Cain, Fisch, Davidoff Solomon & Thomas on Merger Litigation

Matthew D. Cain, Jill E. Fisch, Steven Davidoff Solomon and Randall S. Thomas have posted Mootness Fees on SSRN with the following abstract:

We examine the latest development in merger litigation: the mootness fee. Utilizing a hand-collected sample of 2,320 unique deals from 2003-2018, we find that Delaware’s crackdown on merger litigation substantially altered the merger litigation landscape. Although merger litigation rates remain high, and in 2018 83% of deals experienced litigation, plaintiffs’ lawyers have fled Delaware. In 2018 only 5% of completed deals experienced merger litigation in Delaware compared to 50%-60% in prior years. These cases have migrated to federal court where in 2018 92% of deals with litigation experienced a filing. We find that at least 65% of these federal filings resulted in voluntary dismissal of the case after a supplemental disclosure coupled with the payment of a mootness fee to plaintiffs’ attorneys.

These mootness dismissals, in most cases, occur without an adversarial process, meaningful judicial oversight or an evaluation of whether the complaint even states a colorable claim. Many of these supplemental disclosures provide little or no value to plaintiff shareholders. We argue that these payments are a form of blackmail antithetical to the spirit and principles of civil procedure and that they perpetuate litigation that imposes substantial costs on the judicial system and public companies.

The article proposes that courts address these concerns by requiring transparency of mootness fees and overseeing the circumstances in which such fees are paid. We argue that the Federal Rules of Civil Procedure should be amended to require disclosure and judicial approval of the payment of a mootness fee when a proposed class action is voluntarily dismissed. We further argue that courts should only approve the payment of such a fee when the supplemental disclosures that moot the litigation are “clearly material.”