On The Case

Decrying M&A class action ‘racket,’ judge tosses shareholders’ deal with Akorn

(Reuters) - U.S. District Judge Thomas Durkin of Chicago has thrown down the gauntlet: In a ruling issued Monday, he said it’s time to end the “racket” of “worthless” M&A shareholder litigation. Judge Durkin abrogated a settlement between Akorn and individual shareholders and ordered plaintiffs’ lawyers to return their $322,500 mootness fee to the company, concluding that their purported class action complaints should have been dismissed at the outset of litigation.

Shareholders’ lawyers from Monteverde & Associates, Kahn Swick & Foti and Brower Piven did not respond to my email requesting comment on the judge’s ruling. They had argued that Judge Durkin had no jurisdiction over a private settlement between the company and individual shareholders.

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Judge Durkin’s decision could turn out to be a milestone in M&A shareholder litigation in federal court. As I’ve been reporting for a couple of years – and as a recent study by four eminent law professors documents – plaintiffs’ lawyers developed a shrewd response after judges in Delaware Chancery Court essentially ruled out attorneys’ fees for settlements that deliver only additional proxy disclosures. Shareholders’ lawyers began filing M&A class actions in federal court rather than in Delaware, citing federal securities provisions to assure adequate proxy and tender offer disclosures. But instead of settling the federal court cases as class actions, plaintiffs’ lawyers came up with the tactic of brokering settlements between defendants and individual shareholders – voluntarily dismissing the prospective class action complaints and privately negotiating mootness fees for themselves, purportedly to reward them for obtaining additional proxy disclosures.

Crucially, these individual settlements have mostly gone unreviewed by the federal judges nominally overseeing the cases. Under the Federal Rules of Civil Procedure, judges are not required to sign off when plaintiffs voluntarily dismiss inchoate class actions. Critics like the U.S. Chamber of Commerce have accused shareholders’ lawyers of abusing the leverage of class action litigation, filing complaints on behalf of all shareholders, yet evading judicial scrutiny of their fees by settling on behalf of individual plaintiffs.

Judge Durkin’s new Akorn opinion not only exposes what’s going on in these M&A cases but also suggests a way for federal judges to use their inherent power to stop what the judge called a “sharp practice.” The judge acknowledged that because the litigation was not resolved through a class action settlement, he did not have authority under civil procedure rules over the deal struck between Akorn and individual shareholders. But he said that the class action complaints should have been dismissed at the very beginning of the litigation because the suits sought additional proxy disclosures that were not material to shareholders weighing Akorn’s acquisition by Fresenius.

The judge cited a 2016 ruling, In re Walgreen Co Stockholder Litigation, in which the 7th U.S. Circuit Court of Appeals struck down a class action settlement that provided shareholders only with additional proxy disclosures. But that’s not all the appeals court said in Walgreen, Judge Durkin explained. The 7th Circuit also held that class actions that seek only worthless benefits “should be dismissed out of hand.” Under that precedent, the judge said, the purported Akorn class actions should have been dead on arrival.

“Akorn paid plaintiffs’ attorney’s fees to avoid the nuisance of ultimately frivolous lawsuits disrupting the transaction with Fresenius,” Judge Durkin wrote. “The quick settlements obviously took place in an effort to avoid the judicial review this decision imposes. This is the ‘racket’ described in Walgreen, which stands the purpose of Rule 23’s class mechanism on its head.”

The decision is vindication for class action watchdog Ted Frank of the Hamilton Lincoln Law Institute. Frank, an Akorn shareholder, tried to intervene in the litigation in 2017, when plaintiffs’ lawyers disclosed their $322,500 mootness fee in a stipulation asking Judge Durkin to sign an order closing cases voluntarily dismissed by individual shareholders. Judge Durkin denied the motion to intervene but allowed Frank, represented by his colleague Frank Bednarz, to file an amicus brief arguing, among other things, that the 7th Circuit’s Walgreen decision instructs federal judges to scrutinize all prospective class actions, not just cases that end with classwide settlements. (I should note that Walgreen was also a Ted Frank case.)

In Monday’s opinion, Judge Durkin adopted Frank’s reading of the 7th Circuit’s Walgreen precedent. I asked Frank via email if he thinks other federal judges will now follow Durkin’s lead and analyze M&A class action complaints to determine if they should be tossed for seeking immaterial disclosures. Frank said he’s hoping for that outcome, even though judges might seem to have little incentive to scrutinize early-stage filings.

“If enough judges do it, and attorneys get known for repeat violations, maybe disciplinary authorities start to step in against the abuse of the license,” Frank said in an email. He also suggested that Judge Durkin’s opinion might embolden defendants to move to dismiss shareholder M&A complaints instead of capitulating with quick individual settlements. (Akorn counsel from Jones Walker, Polsinelli and Cravath Swaine & Moore did not respond to my email about Monday’s decision.)

Frank told me he doubts shareholders’ lawyers will appeal Durkin’s decision, but said that if they do, he will ask the 7th Circuit to appoint him as an amicus and allow him to brief and argue in support of Judge Durkin’s decision.

I’m of the view that M&A shareholder class actions in federal court are increasingly untenable as a profitable enterprise for plaintiffs’ lawyers. Mootness fees have been dropping – that $322,500 fee in the Akorn case is at the very high end of the fee spectrum reported by the law professors who published that new study on the phenomenon. And criticism of the cases is on the rise, from defendants, academics and some courts. The U.S. Supreme Court even took a look at one category of M&A class actions this term in Emulex v. Varjabedian, although the justices ended up dismissing the case after oral argument.

Judge Durkin’s opinion should add to that momentum.