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(Reuters) – A new decision denying any fees at all to a plaintiffs’ law firm well known for filing M&A disclosure suits probably won’t put an end to the proliferation of shareholder litigation that follows deal announcements.
But it’s another reason for plaintiffs lawyers to question the profitability of a business model that relies on convincing companies involved in M&A transactions that they should pay fees to make shareholder lawyers go away.
U.S. District Judge Paul Oetken of Manhattan on Monday rejected a request from Monteverde & Associates for a mootness fee of $250,000 from Nuance Communications Inc. Monteverde name partner Juan Monteverde contended that he was due that handsome payout for prodding Nuance, an artificial intelligence and speech technology company, to issue additional disclosures to its shareholders before their vote last June to approve a $16 billion takeover bid from Microsoft Corp.
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Oetken concluded that the additional disclosures for which Monteverde claimed credit – details about the analysis conducted by Nuance’s financial advisor and about price targets that stock market analysts had suggested for the company – did not add much to the mix of information already available to Nuance investors.
Monteverde & Associates is a prolific filer of shareholder cases challenging M&A disclosures, suing more than 60 companies for allegedly deficient disclosures in just the six months between March and September of 2021. Juan Monteverde did not respond to my emails about Oetken’s decision in the Nuance case.
But if you’re doubting the significance of the ruling, consider this: Nuance counsel Jaren Janghorbani of Paul, Weiss, Rifkind, Wharton & Garrison told me she has already received more hosannas about this six-page decision than major trial wins. “There has been an outpouring of joy from the defense bar,” she said. “Any decision we get that creates a disincentive for the plaintiffs bar is a big victory.”
Paul Weiss’ brief opposing Monteverde’s mootness fee request provides the context for the defense bar’s jubilation. After Nuance and Microsoft announced their merger plan, 12 individual shareholders sued Nuance over its allegedly deficient proxy disclosures. That’s nothing unusual, the Nuance brief said. These individual shareholder suits, generally asserting cookie-cutter disclosure claims, are essentially a deal tax for M&A participants. (As I’ve explained many times, most recently last week, shareholder lawyers used to file these federal court disclosure suits as class actions but have mostly switched to suing on behalf of individual shareholders whose cases can be easily dismissed without judicial scrutiny.)
The usual course is for defendants to issue revised proxy materials with additional disclosures, then pay nuisance-value mootness fees to plaintiffs’ lawyers in exchange for the voluntary dismissal of shareholders’ claims. That’s almost always the most sensible approach for target companies focused on closing their deals: It’s quicker and cheaper to pay plaintiffs lawyers than to litigate their fee demands.
Janghorbani declined to say whether Nuance followed the well-trod path and paid mootness fees to the other shareholder lawyers who filed suits challenging its Microsoft deal disclosures. Those cases have all been voluntarily dismissed.
The company decided to take a stand against Monteverde’s fee demand, Janghorbani said, “because the only way these cases stop is if we test the claims in court.”
Monteverde’s brief in support of the firm’s $250,000 fee request from Nuance cited seven cases in which federal courts approved six-figure fees in M&A disclosure cases. Several of them involved class action settlements, rather than voluntary dismissals of suits by individual shareholders. And most of the cases Monteverde listed were from 2017, 2018 and 2019, when M&A disclosure litigation first migrated to federal court from Delaware, after Delaware’s Chancery Court cracked down on mootness fee awards.
Nuance, on the other hand, was able to cite a handful of more recent decisions by federal judges who were stingier about mootness fee requests. In June 2019, for instance, U.S. District Judge Thomas Durkin of Chicago ordered Monteverde to return a $322,500 fee the firm was paid for challenging disclosures in Frensenius Kabi AG’s proposed acquisition of Akorn Inc. (That ruling is now before the 7th U.S. Circuit Court of Appeals.)
Later in 2019, U.S. Magistrate Judge Kevin Fox of Manhattan awarded Monteverde a fee of $55,00, rather than the $350,000 it sought, in an M&A disclosure case with a litigated preliminary injunction motion. U.S. District Judge Eric Komitee of Brooklyn denied fees to Abraham, Fruchter & Twersky, finding that a supplemental disclosure from LyondellBasell Industries NV was not a substantial benefit to shareholders. (That case involved a stock option grant plan, not an M&A deal.)
Then in 2021, as my colleague Jody Godoy reported at the time, U.S. District Judge Ronnie Abrams of Manhattan rejected Monteverde’s $400,000 fee request for obtaining additional disclosures about Energy Transfer LP’s acquisition of SemGroup Corp.
Neither Abrams nor Oetken, in these most recent decisions denying fee requests from Monteverde, discussed defendants’ policy arguments that M&A disclosure suits are nothing more than a way for shareholder lawyers to extract a nuisance tax from corporations. The judges simply found that the additional disclosures that companies made in response to shareholders’ suits were not important enough to make a difference to investors and therefore did not warrant a fee. But that sober analysis could be a more effective deterrent for shareholder lawyers who believe their cause is righteous but still want to earn fees.
For most companies, it’s still going to be preferable to pay shareholder lawyers’ mootness fees instead of investing the time and money to fight their demands. But as Nuance counsel Janghorbani said, if defendants really want to end M&A disclosure litigation, they have to be willing to litigate.
Decisions like Oetken’s should make that choice a little easier.
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Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A Dartmouth college graduate, she has worked as a journalist in New York covering the legal industry and the law for more than three decades. Before joining Reuters, she was a writer and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin.