When public company mergers are announced, plaintiff attorneys frequently recruit shareholders to challenge the proposed deal through so-called “disclosure” claims. These lawsuits, which until recently were brought as putative class actions on behalf of all shareholders, typically allege that the proxy or registration statement distributed to shareholders omitted “material” information in violation of federal securities or state fiduciary duty laws and threaten to enjoin the proposed transaction if the alleged violations are not addressed. Disclosure claims are often mooted through “supplemental disclosures” issued before the shareholder vote. Once the merger closes, plaintiff attorneys will then demand payment of “mootness fees” for the claimed benefit purportedly conferred on shareholders.
On April 15, 2024, the Seventh Circuit Court of Appeals issued a long-awaited decision relevant to both disclosure claims and mootness fees. The appeal, pending since 2018, sought to reverse an order from the U.S. District Court for the Northern District of Illinois compelling various plaintiff attorneys to return mootness fees paid in connection with a then-proposed merger transaction involving Akorn Inc. The unprecedented ruling was prompted by a third-party Akorn shareholder who had attempted to intervene and force disgorgement of the mootness fees. Although the district court ruled that the Akorn shareholder lacked standing to intervene, the court relied on its “inherent authority” to order return of the mootness fees, which it concluded were based on “worthless” disclosure claims. Both the plaintiff and the intervening Akorn shareholder appealed the district court’s rulings.
In a 13-page opinion authored by Judge Frank Easterbrook, the Seventh Circuit ruled that the Akorn shareholder did, in fact, have standing to challenge the mootness fees, reasoning that while the loss to Akorn from payment of the fees was “minimal,” it was enough to confer standing. The court also concluded that the intervening Akorn shareholder was not required to pursue his claims derivatively on behalf of the company, which would have required the shareholder to first make a demand on Akorn’s board of directors. The court explained that because the shareholder was challenging actions taken by class counsel, rather than Akorn’s board of directors, the shareholder was permitted to intervene personally. Perhaps most importantly, the court also confirmed that Akorn’s directors had not breached their fiduciary duties by deciding to pay the mootness fees, observing that the fees “may well have cost Akorn less than what its own lawyers would have billed to defend” the disclosure claims.
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.
The opinion is noteworthy for at least two reasons. First, it adds to the growing number of recent decisions that have expressed harsh criticism of disclosure claims. Over the past eight years, beginning with the Delaware Court of Chancery’s decision in In re Trulia Inc. Stockholder Litigation, 129 A.3d 885 (Del. Ch. 2016), courts have become increasingly skeptical of shareholder lawsuits that seek to challenge merger transactions based solely on alleged disclosure violations. Courts are more likely than ever to scrutinize these types of claims when challenged by companies. Second, the opinion confirms that companies and their boards of directors may continue to pay reasonable mootness fees without fear of breaching fiduciary duties. As the Seventh Circuit correctly observed, resolving disclosure claims through supplemental disclosures and payment of mootness fees is almost always less costly than protracted litigation, even when the disclosure claims have no merit.
Despite its legal significance, the Akorn ruling is unlikely to meaningfully discourage future disclosure claims. This is because plaintiff attorneys, largely in anticipation of the Seventh Circuit’s ruling, are now filing individual (rather than class) disclosure claims or no claims at all, opting instead to rely on threatened claims asserted in private demand letters. Neither individual claims nor threatened claims are governed by the PSLRA’s mandatory judicial review provision relied upon in Akorn. Thus, Akorn provides relatively little reinforcement for resisting actual or threatened disclosure claims. Nevertheless, with Akorn and other recent decisions in their back pockets, intrepid companies and their in-house attorneys may start to reconsider whether resolving these types of nuisance suits through supplemental disclosures and mootness fees is the best path forward.
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