(Reuters) - The class action watchdogs at the Competitive Enterprise Institute lost a battle this week in their challenge to a $322,500 mootness fee for shareholders’ lawyers who sued over Akorn Corporation’s M&A deal with Fresenius Kabi AG. U.S. District Judge Thomas Durkin of Chicago denied a motion by CEI’s Ted Frank, an Akorn shareholder, to intervene in litigation in which Akorn agreed to pay the fee. Judge Durkin rejected CEI’s argument that Frank has an interest, as a shareholder, in assuring that the corporation does not pay unwarranted fees for plaintiffs’ lawyers who abused the class action system.
But CEI’s loss could turn out to be a turning point for shareholder M&A challenges in federal court. Even as he denied the group’s motion to intervene, Judge Durkin signaled his concern with CEI’s central argument that plaintiffs’ lawyers are misusing the leverage of class action filings to extract mootness fees. The judge said he would use his inherent power “to police potential abuse of the judicial process — and abuse of the class mechanism in particular.” He granted CEI’s Frank leave to file an amicus brief addressing the propriety of the fee and said he might order shareholders’ lawyers to disgorge it if it turns out to have been unjustified.
The mootness fee at the heart of Judge Durkin’s decision is emblematic of a new trend that’s developed in securities litigation over the past couple of years. As I’ve explained, after Delaware Chancery Court shut down fees for shareholders’ lawyers who filed class actions challenging M&A transactions and reached settlements that only required defendants to make additional deal disclosures, plaintiffs’ lawyers began filing the suits in federal court instead. The 7th U.S. Circuit Court of Appeals quickly made it clear, in 2016’s In re Walgreen Stockholder Litigation (832 F.3d 718), that it had no more tolerance than Delaware for fee awards in disclosure-only settlements. (The 5th Circuit as also criticized these deals, in which the shareholder class gets no tangible recovery but class counsel are awarded cash fees.)
Judges only have a say in fee awards, however, when M&A challenges are settled on behalf of the entire shareholder class. Under the federal rules of procedure for class actions, when named plaintiffs dismiss a case before class certification or substantive filings by the defendant, the suit is basically over – no classwide notice, no judicial oversight of the settlement.
That’s what happened in the Akorn case. Six individual shareholders filed proposed class actions after the company announced that Fresenius planned to acquire it. Very quickly, Akorn agreed to make additional proxy disclosures and to pay the plaintiffs’ lawyers a mootness fee, presumably in recognition of the benefit of the additional disclosures to shareholders. Plaintiffs’ lawyers dismissed the individual suits without releasing class claims.
CEI’s Frank cried foul and moved to intervene to object to the mootness fee payment. Judge Durkin denied the motion (2017 WL 5593349) last November but allowed Frank to rebrief. This week’s ruling, once again refusing to allow Frank to intervene but permitting CEI to oppose the mootness fee as an amicus, very much leaves the fee controversy alive. It’s worth noting, as Judge Durkin did in the new opinion, that some of the shareholder firms that dismissed prospective class actions against Akorn opted to disclaim their share of the mootness fee after CEI sought to challenge it.
The remaining firms – Brower Piven, Kahn Swick & Foti and Monteverde & Associates – argued in their most recent brief that the fee was reasonable compensation for their successful efforts to obtain additional disclosures from the company. They said Frank and CEI were driven by “irrelevant” animus toward the shareholder bar. “Putting aside Frank’s bellicose unsupported and entirely irrelevant (and untrue) ad hominem attacks on plaintiffs and their counsel, which reflect a political and philosophical agenda appropriately addressed to Congress and not this court, Frank has offered no facts or law to support any of his arguments and, indeed, as demonstrated, the facts and law here defeat every argument he has made.”
Lawyers from the three firms did not respond to my email requesting comment on Judge Durkin’s ruling. CEI lawyer Melissa Holyoak sent an email statement: “While we disagree with the district court regarding our client’s ability to intervene, we are encouraged by the district court’s invitation that we participate as amicus in determining whether the attorneys improperly extorted fees in these class action strike suits.”