Disclosure-only settlements of M&A class actions have received increased scrutiny since decisions like the Delaware Court of Chancery’s 2016 Trulia opinion and the U.S. Court of Appeals for the Seventh Circuit’s Walgreens decision from later that year. Those decisions critiqued the then-prevalent practice of stockholder-plaintiffs bringing M&A strike suits and then quickly exchanging broad, classwide releases for supplemental disclosures of questionable value and fee awards to plaintiffs counsel under the “corporate benefit” doctrine. As a result, the path to quickly resolving M&A class actions has shifted toward individual plaintiffs agreeing to dismiss their claims without prejudice to other class members in exchange for supplemental disclosures and mootness fees under the “corporate benefit” doctrine. The U.S. District Court for the District of Delaware’s recent decision in Scott v. DST Systems, (D. Del. Aug. 23, 2019), should be of great interest to parties facing such issues, particularly defendants who wish to moot a disclosure-based lawsuit without paying fees to plaintiffs counsel.
The Court’s Decision
The decision arises out of the March 2018 acquisition of DST Systems Inc. Three stockholder-plaintiffs separately brought suit alleging the proxy statement soliciting stockholder approval omitted material information. Within a month, and after settlement discussions with the plaintiffs, DST issued supplemental disclosures concerning analyses performed by DST’s financial adviser, which expressly were made to moot the lawsuits. The parties did not agree on a mootness fee, however, and they proceeded to litigate that issue. After initial submissions, U.S. District Judge Richard G. Andrews for the District of Delaware requested supplemental briefing, at which point one of three plaintiffs withdrew its fee application; the other two respectively sought $115,000 and $100,000.
The district court denied the plaintiffs’ fee applications because it found that the plaintiffs failed to carry their burden to show the supplemental disclosures provided a “substantial benefit” justifying a fee award. Citing Walgreens and Trulia, the court reasoned that the plaintiffs “must establish, as a factual predicate, that the supplemental information was material.”
First considering supplemental disclosures of unlevered free cash flow projections used in the target’s financial adviser’s discounted cash flow analysis, the court reasoned that past cases supporting that such information can be material in certain circumstances do not make it per se material. The court explained the plaintiffs did not “explain how the stockholders would have been misled” by the omission of this information in these circumstances, nor did they “cite evidence or expert opinion on the issue.” The court held similarly with respect to supplemental disclosures about the adviser’s calculation of the discount rate, the terminal multiple and the perpetuity growth rate. Again, the plaintiffs cited no authority showing this information is per se material, only cases “where courts found, on better developed records, that certain omissions were material given the particular factual circumstances.” The court further explained “neither caselaw nor law review articles are evidence of materiality in this case.” Finally, the court held similarly with respect to supplemental disclosures of the multiples for each comparable company or precedent transaction included in the adviser’s analyses, when prior disclosures had already provided the overall ranges of multiples used. Such disclosures were not per se required, and plaintiffs failed “to connect the supplemental information to the facts of this case such that I could conclude that the omissions were material to DST stockholders given the total mix of information available to them.”
The court accordingly denied the plaintiffs’ fee application. Its concluding remarks summarized why: “It is far from clear, as a factual matter in this case, that the information disclosed by the defendants was material. Plaintiffs attorneys’ arguments, opinions from judges in other cases, and law review articles do not carry the weight the plaintiffs put on them. Moreover, absent evidence that the information was material, there is no basis in the record to find that the plaintiffs conferred any benefit on DST stockholders. Simply put, the plaintiffs have failed to carry their evidentiary burden.”
The district court’s DST opinion indicates that, after Trulia and Walgreens, requests for court approval of mootness fees may involve similar judicial scrutiny of the benefit achieved, even though mootness dismissals do not involve potentially problematic classwide releases. The court’s discussion of the plaintiff’s burden as an evidentiary matter in the context of the specific target company also is instructive, at least where (as is common) the supplemental disclosures are not per se material. Plaintiffs counsel may find it difficult to carry that burden given that defendants typically will want to moot an action before discovery, although the court indicated that expert opinions on materiality may also suffice. Subsequent decisions in this area may further clarify whether, and in what circumstances, attorneys’ arguments that more clearly explain the importance of supplemental disclosures in the specific circumstances at hand may suffice to carry the plaintiffs’ burden.