September 30, 2019

Mootness Fees: Delaware Federal Court Says “No” & Looks to Trulia

I’ve previously blogged about the rise of mootness fees as plaintiffs’ favorite post-Trulia method for extracting a quick buck in federal merger objection strike suits.  Last summer, a Chicago federal court balked at signing off on a mootness fee, which the judge referred to as a “racket” promoting useless merger litigation.

It looks like that case may be the start of a trend.  This Morris James blog highlights a Delaware federal court’s recent decision refusing to approve a mootness fee application on the basis that the additional disclosures provided conferred no benefit to shareholders.  Here’s an excerpt from the blog:

The district court denied the plaintiffs’ fee applications because it found that the plaintiffs failed to carry their burden to show the supplemental disclosures provided a “substantial benefit” justifying a fee award. Citing Walgreens and Trulia, the court reasoned that the plaintiffs “must establish, as a factual predicate, that the supplemental information was material.”

First considering supplemental disclosures of unlevered free cash flow projections used in the target’s financial adviser’s discounted cash flow analysis, the court reasoned that past cases supporting that such information can be material in certain circumstances do not make it per se material. The court explained the plaintiffs did not “explain how the stockholders would have been misled” by the omission of this information in these circumstances, nor did they “cite evidence or expert opinion on the issue.”

The court held similarly with respect to supplemental disclosures about the adviser’s calculation of the discount rate, the terminal multiple and the perpetuity growth rate. Again, the plaintiffs cited no authority showing this information is per se material, only cases “where courts found, on better developed records, that certain omissions were material given the particular factual circumstances.” The court further explained “neither caselaw nor law review articles are evidence of materiality in this case.”

Finally, the court held similarly with respect to supplemental disclosures of the multiples for each comparable company or precedent transaction included in the adviser’s analyses, when prior disclosures had already provided the overall ranges of multiples used. Such disclosures were not per se required, and plaintiffs failed “to connect the supplemental information to the facts of this case such that I could conclude that the omissions were material to DST stockholders given the total mix of information available to them.”

The blog notes the Court’s references to Trulia and Walgreens, and suggests that one of the takeaways from the decision is that “requests for court approval of mootness fees may involve similar judicial scrutiny of the benefit achieved, even though mootness dismissals do not involve potentially problematic classwide releases.”  Considering the fact that about 70% of merger objection lawsuits this year have been filed in the 3rd Circuit, this decision has the potential to put a real crimp in the mootness fee racket.

John Jenkins