While Delaware’s hunters are focused on deer and duck this fall, it appears that other hunters pursuing a highly valued legal prize in the state might be coming up empty handed this season.

Delaware Federal District Court Judge Richard Andrews in an August 2019 merger case, Scott v. DST Systems, Inc. et al, rejected plaintiffs’ request for payment of their fees, ruling that the lawyers did not produce a “substantial benefit” to shareholders.  The case settled merely with minor tweaks to disclosure, which the judge found did not “warrant an award of attorneys’ fees.”[1]  This decision is important and a win for shareholders, but putting an end to this type of legal hunting expedition nationwide should be in the sights of Congress and the Securities and Exchange Commission (SEC) in the coming year.

The data show America’s securities litigation is out of control. Case filings jumped 50 percent in 2017[2] and continued apace in 2018[3] and into the first half of 2019.[4] Virtually every merger and acquisition deal over $100 million produces one or more lawsuits from plaintiffs’ lawyers.[5]

Here’s the playbook:  plaintiffs’ lawyers sue the companies and boards of directors in connection with a proposed merger or acquisition. To settle the case, the companies accede to window-dressing of additional, immaterial disclosures and agree to pay the plaintiff’s attorneys a “mootness fee” – that is, the money makes the plaintiffs go away.  The lawyers bag a big monetary trophy and the shareholders ultimately bear the cost of the payoffs.

Delaware has for years been the plaintiff bar’s happy hunting ground.  In 2018, virtually all merger cases were resolved by dismissal and 63% involved payments of “mootness fees” to plaintiff lawyers.[6] These lawsuits formerly were brought in Delaware state court; but Delaware state courts cracked down on the abuse[7], so the fee hunters moved to federal court in Delaware. In 2009, 61% of deals sued in state court; 15% in federal court[8]. After the crack down, in 2017, 74% of deals faced lawsuits in federal court.[9]

So, while it was a welcome development that Judge Andrews recently denied the plaintiffs’ lawyers’ fee petition, more must be done.  The rationale of Judge Andrews’ no benefit-no lawyer fees ruling should be adopted in courts across the country.  Policymakers should see through the plaintiffs’ bar’s false camouflage claims of benefitting shareholders to reach a solution for this legal snipe hunt. The SEC, in its role as the investors’ advocate, should advocate for stricter oversight by courts.  It could engage to identify publicly the various guises under which lawyers bring cases that rest on little merit and thus result in paltry benefit to shareholders.  The agency could also actively weigh in, such as through filing of amicus briefs that urge federal courts to bar attorney fee awards for immaterial disclosures (as the Delaware state courts and Judge Andrews did) in order to eliminate a perverse incentive for M&A claims.  Ultimately, Congress can step in, including to require that M&A cases be brought in federal court in the state of a company’s incorporation and to eliminate abusive practices used by plaintiffs’ lawyers who have used Delaware as their private litigation reserve.

It’s time for policymakers to take the legal and regulatory steps necessary to end this big-game hunt approach by plaintiffs’ lawyers who care little for outcomes that benefit the interests of shareholders, and more about the trophies that end up on their wall and in their bank accounts.

[1] Scott v. DST Sys., Civil Action No. 1:18-cv-00286-RGA, 2019 U.S. Dist. LEXIS 143596 (D. Del. Aug. 23, 2019), https://advance.lexis.com/api/permalink/64e87367-18cb-4cdc-b6aa-e2d8f12c7910/?context=1519360

[2] NERA Economic Consulting, Recent Trends in Securities Class Action Litigation: 2018 Full-Year Review, at 2 (January 29, 2019), https://www.nera.com/content/dam/nera/publications/2019/PUB_Year_End_Trends_012819_Final.pdf

[3] Cornerstone Research, Securities Class Action Filings: 2018 Year in Review, at 5, 19 (Jan. 2018), https://www.cornerstone.com/Publications/Reports/Securities-Class-Action-Filings-2018-Year-in-Review

[4] Cornerstone Research, Securities Class Action Filings: 2019 Midyear Assessment, at 1 (2019), https://www.cornerstone.com/Publications/Reports/Securities-Class-Action-Filings-2019-Midyear-Assessment.pdf

[5] Matthew D. Cain, Jill Fisch, Steven Davidoff Solomon & Randall S. Thomas, The Shifting Tides of Merger Litigation, 71 Vanderbilt L. Rev. 603, 620 & 621 (2018), https://vanderbiltlawreview.org/lawreview/2018/03/the-shifting-tides-of-merger-litigation/

[6] Matthew D. Cain, Jill E. Fisch, Steven D. Solomon & Randall S. Thomas, Mootness Fees, Vanderbilt L. Rev., at 13 (forthcoming), https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=3085&context=faculty_scholarship

[7] In re Trulia, Inc. Stockholder Litig., 129 A.3d 884 (Del. Ch. 2016)

[8] The Shifting Tides of Merger Litigation, supra note 5, at 621

[9] Id.

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