(Reuters) - For securities litigators and deal lawyers, the consequences of two related appeals at the 7th U.S. Circuit Court of Appeals, both stemming from shareholder litigation over Akorn’s since-aborted merger with Fresenius Kabi AG, could be huge. The appeals court could provide weapons for federal judges and objecting shareholders who are skeptical about the shareholder class actions filed in the wake of M&A announcements. Or the 7th Circuit could allow plaintiffs’ lawyers in M&A shareholder suits to continue to capitalize on a strategy that allows them to obtain fees without being subject to judges’ authority. It’s no exaggeration to say that the topography of M&A shareholder litigation may change dramatically after the 7th Circuit rules in the Akorn cases.
But the latest briefs in the case suggest that for the parties, this is also personal.
You need some context to understand the filings. After Akorn announced the Fresenius deal (which Fresenius later abandoned) in 2017, six shareholders filed prospective class actions in federal court in Chicago. Akorn quickly agreed to add some disclosures to its proxy filings on the deal. Shareholders’ lawyers, in turn, agreed to dismiss their clients’ suits, which were at such early stages that the voluntary dismissals did not require judicial approval. Akorn and the plaintiffs’ lawyers reached a private side deal for the company to pay shareholders’ counsel $322,500 in mootness fees, which they disclosed in a stipulation in one of the cases.
Then class action watchdog Ted Frank of the Hamilton Lincoln Law Institute got involved. Frank was fresh off of a big 2016 win at the 7th Circuit in In re Walgreen Stockholder Litigation (832 F.3d 718). In Walgreens, after Frank appealed the approval of a M&A class action settlement that delivered only immaterial disclosures to investors but $370,000 to shareholders’ lawyers, the 7th Circuit rejected the settlement. “No class action settlement that yields zero benefits for the class should be approved, and a class action that seeks only worthless benefits for the class should be dismissed out of hand,” the 7th Circuit said, calling such litigation “a racket.”
The Akorn M&A suits, you’ll recall, were not resolved as class action settlements that required court approval. (Walgreens would likely have doomed any such settlement.) Yes, the cases were filed as prospective class actions. But they were dismissed by individual shareholders, not settled on behalf of all shareholders.
Frank nevertheless believed that the $322,500 mootness fee to lawyers in the Akorn case was just as unwarranted as the fees struck down in the 7th Circuit’s Walgreens opinion. So he bought Akorn shares and moved, as a shareholder, to intervene in the six dismissed suits in order to enjoin the mootness fee.
To make a rather long story short, U.S. District Judge Thomas Durkin of Chicago ended up denying Frank’s motion to intervene in the case but allowing him to argue against the mootness fee as an amicus. In June 2019, Judge Durkin invoked his equitable power to abrogate the mootness fee deal between Akorn and shareholder lawyers.
Judge Durkin’s handling of the Akorn cases provoked two appeals at the 7th Circuit. Frank is appealing the judge’s denial of his motion to intervene as an Akorn shareholder to block the mootness fee. And meanwhile, the shareholders’ firms Monteverde & Associates and Kahn Swick & Foti are appealing Judge Durkin’s invocation of his equitable power to undo their fee deal.
Frank has asked the 7th Circuit to appoint him as an amicus to defend Judge Durkin’s decision on the scope of the judge’s power. Akorn, I should note, said in a brief filed Monday that it is taking no position in the appeals.
Frank filed his opening brief in the intervention appeal, captioned House v. Akorn, last month, arguing that Judge Durkin committed legal errors by failing to recognize that plaintiffs’ lawyers had fiduciary obligations to all shareholders, not just their clients, and to acknowledge that Frank, as a shareholder, had an interest in asserting a claim that those lawyers had breached their duty to him.
Frank’s brief is rife with criticism of the shareholder firms that file M&A class actions, which he calls “opportunistic, rent-seeking ‘strike suits.’” He repeatedly accuses plaintiffs lawyers of “extorting” mootness fees, in describing their “incessant, unethical practice” of filing M&A class actions and then negotiating private fee deals “without the safeguards of settlement approval.”
Frank is particularly scathing about Monteverde & Associates, a “serial strike suit filer,” in Frank’s description. Frank’s brief pointed out that a recent academic paper identified Monteverde as the plaintiffs’ firm most likely to obtain mootness fees in its M&A shareholder challenges, receiving fees in 80% of its cases. Frank suggested that all of the more than 50 shareholder M&A class actions that the Monteverde firm has so far filed in 2019 are “strike suits.”
Monteverde and Kahn Swick fired back in a newly filed brief addressing Frank’s request to appear as an amicus in the mootness fee appeal. The shareholders’ firms, whose brief is signed by appellate litigator Daniel Geyser, told the 7th Circuit that they would defer to the court to decide whether Frank’s involvement would be helpful. But they warned the appeals court that Frank is a partisan ideologue with a financial stake in the outcome of the appeal.
“He admits that his work here is designed to achieve objectives via litigation that he has not achieved via the political process,” the shareholder brief said. “He purchased Akorn shares with the specific aim of increasing, not reducing, the cost and expense of litigation in this case (and) he intends to seek his own fees for his ‘win’ below — an apparent racket of his own.”
Frank didn’t own any Akorn stock when the first shareholders’ suits were filed, the brief said, nor when Akorn investors voted to approve the Fresenius deal. Instead, the brief said, “his plan was to use the pretense of his late-acquired shares to object to any settlement and request a personal fee in the event his objection is (wrongly) sustained—all over litigation filed before he owned anything and a merger on which he lacks a right to vote.”
The brief suggested that if the 7th Circuit really wants a discussion of the issues, it should consider appointing “a neutral advocate among the many talented lawyers constituting this court’s bar.”
In emails responding to the new brief, Frank told me that the argument about when he acquired his shares is spurious because he bought his shares before the filing of the shareholders’ complaint at issue at the 7th Circuit. And even if plaintiffs’ lawyers are correct that they don’t have a fiduciary duty to investors who were not eligible to vote on the merger, Frank said, that’s really an argument against his intervention as a party, not whether he can offer an adversary presentation to the 7th Circuit as an amicus in the fee appeal.
I asked Frank what he thought of the tone of the brief. He quoted the old adage about pounding the table when neither the facts nor law are on your side. “I’m used to the ad hominems, but it seems especially counterproductive in a cohesive court that’s so familiar with my track record,” Frank said in an email. Shareholders’ lawyers, he said, “brought in an experienced (U.S.) Supreme Court advocate for this case, and I would’ve thought he knew better.”
Geyser said by email that his side’s brief doesn’t “attack Frank as an individual.” (In fact, he said, he holds Frank in high regard.) But Geyser said it’s fair play to make sure the court is aware of the interests and motivations of someone who purports to be an objective authority but is actually a partisan.
“We identify the nature of his practice and the critiques offered by other courts when faced with his broad-brush attacks on class and securities litigation,” Geyser said in his email. “And we ultimately suggest what is virtually always true of every appeal: The briefing would be more productive if trained on the actual issues on this actual record, not alleged faults in the nation’s scheme of securities regulation.”