On July 6, 2023, the Delaware Court of Chancery issued an important opinion1 that seeks to further limit the “merger tax” imposed on many companies in the context of significant M&A transactions. The court declared that future mootness fees for supplemental disclosures will only be awarded where such disclosures are “material” and, even then, signaled that amounts awarded will be much lower than in the past. This decision, which builds on prior Delaware jurisprudence that has sought to discourage nonmeritorious litigation in the M&A context, is a welcome development.
What Was the Case About?
In January 2021, Centene Corporation agreed to acquire Magellan Health, Inc. As has become a near-universal occurrence in connection with the acquisition of a public company, a stockholder filed a lawsuit challenging the adequacy of the disclosures made by Magellan in the proxy statement for the transaction. Magellan issued supplemental disclosures and agreed to waive certain terms of three of the original 24 confidentiality agreements that it had with potential acquirers. In response, the stockholder quickly dismissed his lawsuit as moot, with his counsel then seeking a “mootness fee” in the amount of $1.1 million for the purported corporate benefit that the supplemental disclosures and confidentiality agreement waivers conveyed on Magellan’s stockholders.
The court found that the supplemental disclosures were not material, and that the confidentiality agreement waivers had little-to-no-value. The court granted a mootness fee of $75,000, the bottom of the range defendants argued for.
Why Is This Case Important?
Attempts by plaintiffs’ counsel to extract a merger tax in M&A transactions continue to plague both buyers and sellers of public companies. In its 2016 Trulia decision, the Court of Chancery did much to reduce the attractiveness of strike suits in M&A transactions by requiring that disclosures be “plainly material” to justify a disclosure-only settlement (and the associated award of attorneys’ fees to plaintiffs’ counsel).2 Post-Trulia, issuing mooting disclosures and subjecting the company to a mootness fee became the preferred path for resolving disclosure claims. However, in subsequent cases, the Court of Chancery chose not to extend the “plainly material” standard of Trulia when evaluating petitions for mootness fees based on supplemental disclosures. Instead, the court focused on whether the supplemental disclosures were “helpful” in that they provided some benefit to stockholders, even if the disclosures were not material to the stockholder vote. This looser standard led to an influx of plaintiffs’ counsel pursuing “weak disclosure claims with the expectation that the defendants would rationally issue supplemental disclosures and pay a modest mootness fee as a cheaper alternative to defending the litigation.”3
Finding that “a rule that seems to encourage the pursuit of legally meritless disclosure claims does not make sense,” the court determined that, going forward, it will award mootness fees based on supplemental disclosure only when the information is material. In other words, the “plainly material” standard of Trulia now applies in the context of the court’s review of mootness fee applications for supplemental disclosures, and disclosures that are not material should no longer result in a fee award.
The court determined it would be “unjust” to apply the new materiality standard here—which likely would have resulted in no fee at all—and awarded $75,000 in fees, which it noted was less than counsel’s hourly rates. In so doing, the court strongly signaled that the value of supplemental disclosures will be heavily scrutinized going forward. Noting that “[w]here lawsuits are not worth much, plaintiffs’ counsel should not be paid much[,]” Chancellor Kathaleen McCormick fired a shot across the bow for future cases, stating that “these sorts of cases are not worth the attorneys’ time.”
What Are the Takeaways?
This decision should be helpful in pushing plaintiffs’ counsel to only bring meritorious disclosure-based challenges to M&A transactions in the Court of Chancery, thereby helping to curtail the cottage industry of disclosure claims and lawsuits that continued after Trulia. It also shows the Court of Chancery’s continued awareness of the deal ecosystem and ongoing desire to reduce or eliminate wasteful practices.
For more information, please contact any member of the securities litigation, Delaware law, or mergers and acquisitions practices at Wilson Sonsini Goodrich & Rosati.
[1] Anderson v. Magellan Health, Inc., -- A.3d --, 2023 WL 4364524 (Del. Ch. July 6, 2023).
[2]In re Trulia, Inc. S’holder Litig., 129 A.3d 884, 898 (Del. Ch. 2016).
