A stockholder plaintiff sues alleging that a company’s disclosures or other decisions were inadequate or improper. The company responds by issuing disclosures or taking actions that moot the plaintiff’s claims. This, laudably, avoids the expense and distraction of litigation.
But that leaves a second order question: how much should plaintiff’s counsel be paid for the putative, non-monetary “corporate benefit” they have achieved? The prospect of such counsel fees, often predicated on negligible benefits to stockholders, has been understandably deemed a “deal tax.” Recent doctrinal developments have made such litigation less desirable to pursue in the Delaware Court of Chancery. Unsurprisingly, we have seen the increased repackaging of such claims as federal securities claims, which are then instead pursued in disparate federal courts across the country.
Chancellor McCormick’s recent Magellan Health decision provides rare guidance for those assessing mootness fee disputes, and indicates that heightened scrutiny of such requests is appropriate. As for supplemental disclosures specifically: the go-forward expectation is that a mootness fee award will be predicated on the additive information being “material,” not merely “helpful” to stockholders.
Magellan Health followed the typical M&A mootness process to the proverbial “T.” Over the course of 2019, Magellan Health engaged in a sales process in which 34 potential acquirers were contacted, “24 of whom entered confidentiality agreements containing don’t-ask-don’t-waive provisions.” Although the process resulted in an agreement to sell a subsidiary, there was no offer made to acquire the company as a whole.
In 2020, one of the 2019 suitors reappeared. The board agreed to engage with that suitor on an exclusive basis, given the recency of the failed 2019 process and the information it provided about other bidders’ apparent disinterest. On January 4, 2021, a merger agreement was executed. On February 19, 2021, the company issued its proxy statement. And on March 9, 2021, a stockholder plaintiff sued, seeking expedition and to enjoin the March 31, 2021 stockholder vote. The rationale? That five confidentiality agreements, still in effect from the 2019 process, contained so-called “don’t-ask-don’t-waive” provisions that tainted the sales process.
On March 19, 2021, 10 days after filing the complaint, having neither prosecuted his one-page expedition motion nor obtained any discovery, the plaintiff agreed to dismiss the litigation as moot. This recognized that Magellan Health had since (1) waived three don’t-ask-don’t-waive provisions (while retaining one provision that its board believed to be in the company’s best interest), and (2) issued supplemental disclosures describing the “history and the terms” of those provisions, their purpose, and the waiver agreement. Having mooted the litigation, however, the company and the plaintiff’s counsel were unable to agree on a mootness fee – a reward for the putative “corporate benefit” counsel obtained via the litigation. Plaintiff’s counsel sought an “eye-popping” $1.1 million fee. The company countered that a fee of $75,000–$125,000 was appropriate.
On June 6, 2023, in an unpublished transcript ruling, the Court sided with Magellan Health and awarded $75,000 in fees – the bottom end of what the company had argued was appropriate. Two law school faculty members filed papers as amici curiae and “urged that [the Court] issue a written decision to warn other courts applying Delaware law of these policy dangers.” Consequently, on July 6, 2023, Chancellor McCormick issued a written Opinion explaining the reasoning behind the $75,000 award.
Despite the prevalence of mootness fees, Magellan Health is one of the few opinions that provides a meaningful examination of the considerations attendant to a mootness fee award. It is a must-read for practitioners (and, ultimately, courts) across the country faced with determining an appropriate mootness fee in matters concerning a Delaware entity.
A few takeaways from the Court’s rationale in awarding $75,000 and rejecting the requested $1.1 million fee:
- Heightened Materiality Standard for Supplemental Disclosures Going Forward: The Court indicated that it would “award mootness fees based on supplemental disclosures only when the information is material.” This is a departure from prior Court of Chancery precedent (specifically, Xoom), which had held that “helpful” information could warrant a fee award.
But the Court did not apply this new standard to Magellan Health, holding it would be unjust to apply this new, heightened standard in the immediate case because it was not briefed by the parties. The Court found that the supplemental disclosures were “marginally helpful” and therefore awarded a $75,000 fee – the bottom end of what Magellan Health had argued appropriate.
- The “Benefit” of Loosened Deal Restrictions Must Be Analyzed in Context: Plaintiff’s counsel pointed to precedent, awarding seven-figure fees to counsel that had challenged don’t-ask-don’t-waive restrictions. But the Court viewed these as inapposite. The Court explained that the precedent had not created a one-size-fits-all approach, but rather that the value of loosened deal restrictions was “the incremental amount that stockholders would receive if a higher bid emerged” and that a plaintiff could only “take credit for the increased likelihood of a topping bid.”
Counsel’s fee request unraveled because they could not demonstrate an “increased likelihood of a topping bid” due to their efforts. The three don’t-ask-don’t-waive waivers all pertained to entities preliminarily involved in the 2019 sales process that had not “expressed any serious interest” in a deal. The Court consequently found that the “increased likelihood of a topping bid was close to zero. The resulting equation is lawyer-friendly: zero multiplied by anything is zero. So the waivers do not justify a fee award.”
- Beware Pre-Trulia Precedent: The Court highlighted that certain doctrinal shifts – including the 2016 Trulia decision – caused a decline in settlements and fee awards. The Court explained that this “renders pre-Trulia precedent less useful in determining the value of otherwise comparable benefits.” The Court flagged this as a “warning”: “Often, pre-Trulia precedent pricing corporate benefits reflect inflated valuations and warrant careful review.”
- Guidance Relevant to Courts Nationwide: The Court explicitly wrote the opinion to offer guidance to other courts applying Delaware law and determining fee awards. In so doing, the Court recognized that recent Delaware law developments (g., the 2016 Trulia decision) had pushed substantial M&A litigation volume to disparate federal courts, which hear a wider array of cases and likely do not “have access to the transcripts” in which Delaware courts typically address fee disputes.
- Perhaps Less Litigation to Come: A cynic might argue that the prospect of a lower (or no) fee award for counsel will limit the number of claims filed. We will have to wait and see. But if federal courts apply Magellan Health consistently, it would be logical to expect that the “merger tax” litigation that has been pushed to federal courts will be filed less frequently.
This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.