Roger Cooper, James Langston, and Mark McDonald are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. Cooper, Mr. Langston, Mr. McDonald, and Charity E. Lee.
These days, most public company mergers continue to attract one or more boilerplate complaints, usually filed by the same roster of plaintiffs’ law firms, asserting that the target company’s proxy statement contains materially false or misleading statements. These complaints usually also assert that the stockholder meeting to approve the merger should be enjoined unless and until the company “corrects” the false or misleading statements by making supplemental disclosures. While not too long ago cases like this tended to be filed in the Delaware Court of Chancery and other state courts asserting breaches of state-law fiduciary duties, including the duty of disclosure, after Trulia the vast majority of these cases today are filed in federal court under Section 14 of the Securities Exchange Act of 1934. [1]
Almost none of these cases, however, are actually litigated. Instead, they usually follow a by-now-familiar pattern: After one or more complaints are filed, defendants (usually the target company and its board of directors) offer to make supplemental disclosures to “moot” the plaintiffs’ claims (even though defendants rarely believe there is any merit to the claims); perhaps after some back-and-forth negotiation (sometimes not), the plaintiffs agree to withdraw their claims in light of the supplemental disclosures; the plaintiffs’ lawyers then seek a “mootness fee,” supposedly in compensation for the “benefit” provided in the form of the supplemental disclosures; and the defendants (usually after some negotiation) agree to pay such fees, which ends the case. (Because no class-wide release is obtained, the courts typically never get involved.) This practice has been widely criticized as imposing a “merger tax” without providing any benefits to companies or stockholders. But, given the strong incentives to avoid delaying the overall transaction, as well as to minimize litigation costs and risk, most defendants elect not to litigate these cases (despite their weaknesses on the merits), and so the practice continues.
