February 24, 2022

Mootness Fees: SDNY Says “No” to M&A Disclosure Litigation Plaintiff

I’ve blogged a few times in recent years about mootness fees, which have become a popular alternative for plaintiffs asserting M&A disclosure claims post-Trulia. In order to avoid Delaware’s limits on disclosure-only settlements, plaintiffs bring their claims in federal court. Once “corrective” proxy disclosure is made, they settle their claims in exchange for a mootness fee. Since the idea is to avoid Trulia-like scrutiny of these settlements, the objective is to slide the mootness fee through without attracting a lot of attention from the judge – and plaintiffs have enjoyed some success with that approach.

However, federal judges don’t typically like to get played. In recent years, some of them have caught on to the game and have imposed Trulia-like conditions on attempted mootness fee settlements. The latest example of that comes from the SDNY.  In Serion v. Nuance Communications, (SDNY; 2/22), the Court refused to approve a mootness fee settlement where it concluded that additional disclosures did not provide a significant benefit to shareholders.  Here’s an excerpt from this Shearman blog on the decision:

The case arose in connection with defendant’s agreement to be acquired by Microsoft Corporation.  After the company filed its proxy statement in connection with the merger, plaintiff—a Nuance shareholder—filed suit claiming violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934.  Specifically, plaintiff alleged that the proxy omitted material information.  Several similar complaints were also filed by other shareholders.  Thereafter, defendant filed a supplement to the proxy, which disclosed the allegedly omitted information and “mooted” plaintiff’s claims.  Plaintiff’s counsel sought payment of attorneys’ fees from defendant on the basis of the “common benefit” doctrine.

The Court explained that there is no entitlement to such fees unless (i) there is “a causal connection between the lawsuit and the defendant’s action mooting the suit,” and (ii) a “substantial benefit was conferred.”  The Court added that to satisfy the “substantial benefit” requirement, a supplemental disclosure “must provide something more than technical in consequence and . . . accomplish[] a result which corrects or prevents an abuse. . . .”

The supplemental disclosure consisted of some additional data points for the comparable companies trading analysis conducted by target’s banker in rendering its fairness opinion. The Court believed that the existing proxy statement already included the required “fair summary” of the opinion, and that other disclosures added in response to the lawsuit didn’t move the needle either. Accordingly, it concluded that the additional disclosures didn’t confer a substantial benefit.

John Jenkins