DealLawyers.com Blog

The 7th Circuit was one of the first federal courts to take a dubious view of mootness fee awards in M&A disclosure litigation, and its decision last month in Alcarez v. Akorn, (7th. Cir; 4/24), suggests that the Court’s views haven’t mellowed with time.

In Akorn, Judge Easterbrook ruled that an intervening shareholder had standing to challenge the Akorn board’s decision to pay mootness fees to a group of plaintiffs’ attorneys as part of the settlement of M&A disclosure claims, but rejected the shareholder’s allegations that the board breached its fiduciary duties in agreeing to pay those fees. As this Alston & Bird memo explains, the Judge then turned his attention to the district court’s decision to order the return of mootness fees:

Easterbrook next turned to the district court’s ruling on the mootness fees, finding that the court was authorized to consider whether sanctions—including return of the fees—were warranted pursuant to the Private Securities Litigation Reform Act’s (PSLRA) mandatory judicial review provision. The Seventh Circuit confirmed that because the disclosure claims were pursued through a putative class action, the provisions of the PSRLA applied. Easterbrook also expressed his displeasure with disclosure claims generally, citing a previous opinion from the Seventh Circuit that had described the claims as a “racket.” Easterbrook then remanded the case to the district court for further consideration of potential sanctions.

Unfortunately, the decision is a bit of a mixed bag for boards.  The good news is that the Court endorsed the view that boards may enter into agreements to pay mootness fees without breaching their fiduciary duties. The bad news is that plaintiffs have been anticipating a ruling like this, and have moved away from filing disclosure claims as class actions in order to avoid the potential imposition of sanctions authorized by the PSLRA.

– John Jenkins