Fees Pushing $100,000 Fuel Doomed M&A Lawsuits Lawyers Call Easy

Some judges have been slower than others to undercut the “mootness fees” driving a torrent of M&A litigation, potential six-figure payouts dangled before lawyers who file suits destined for dismissal.

A bid by Volta Inc. shareholders for $171,000 in attorneys’ fees failed last month in a case over Shell Plc’s $149 million buyout of the electric-vehicle charging company. It’s the among the latest decisions in a growing push by judges to disincentivize challenges to proposed mergers — particularly those seeking big payouts from companies after a remedial disclosure renders the lawsuit moot.

This type of litigation rarely halts a deal, but plaintiffs’ counsel can seek mootness fees even when a case is dismissed. Awards can hit $100,000 per suit as they did before entering judicial crosshairs years ago, lawyers said, but are typically closer to $75,000 each depending on the court. This has led to rampant forum shopping for judges that are behind the curve, said Priya Cherian Huskins, partner at Woodruff Sawyer & Co.

While those mootness awards can be relatively modest in the context of securities litigation, “they’re not zero and filing a merger objection suit isn’t exactly hard work,” she said.

Individual investors have brought more than a dozen merger suits across New York’s Southern District and the District of Delaware just since the start of February, with additional filings cropping up in California and Colorado district courts. So far this month, such suits have targeted companies including electric truck maker Xos Inc., window and door manufacturer PGT Innovations Inc., and biotech company Axonics Inc.

“There has been a concern for a number of years that it’s easy to file a lawsuit challenging a merger to try and wrestle some sort of fee award from some sort of corrective disclosure for the suit’s nuisance value because the parties want to move forward with the merger and want the case to go away,” said Jill Fisch, co-director of the Institute for Law & Economics at the University of Pennsylvania’s Carey Law School. “Often the disclosures are not material, so that’s not to say that mergers can’t be challenged for good reason, but historically we’ve seen a lot more challenges than we’ve seen valid claims.”

In his Volta decision, Judge Jed S. Rakoff said the Southern District of NY suit didn’t identify any false or misleading statement in the company’s initial proxy filing that required correction, and that the supplemental disclosures in question consisted of publicly available information. After making the disclosures, Volta argued against the requested attorney fee award, stating that the disclosures provided “no information plausibly affecting how a reasonable stockholder would vote on the merger.

More than $547 billion of mergers have been announced on US exchanges this year as of March 14, a 62% jump from the same period in 2023, according to data compiled by Bloomberg. As new deals are announced, shareholders file the suits seeking to prevent them from being completed until allegedly deficient filings are fixed. Those same lawsuits also aim to recover rescissory damages in the event that a proposed deal closes without first providing a supplementary disclsoure.

Mootness Fee Scrutiny

Merger disclosure suit filings ebbed in Delaware Chancery Court immediately after the 2016 ruling, In re Trulia Inc. Stockholder Litigation, which held that plaintiffs wouldn’t receive substantial fees unless the supplementary disclosures they sought benefitted stockholders, lawyers say.

“There certainly has been a move from state court to federal court, and that’s largely due to the fact that Delaware [Chancery] court started cutting back on fees and reviewing mootness dismissals with greater scrutiny, and those are things that the federal courts haven’t really done” Fisch said. “So that’s largely a movement of generally weaker cases to federal court with plaintiffs’ lawyers hoping to get a more favorable fee award.”

That trend of opting to file such suits in federal court rather than Delaware Chancery originated after the 2016 Trulia ruling and was reinforced in July 2023, when Chancellor Kathaleen McCormick considered plaintiffs’ “eye-popping” request for a more than $1 million fee in a suit against Magellan Health Inc. The court ultimately awarded just $75,000 in fees and expenses stemming from the supplemental disclosures attained through the litigation, the chancellor said in a July opinion filing.

Mootness fees are often negotiated outside of court after a voluntary dismissal, according to Cliff Brinson, a partner at Smith Anderson.

“On the rare occasions when those cases have gone to court, they usually don’t go very well, for the plaintiffs’ lawyers, they get significantly less than what they’re asking for, if anything,” he says. “Even though court decisions have not been very plaintiff-friendly, it hasn’t necessarily stopped these lawsuits from being filed, because they still make some money for plaintiffs’ lawyers.”

Down, But Not Out

More than 25 new merger disclosure suits were filed across district courts since the start of February. The steady flow of complaints contrast with a forum like Delaware, where specialist judges have been faster to rein in the fees and now typically field roughly a few of these suits per month.

Some of Rakoff’s Southern District colleagues also took aim at mootness fees in recent years, awarding $55,000 to plaintiffs requesting more than $350,000 from in a 2021 ruling and outright denying a fee request in a separate 2022 ruling in a case challenging Microsoft’s acquisition of Nuance Communications.

A $75,000 figure like the mootness fee awarded in the Magellan ruling represents a more typical award in the post-Trulia litigation landscape, according to Brinson.

“Pre-Trulia, attorneys had an understanding of how much they could get for disclosure-only settlements,” he says. “It was generally six figures, and as I recall, you could even get close to seven figures.”

District courts elsewhere may provide more fertile ground than New York and Delaware for gleaning mootness fees, depending on how experienced a given judge is when it comes to merger and acquisition litigation, lawyers say. The Seattle-based Western District of Washington, the Northern District of California, and the District of Colorado in Denver have all seen new merger suits since Feb. 1, filings show.

“Plaintiffs are smart, and they can be very persuasive, particularly for judges who haven’t heard their tales of woe as many times as the Delaware judges,” Woodruff’s Huskins said.

Economies of Scale

Representing plaintiffs in merger objection suits in federal court, even for a modest mootness fee, remains compelling, especially for firms that may benefit from economies of scale when filing straightforward complaints against a wide array of companies, according to Brinson.

“There are just more opportunities to find a plaintiff, and I do think until all courts clamp down on mootness fees, you absolutely should expect to see the number of these cases wax and wane with M&A activity,” Huskins says.

Investors aren’t likely to ever cease filing merger-related disclosure lawsuits entirely, even as the economic prospects of doing so become less appealing than they once were due to court scrutiny, according to Huskins.

“Plaintiffs’ appetite for disclosure is a never-ending black hole of desire,” she says. “It makes sense for companies and their lawyers to do a good thorough job on their disclosures, but this is the United States, anybody can sue anybody, anytime, for anything.”