July 28, 2021 Practice Points

How Merger Litigation Works Now

Five years after Trulia, merger litigation is still routine—but its silhouette has changed.

By Donald H. Tucker Jr. and Clifton L. Brinson

For many years, stockholder litigation has reflexively followed almost any announcement of the acquisition of a public company. But in the past few years the shape of those lawsuits has changed.

Prior to 2016, merger lawsuits usually took the form of a class action lawsuit filed in the Delaware Court of Chancery, claiming that the target company’s directors breached their fiduciary duties by failing to get the best deal for the stockholders and failing to make adequate disclosures to the stockholders regarding the proposed deal. After some expedited discovery, the case would settle. In the settlement, the company would make supplemental disclosures, the plaintiff (on behalf of all stockholders) would release the company from all claims associated with the merger, and the plaintiff’s lawyers would ask the court for an award of attorney fees, usually up to a “cap” amount negotiated with defendants, based on the benefit they purportedly procured for the stockholders.

That all changed in 2016 when the Delaware Court of Chancery issued its opinion in In re Trulia, Inc. Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016). In Trulia, Chancellor Bouchard stated that he would no longer routinely approve “disclosure only” settlements that provided the stockholders no separate financial benefit. This ruling, as intended, effectively ended the merger litigation model that until then had dominated the landscape.

Trulia did not, however, end routine merger litigation—it simply caused a change in what that litigation looks like and how it is resolved. Post-Trulia, a new model has emerged. Now, rather than being filed in the Delaware Court of Chancery, cases frequently are filed in federal court. Rather than claiming a breach of fiduciary duties, the lawsuits now claim that the target company’s disclosures failed to comply with the federal securities laws. Rather than being filed as class actions, the lawsuits typically are filed as individual actions. Often there are multiple lawsuits in multiple federal courts that are either identical or near-identical in form.

Soon after the cases are filed—and before the stockholder vote on the merger—the company negotiates supplemental disclosures with plaintiffs’ counsel. Where there are multiple plaintiffs’ counsel, they generally work in cooperation with each other. Once the supplemental disclosures are issued, the plaintiffs voluntarily dismiss their lawsuits as moot.

Following the supplemental disclosures, plaintiffs’ counsel seeks to negotiate a “mootness fee” with the company. The theory is that attorney fees are warranted because the lawsuits filed by plaintiffs “caused” the supplemental disclosures and the resulting benefit to the stockholders. If, as is usually the case, plaintiffs’ counsel can reach agreement with the company as to the amount to be paid, then the company makes the payment and that is the end of it. Court involvement is not required, except in the unusual case where the parties cannot agree on the amount of a fee.

The key practical differences between the old model and the new model are: (1) settlements under the new model generally do not require judicial involvement, because there is no class to certify; (2) settlement amounts under the new model are generally lower than under the old model; and (3) there is no class-wide release under the new model, meaning that stockholders other than the plaintiffs are still free to bring actions challenging the completed merger.

Defendants who do not want to pay mootness fees are of course free to fight these lawsuits rather than settle them, asking the court to rule that the company’s existing disclosures are sufficient. See, e.g., Karp v. SI Financial Group, Inc., 2020 WL 1891629 (D. Conn. Apr. 16, 2020). Alternatively, defendants can make the requested supplemental disclosures, but dispute that the disclosures were caused by plaintiffs’ lawsuits or created a substantial benefit for the stockholders so as to justify the demanded attorney fees, and litigate that issue in court. See, e.g., Scott v. DST Systems, Inc., 2019 WL 3997097 (D. Del. Aug. 23, 2019). And in at least one case, a stockholder has sought to intervene in a merger litigation case to prevent the defendant from paying mootness fees. See House v. Akorn, Inc., 385 F. Supp. 3d 616 (N.D. Ill. 2019).

But these cases are the exceptions. For now, five years after Trulia, routine merger litigation has not gone away; it has simply come back in a different form.

Donald H. Tucker Jr. and Clifton L. Brinson are partners at Smith Anderson in Raleigh, North Carolina.

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