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Citing Trulia and Walgreens Decisions, Federal District Court Orders Plaintiffs’ Counsel to Return Agreed-Upon Mootness Fee

House v. Akorn, Inc., Consol. Nos. 17-C-5018, 17-C-5022, 17-C-5026 (N.D. Ill. Jun. 24, 2019).

Disclosure-only settlements of stockholder class actions have received increased scrutiny following the Delaware Court of Chancery’s Trulia decision in 2016 and the Seventh Circuit Court of Appeals’ Walgreens decision later that year.  Those decisions observed the problem of M&A strike suits, expressed disfavor of disclosure-only settlements in M&A class actions, and significantly raised the bar for getting the required court approval of such settlements.  One consequence has been many M&A suits migrating from the Delaware Court of Chancery to federal courts around the country.  Another has been defendants more frequently acting to voluntarily moot the claimed disclosure violations through supplemental disclosures.  In that instance, the parties then face the choice of either litigating the appropriate mootness fee award to plaintiffs’ counsel for the supplemental disclosures prompted by their claims or, alternatively, privately negotiating the mootness fee award and thus avoiding the judicial process, provided no other stockholders object to the negotiated award. 

This recent decision from a District Court within the Seventh Circuit extends Trulia and Walgreens to reject an out-of-court agreement to pay a mootness fee to plaintiffs’ counsel, reached after the defendants made supplemental disclosures that caused plaintiffs to voluntarily dismiss their claims without prejudice.  Although there was no class action settlement, and thus no prior court approval required, an Akorn stockholder objected to the company’s payment of the fee.  The objector argued the cases were abusive strike suits, which were contrary to the corporation and its stockholders’ best interests for reasons discussed in Trulia and Walgreens.  Exercising what it called its “inherent authority to abrogate the settlement agreements” under the standard set forth in Walgreens, the District Court reviewed each of the disclosures sought by the suits, and concluded they were not “plainly material.”  As a result, under Walgreens, the suits should have been “dismissed out of hand.”  The District Court accordingly abrogated the mootness fee settlements and ordered plaintiffs’ counsel to return the attorneys’ fees the defendants had paid.