“Mootness fees” to plaintiffs’ counsel after a voluntary dismissal have become a standard feature of deal litigation resolved before a stockholder motion to enjoin a transaction based on alleged proxy disclosure deficiencies is decided. After the sudden but widespread adoption in Delaware and elsewhere of sharp limitations on “disclosure-only” settlements—where the parties agree to settle solely on the basis of supplemental proxy disclosures in exchange for comprehensive class-wide releases of all claims relating to the transaction (followed by class counsel’s fee application for contributing to the disclosure benefit)—mootness fees have replaced disclosure-only settlements as the ordinary method of resolving disclosure-focused deal litigation. This column explains the important differences between these two approaches to resolving deal litigation. It also examines a recent federal decision currently on appeal to the Seventh Circuit in which the court, unlike Delaware courts, when addressing a negotiated mootness fee decided to “exercise its inherent powers to police potential abuse of the judicial process—and abuse of the class mechanism in particular—and require plaintiffs’ counsel to demonstrate that the disclosures for which they claim credit” were “plainly material” to stockholders—a standard Delaware reserves for disclosure-only class-wide settlements. House v. Akorn., 2018 WL 4579781, at *3 (N.D. Ill. Sept. 25, 2018). The continuing migration of deal litigation from Delaware to other fora (usually federal court to avoid Delaware forum selection clauses) makes Akorn an important read.

Background

Non-monetary benefits provided by a settlement, such as corporate governance and other therapeutic changes, additional disclosures in a proxy statement, or modifications to a merger agreement can provide fair, reasonable and adequate consideration for the release of class claims. The availability of disclosure-only settlements to obtain a classwide release in transaction litigation, however, has receded dramatically. In the seismic Court of Chancery decision In re Trulia, Inc., 129 A.3d 884 (Del. Ch. 2016), Chancellor Bouchard cautioned courts to be “increasingly vigilant in applying [their] independent judgment” when evaluating disclosure-only settlements and to evaluate the “reasonableness of the ‘give’ and ‘get’ of such settlements.” Trulia directed that disclosure-only settlements be approved only where the supplemental disclosures address a sufficiently material misrepresentation or omission, “and the subject matter of the proposed release is narrowly circumscribed to encompass nothing more than disclosure claims and fiduciary duty claims concerning the sale process, if the record shows that such claims have been investigated sufficiently.” With a broad classwide release of “any and all claims” arising from a transaction no longer obtainable on the basis of supplemental disclosures to shareholders, almost overnight the disclosure-only settlement which was once the norm in transaction litigation became scarce and the “mootness fee” became ascendant.