Delaware Chancery Requires Supplemental Disclosures Be "Material" for Mootness Fee Awards
In Short
The Situation: The Delaware Court of Chancery recently held that supplemental disclosures must be "material" to warrant mootness fees in litigation challenging the disclosures for M&A transactions. Anderson v. Magellan Health, Inc., No. 2021-0202-KSJM (Del. Ch. July 6, 2023).
The Development: Anderson implements a heightened standard of materiality, as compared to the previously employed "helpful" standard, to evaluate whether mootness fees are justified in connection with supplemental disclosures.
Looking Ahead: The decision is another in a consistent line of Delaware Chancery cases that seek to reduce the attractiveness of strike suits challenging M&A transactions in Delaware where such claims are of little or no value to stockholders. The decision is likely to further deter plaintiffs from filing M&A litigation in Delaware and also signals to federal courts that they should be wary of such fees in connection with M&A litigation involving Delaware corporations.
Background
In January 2021, Magellan Health, Inc. entered into a merger agreement with Centene Corporation. At the time of the merger agreement, six confidentiality agreements between Magellan and other potential buyers were in effect, five of which contained a "don't-ask-don't-waive" provision. Don't-ask-don't-waive provisions prohibit potential acquirers from making any public or private request to waive the standstill provisions in a confidentiality agreement.
In March 2021, a Magellan stockholder sued and sought to enjoin the stockholder vote and merger. The stockholder alleged that the don't-ask-don't-waive provisions "insulated" the proposed acquisition from topping bids. He further alleged that Magellan's proxy statement contained "materially misleading information" because it did not disclose how many of the confidentiality agreements contained a don't-ask-don't-waive provision and whether the provisions were still in effect when the merger agreement was executed.
Ten days after filing suit, the stockholder voluntarily dismissed his claims as moot in exchange for Magellan releasing some of the remaining don't-ask-don't-waive provisions and issuing supplemental disclosures. After the parties stipulated to dismissal and the merger was approved, plaintiff's counsel asserted that the waivers and supplemental disclosures provided a corporate benefit to Magellan and therefore sought (what the court described as) an "eye-popping" award of $1.1 million in attorneys' fees. Magellan argued in opposition that fees should be awarded in the range of $75,000 to $125,000. Ruling from the bench, Chancellor McCormick awarded plaintiff's counsel $75,000 in fees.
The Written Decision
One month later, the court issued a written decision at the request of two law professors, amici in the case, who asked the court to clarify Delaware law governing mootness fee awards and adopt certain policy-based reforms. While the court did not adopt the professors' proposed reforms, it did impose a heightened standard for the award of mootness fees concerning supplemental disclosures.
First, with regard to the don't-ask-don't-waive releases, the court found that no fees were warranted because the particular releases at issue were not designed to increase the likelihood of a topping bid and had "little-to-no value."
Second, as to the supplemental disclosures, the court awarded plaintiff's counsel $75,000 in fees, accounting for roughly half of counsel's time incurred, because the disclosures were "marginally helpful." The court held that moving forward, however, supplemental disclosures must be "legally required" and "material"—not merely "helpful"—in order to warrant mootness fees. The court applied the "helpful" standard here as a matter of fairness based on existing precedent, but emphasized that plaintiff's counsel likely would not have received any fees under the new "material" standard. The court highlighted that "[w]here lawsuits are not worth much, plaintiffs' counsel should not be paid much" and noted that Delaware policy "does not encourage" plaintiffs' counsel "to pursue meritless claims."
The "material" standard adopted by the court is consistent with more recent Delaware precedent governing fees in disclosure-only settlements, which requires that such disclosures be "plainly material." See In re Trulia, Inc. S'holder Litig., 129 A.3d 884, 898 (Del. Ch. 2016). In disclosure-only settlements, stockholders release their claims against the company in exchange for supplemental disclosures. In mootness proceedings, which Trulia identified as the preferred path for resolving disclosure claims, stockholders voluntarily dismiss their suit after the company makes supplemental disclosures but do not release defendants from later claims.
According to the court, the "defendant-friendly" "plainly material" standard for disclosure-only settlements in Delaware "effectively ripped out the final page in the nearly empty playbook that the plaintiffs' bar had used in pre-closing deal litigation." The court, in adopting a Trulia-like standard for mootness fees, "signal[s] that these sorts of cases are not worth the attorneys' time."
Two Key Takeaways
- The decision warns prospective plaintiffs against bringing weak M&A lawsuits in Delaware.
- Plaintiffs' attorneys may continue to take their suits to federal court given the likelihood of receiving lesser (or no) fees in Delaware, but Anderson provides a clear pathway for federal courts to follow suit. The court noted that although the "merger tax" resulting from deal litigation "is not presently a problem in Delaware courts, it continues to plague Delaware corporations."
