On July 6, 2023, the Delaware Court of Chancery decided in Anderson v. Magellan Health, Inc. that the court would no longer apply the In reXoom Corp. Stockholder Litigation standard in determining the size of a mootness fee award in the context of supplemental disclosures. While Xoom only required that disclosures be “helpful” to justify the granting of mootness fee awards, Chancellor Kathaleen McCormick held that going forward, mootness fees will only be permissible for disclosures that are “plainly material.”
Magellan marks another initiative from the Court of Chancery to crack down on excessive M&A litigation and builds upon its 2016 In reTrulia, Inc. Stockholders Litigation decision.
In January 2021, healthcare provider Centene Corp. agreed to acquire Magellan Health, Inc. Centene had expressed interest in acquiring Magellan in 2018, but never extended an offer, so Magellan canvassed the market at that time, entering into confidentiality agreements with 24 potential buyers. None of the buyers followed through with the deal. At the time of the 2021 Centene acquisition, five of the confidentiality agreements remained in effect. The confidentiality agreements also included “don’t-ask-don’t-waive” provisions, which prohibit a bidder from requesting a waiver of the standstill provision to make a bid. Although potentially helpful in active auction scenarios, “don’t-ask-don’t-waive” provisions can cause a target board to be uninformed about potential topping bids.
After Centene and Magellan reached an agreement, Magellan decided not to conduct a market check, instead issuing a proxy statement in February 2021 and scheduling a board vote for the end of March. Before the board could vote, however, stockholder Bryan Anderson filed suit against Magellan on March 9, seeking to enjoin the vote. Anderson alleged that the “don’t-ask-don’t-waive” provisions impaired the sale process, prohibiting other buyers from coming forward with topping offers. Magellan agreed to waive three of the provisions (the fourth had already expired, and the fifth was considered in Magellan’s best interest to maintain) and to issue supplemental disclosures about the provisions to the board. Anderson dismissed the suit as moot only 10 days after it was filed and sought a mootness fee award of $1.1 million. Magellan’s counsel objected and argued for an award range of $75,000 to $125,000.
The size of the mootness fee is the subject of the present action. Anderson argued that the $1.1 million is warranted based on the beneficial results that the waiver and supplemental disclosures provided to the corporation. The Delaware Court of Chancery, however, disagreed. It found that the waiver and supplemental disclosures were not material and awarded $75,000 in mootness fees, which was at the lower end of Magellan’s requested range.
The Court’s Analysis
Under the corporate benefit doctrine, Delaware courts routinely have awarded legal fees to plaintiffs, in recognition of the benefits their lawsuits bring to stockholders of the defendant corporation. Litigation that results in supplemental disclosures and waiver of deal protections like the “don’t-ask-don’t-waive” provisions provides a benefit to corporations by informing the board and stockholders, and increasing the chance of a topping bid. Fees often are awarded regardless of whether a topping bid occurs. In determining the size of the fee, Delaware courts apply the seven-factor test from Sugarland Industries, Inc. v. Thomas. The test’s most important factor is the value the benefit brings to the corporation, but elements like complexity, duration and stage of the lawsuit also are considered.
In Magellan, the court first looked at the benefits produced by the waivers. McCormick called out what she categorized as “muggle magic” involved in Anderson’s calculations of the $1.1 million fee request. The court found that Anderson failed to factually support the most important component of the process: how much this action increased the likelihood of a topping bid. Instead, Anderson took credit for the entire chance a competing bid could occur. Contrary to his argument, the court found that the waivers in this situation would not have increased the likelihood of a topping bid. The companies subjected to the “don’t-ask-don’t-waive” provisions never expressed serious interest in acquiring Magellan, and it is unlikely anyone would have come forward in 2021. The court found the waivers did not justify a fee award.
Next, the court analyzed the benefits achieved by the supplemental disclosures. Since the court’s 2016 decision in Trulia, disclosure-only settlements have been looked at with increased scrutiny in Delaware. Trulia established that these settlements would be approved only when the disclosures were “plainly material.” But in Xoom that same year, the court decided on a less stringent standard for evaluating a petition for mootness fees, since “securing a release” from future claims is “not at stake” in moot cases.
Xoom clarified that the standard for mootness fees was merely whether the supplemental disclosures were “helpful.” The court’s view at the time was that this standard would reduce the court’s workload, eliminating its need to assess legal viability of a case, because a mootness fee claim already necessitated a meritorious case. However, in the years since, it has not eliminated the plague of superfluous litigation. In fact, McCormick reasoned that the rule incentivized plaintiffs to bring meritless disclosure suits, since defendants would rather pay modest mootness fees instead of defending the cases.
The court has determined in Magellan that the best course of action is to cease adherence to the Xoom materiality standard, and instead raise the bar for supplemental disclosures in moot cases to be commensurate with the Trulia “plainly material” standard. If the disclosures are not material, the court will not award any fees to a plaintiff. Supplementary disclosures deemed not “material” enough to justify a mootness fee award, include those containing information already known to stockholders, and certain disclosures not otherwise required by law.
McCormick further remarked that if the disclosures in Magellan had been evaluated under the newly pronounced materiality standard, no mootness fees would have been justified. However, believing it to be “unjust” to apply this new standard to the current case, since neither party contemplated or argued this issue in the briefing, the court applied the Xoom standard for the last time in Magellan and awarded only $75,000 in mootness fees to the plaintiff. The court found the disclosures were “helpful” enough to merit some small award, and that $75,000 was consistent with a range of similar mootness fees awards based on pre- and post-Trulia precedents. Analysis of the other Sugarland factors only provided a neutral or negative effect on the size of the award since the litigation was not complex and was resolved quickly.
McCormick said that much M&A litigation concerning disclosures to stockholders mandated by federal securities laws is being brought in federal court instead of in the Delaware Court of Chancery. Federal courts presiding over these disputes apply a different “substantial benefit” standard when evaluating supplementary disclosures and mootness fee awards. Such mootness fee seekers must prove that the supplementary disclosures made a meaningful difference in stockholders’ abilities to make decisions on the transaction.
Notably, federal courts applying this standard have become more stringent, and recently rejected mootness fee award applications involving commonplace disclosure issues. For example, in Serion v. Nuance Communications, the plaintiff argued that the proxy statement was deficient for failing to include all the data points reviewed by the company’s financial adviser in conducting its discounted cash-flow valuation analysis, how the company’s financial adviser selected the discount and growth rates used in its valuation, and all the data reviewed by the financial adviser in conducting its comparable transaction analysis. After the alleged disclosure defects were cured, the plaintiff applied for a mootness fee award, arguing that the additional information regarding the company’s financial adviser’s comparable transactions analysis and the individual price targets from research analysts (as opposed to the range of price targets originally provided by the company) conferred a substantial benefit on stockholders. The court disagreed, denying the mootness fee application in its entirety.
Magellan raises the standard of scrutiny for mootness fee awards in the Court of Chancery, rendering it equivalent to the Trulia standard and creating more consistency for evaluating the benefit of supplemental disclosures in Delaware. Magellan also serves as a reminder of the Court of Chancery’s staunch opposition toward plaintiffs’ attempts to extract a “merger tax” in M&A transactions.
In concluding the opinion, McCormick expressed hope that the comparatively greatly diminished award handed down to Anderson’s counsel will signal to other potential plaintiffs and their attorneys that these kinds of cases might not be worth litigating. The Delaware Court of Chancery and federal courts have demonstrated increased skepticism regarding excessive M&A litigation, specifically pertaining to allegedly deficient disclosures to stockholders.
The authors thank McGuireWoods summer associate Gabrielle Gonzalez for her assistance in preparing this legal alert. She is not licensed to practice law.