Taming the Bull Rider: Delaware Chancery Court Reining in Mootness Fee Awards in Merger Litigation
Last month, the Delaware Chancery Court drastically reduced – from $275,000 to $50,000 – a mootness fee award requested by plaintiffs’ counsel in a lawsuit challenging the merger between PayPal and Xoom Corporation, finding the supplemental disclosures that flowed from the lawsuit provided only minor benefits to stockholders. In re Xoom Corp. Stockholder Litigation. The steep fee reduction reinforces Trulia’s admonition earlier this year that the days of $250,000-$350,000 attorneys’ fee awards for meaningless additional disclosures are over, as Delaware judges will carefully scrutinize attorneys’ fee requests for litigation that yields disclosures of little or no value.
The lawsuit involved an $890 million merger between PayPal and Xoom in 2015. A derivative suit was brought shortly after the merger was announced alleging price and process deficiencies and breach of fiduciary duty claims based on alleged misstatements and omissions in Xoom’s proxy materials. In response to the complaint, Xoom agreed to provide four supplemental disclosures. The plaintiffs then dismissed the lawsuit as moot, and the plaintiffs’ attorneys sought a $275,000 mootness award based on the value of the supplemental disclosures.
In Delaware and elsewhere, attorneys representing stockholder plaintiffs may request a mootness fee where the pendency and prosecution of the lawsuit causes the company to make additional disclosures that effectively moot the pending claims. They must show that the suit was meritorious when filed, the action producing a benefit to the corporation was taken by the defendants before a judicial resolution was achieved, and the resulting corporate benefit was causally related to the lawsuit.
The Xoom court began by clarifying the standard for mootness fees post-Trulia, and in doing so it distinguished, to some degree, fee awards in disclosure-only settlement cases from fee awards in cases that are dismissed on mootness grounds. Trulia involved a disclosure-only settlement in which, as is generally the case, a broad release of claims from the entire class of stockholders was provided to the defendants in exchange for certain supplemental disclosures from the company and, of course, reasonable attorneys’ fees to plaintiffs’ counsel. In re Trulia, Inc. Stockholder Litigation. Trulia held that such settlements would be closely scrutinized and approved only if the supplemental disclosures were “plainly material.” In Xoom, the court clarified that a “helpful”– but not necessarily “material”– disclosure may support a modest fee award because unlike disclosure-only settlements, mootness cases do not involve class-wide releases; the claims are dismissed as to the named plaintiffs only. According to Vice Chancellor Glasscock, there is thus no “give” by the class in the form of a class-wide release in exchange for the “get” of the supplemental disclosures. Therefore, “a fee can be awarded if the disclosure provides some benefit to stockholders, whether or not material to the vote.”
Applying that standard, the court found that Xoom’s supplemental disclosures conferred a “modest benefit” to stockholders sufficient to support a reduced award of $50,000. The court found one of the disclosures – the fees paid to Xoom’s financial advisor by PayPal’s former parent – only “mildly helpful” because stockholders had already been told that the financial advisor had worked for PayPal’s former parent. The court found another disclosure – discussions about employing Xoom board members at PayPal after the merger – “somewhat of value” because there was no risk that PayPal, as the sole bidder, would gain an advantage through promises of future employment.
In reaching his decision, Vice Chancellor Glasscock likened the plaintiffs’ counsel to a rodeo bull-rider attempting to ride a bad bull: “It takes a good rider to ride a good bull, but not even a great rider can wring a high score from a bad bull. Not even great counsel can wring significant stockholder value from litigation over an essentially loyal and careful sales process.”
Two weeks before the Xoom decision, Chancellor Bouchard similarly reined in a mootness award in a sharply-worded opinion cutting a requested fee from $350,000 to $100,000. In re Receptos, Inc. Stockholder Litig., No. 11316-CB (Del. Ch. Jul. 21, 2016). “[A] lesson to take away from this [is that there] is no right to cover one’s supposed time and expenses just because you sue on a deal, and plaintiffs should not expect to receive a fee in the neighborhood of $300,000 for supplemental disclosures in a post-Trulia world unless some of the supplemental information is material under the standards of Delaware law.”
Xoom and Receptos demonstrate that Delaware courts will no longer reward minor, cosmetic disclosures with mootness fee awards in the $250,000-$350,000 range. In 2013, the Chancery Court reduced fee requests by plaintiffs’ attorneys by an average of only 20 percent. Olga Koumrian, Cornerstone Research, Settlements of Shareholder Litigation Involving Mergers and Acquisitions: Review of 2013 M&A Litigation (2014). In 2016, however, the Xoom and Receptos courts reduced the fee requests at issue by over 80 percent and 70 percent, respectively. The jurisdictional effects of such fee reductions may also be beginning to take shape. Ravi Sinha, Cornerstone Research, Shareholder Litigation Involving Acquisitions of Public Companies: Review of 2015 and 1H 2016 M&A Litigation (2016). Preliminary statistics from the first half of 2016 (post-Trulia) suggest that only 64 percent of all M&A deals valued at over $100 million were litigated – dropping below 90 percent for the first time since 2009 – and hint that the Chancery Court is becoming a less common filing destination for such suits.