Delaware Court Of Chancery Clarifies Standard Applicable To Mootness Fee Awards For Supplemental Disclosures
On July 6, 2023, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery issued a written opinion explaining a prior bench ruling on a mootness fee awarded to plaintiff’s counsel in connection with a putative stockholder class action brought against Magellan Health, Inc. (the “Company”) and its directors in connection with its acquisition by Centene Corporation. Anderson v. Magellan Health, Inc., C.A. No. 2021-0202-KSJM (Del. Ch. July 6, 2023). Plaintiff’s suit, commenced after the publication of the merger proxy and prior to closing, alleged that “don’t-ask-don’t-waive” provisions contained in confidentiality agreements between the Company and other prospective bidders impeded the deal process and were not fully disclosed in the proxy. In response, the Company waived its rights under three of four then-remaining confidentiality agreements containing don’t-ask-don’t-waive provisions (the “Waivers”) and issued supplemental disclosures (the “Supplemental Disclosures”) related to the agreements and waivers. Plaintiff agreed the Waivers and Supplemental Disclosures mooted his claims and stipulated to dismissal of his suit. Although plaintiff’s counsel sought a $1.1 million mootness fee, the Court awarded only $75,000. The decision also clarified that the Chancellor would in the future only award a mootness fee for supplemental disclosures that are “material” rather than merely “helpful.”
After the acquisition closed, plaintiff’s counsel petitioned the Court for the $1.1 million mootness fee award for alleged corporate benefits conferred on the Company’s stockholders as a result of the Waivers and Supplemental Disclosures. Defendants opposed the fee application, arguing that an award in the range of $75,000 to $125,000 was warranted. The Court found that the Waivers “do not justify a fee award.” In approving a fee award for the Supplemental Disclosures, the Chancellor applied the standard set forth in In re Xoom Corp. Shareholder Litigation, 2016 WL 4146425 (Del. Ch. Aug. 4, 2016), which requires only that such disclosures be “helpful” to stockholders in order to support a fee award. But the Chancellor clarified: “[U]nless a higher authority proclaims otherwise, this is my last call for Xoom. I will award mootness fees based on supplemental disclosures only when the information is material.” The Chancellor added that, if Delaware courts were to “see an uptick in mootness fee petitions for supplemental disclosures, it would be appropriate to respond” by adopting the even stricter “plainly material” standard set forth (in the context of disclosure settlements) in In re Trulia, Inc. Shareholder Litigation, 129 A.3d 884 (Del. Ch. 2016).
With respect to the Waivers, the Court explained that the benefit to stockholders of waivers of alleged deal protections, such as don’t-ask-don’t-waive provisions, could be assessed by a “qualitative evaluation of the increased likelihood of a topping bid due to the plaintiff’s efforts.” Confidentiality agreements in a deal process “typically contain ‘standstill’ provisions that obligate the [potential] acquirer to refrain from taking actions that relate to acquisition or control of the target.” Don’t-ask-don’t waive provisions “prohibit a potential acquirer from making any public or private requests to waive the standstill restrictions.” Here, the Court reasoned that the Waivers produced no value because, among other things, they added only three potential bidders into a process in which 24 prospective counterparties had entered similar confidentiality agreements, and none of the three bidders had expressed serious interest in acquiring the Company. Moreover, one of the Waivers addressed a limitation set to expire a day later. Thus, “[t]aking all this into consideration, the increased likelihood of a topping bid was close to zero.”
As to the Supplemental Disclosures, which provided a summary of the existence, terms, and operation of the don’t-ask-don’t-waive provisions, as well as the Company’s view as to why they did not impede the acquisition process, the Court determined that they were “marginally helpful” and therefore sufficient to support a fee award under the Xoom standard. The Court found that it would be “unjust to apply” a higher standard (i.e., materiality) in this case without advance notice because “no Delaware court has applied [a higher] standard since Xoom when evaluating fees for supplemental disclosures in the mootness context.” The Court nevertheless concluded that only a “modest fee award” of $75,000 was appropriate for the Supplemental Disclosures, which “contextualize[d] other information disclosed to stockholders.” In setting the amount, the Court looked to a survey of mootness fees commonly negotiated in analogous federal litigation and the limited set of court-ordered mootness fees awarded by Delaware courts post-Trulia.
In rejecting the lower Xoom standard on a going-forward basis, the Chancellor explained that Xoom imposed “a rule that seems to encourage the pursuit of legally meritless disclosure claims.” The Court acknowledged that its reasoning and its award were also influenced by “highly persuasive” arguments from law professor amici advocating for dramatically reduced fees so as not to “signal to other jurisdictions that [post-Trulia] concern over merger litigation has dissipated.” The Court thus clarified that “[w]here lawsuits are not worth much, plaintiffs’ counsel should not be paid much.”