The Delaware Court of Chancery recently published an opinion that provides guidance on the latest iteration of the standard that will be applied when the court considers an application for mootness fees in the context of stockholder litigation. In Anderson v. Magellan Health Inc., C.A.No. 2021-0202-KSJM (Del. Ch. July 6, 2023), Chancellor McCormick granted a fee award of $75,000 in response to a fee request of $1.1 million in connection with a stockholder class action challenging a merger agreement between Centene Corporation and Magellan Health, Inc. After suit was filed, Magellan took certain actions that included supplemental disclosures which mooted the action and a stipulation of dismissal was filed.

Basic Background Facts

The suit claimed that confidentiality agreements that contained “don’t-ask, don’t-waive” provisions impeded the process that led to the Centene deal and, because the provisions were not fully described in the proxy, rendered stockholder provisions materially deficient. Shortly after suit was filed, Magellan issued supplemental disclosures on the don’t-ask-don’t-waive provisions and waived its rights under three of the four confidentiality agreements. On the theory that the supplemental disclosures and waivers were corporate benefits, plaintiff’s counsel petitioned the court for an award of fees and expenses.

Key Aspects of Ruling

This decision was provided as a public service to non-Delaware courts applying Delaware law who may not have “access to the this court’s bench rulings” that reflect a doctrinal shift that resulted in an “overall decline in settlements and fee awards” for strike suits challenging M&A transactions in Delaware. Slip op. at 15.

The Chancellor described this opinion as a clarification “for their sake”. Id. Specifically, the Court explained that: “Often, pre-Trulia precedent pricing corporate benefits reflect inflated valuations and warrant careful review.” Id.

The Court’s analysis emphasized that precedent prior to the seminal decision in the matter of In Re Trulia S’holder Litig.,129 A.3d 884 (Del. Ch. 2016), was “less useful”. In particular, the Court added that: “Post-Trulia decisions awarding attorneys’ fees in suits challenging don’t-ask-don’t-waive provisions reflect the decline in fees awarded for non-monetary benefits in merger litigation.’ Id.

Supplemental Disclosures

After explaining why the waivers did not deserve a fee award, the Court focused on the value of the supplemental disclosures. Although such disclosures have been recognized as a benefit, the Court observed that: “… the standard for pricing that benefit for the purpose of awarding mootness fees warrants reexamination in view of developments in deal litigation since Trulia.” Slip op. at 16.

In response to excessive deal litigation, Delaware courts responded in several ways, including a change in substantive law. In MFW and Corwin, the Supreme Court allowed deal lawyers to invoke the business judgment rule to avoid a merits-based review under the entire fairness or enhanced scrutiny standards. See Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) and Corwin v. KKR Fin. Hldngs LLC, 125 A.3d 304 (Del. 2015). In addition, C & J Energy Servs. Inc. v. City of Miami Gen. Empls. and Sanitation Empls. Ret. Trust, 107 A.3d 1039 (Del. 2014), “denounced the use of preliminary injunctions as a means of challenging third-party acquisitions and rerouted stockholders to ‘after-the-fact monetary damages.'” Slip op. at 17.

Importantly, moreover, “Delaware courts … began to clamp down on disclosure-only settlements.” Id. See footnote 49 and 51 collecting cases that document this change.

Delaware Public Policy

For the avoidance of doubt, the Court underscored that Delaware public policy does not encourage plaintiffs’ counsel to: “pursue weak disclosure claims with the expectation that defendants would rationally issue supplemental disclosures and pay a modest mootness fee as a cheaper alternative to defending the litigation.” Slip op. at 22.

Delaware courts have not had much opportunity to clarify Delaware policy and law on mootness fees based on supplemental disclosures because in the wake of Trulia, the “… deal-litigation diaspora spread mainly to federal courts, where plaintiffs’ attorneys repackaged their claims for breach of the fiduciary duty of disclosure as federal securities claims.” Id.

After careful reasoning and citation to scholarship on the topic and the case law developments, the Chancellor clarified that: ” At a minimum, mootness fees should be granted for the issuance of supplemental disclosures only where the additional information was legally required.” Slip op. at 23.

Going forward, the Court gave notice that it: “… will award mootness fees based on supplemental disclosures only when the information is material”. Slip op. at 24.

The Court engaged in a thorough analysis of the precise details and impact of the supplemental disclosures in this case, and what amounts have been awarded in relevant Delaware decisions. See, e.g., footnotes 81 to 84.

Money Quote and Takeaway

After an extensive review of the facts of this case and reasoning based on the applicable cases as well as public policy considerations, including the submissions by several professors who filed amici curiae briefs, my vote for the best concluding quote of the case, that also serves as a takeaway for future guidance, follows:

Where lawsuits are not worth much, plaintiffs’ counsel should not be paid much. In this case, the award represents less than the Movants’ lodestar, which should send a signal that these sorts of cases are not worth the attorneys’ time. Moreover, had Movants been required to meet the materiality standard, it seems unlikely that there would have been any award at all.

Slip op. at 35 (emphasis added).