The Delaware Court of Chancery held on July 6, 2023 in Anderson v. Magellan Health, Inc. that, going forward, supplemental disclosures secured by plaintiffs’ counsel in merger litigation must be material in order to support a mootness fee. Reflecting concerns similar to those expressed in the Court’s 2016 In re Trulia, Inc. Shareholder Litigation decision (requiring supplemental disclosures to be “plainly material” for the Court to approve a disclosure-only settlement), the Magellan decision continues Delaware’s trend of seeking to curb “the continued merger tax of deal litigation”—a trend that has pushed such litigation into other forums, especially federal court.
Background
In early 2021, Centene and Magellan entered into a merger agreement following a pre-signing market check in which several potential buyers entered into confidentiality agreements with “don’t ask, don’t waive” provisions, which prevented them from asking Magellan to waive the agreements’ standstill prohibitions on unsolicited bids. After plaintiff sought to enjoin the pending sale on the ground that the five confidentiality agreements in effect as of announcement tainted the sale process, Magellan waived the “don’t ask, don’t waive” provisions in three of the four remaining agreements (one agreement having expired in the interim) and provided supplemental disclosures to stockholders with a fuller discussion of the standstills. No topping bid materialized, and plaintiff agreed that Magellan’s actions mooted the lawsuit. However, plaintiff’s counsel and Magellan were unable to agree on the amount of mootness fees.
Opinion
The Court first addressed the waivers. Rejecting the “muggle magic” whereby plaintiffs’ counsel drew on pre-Trulia precedent to argue that Magellan’s standstill waivers supported the “eye-popping” mootness fee of $1,100,000 (a figure based in part on plaintiffs’ calculation of the expected value of a hypothetical topping bid), the Court pointed out that the increased likelihood of a topping bid was “close to zero” and, therefore, that the waivers do not justify a fee award.
The Court then considered whether the “marginally helpful” supplemental disclosures supported a mootness fee. Applying the standard articulated in the Chancery Court’s prior decision in In re Xoom Corporation Stockholder Litigation—which had only required that such supplemental disclosures be of “some benefit” or “helpful” in order to support a mootness fee—the Court awarded a modest $75,000, the lower end of Magellan’s proposed range and, importantly for its potential signaling effect, only 52% of counsel’s lodestar. However, noting that the Xoom standard could “encourag[e] . . . meritless claims,” the Court announced that, going forward, supplemental disclosures must be material, which Magellan’s supplemental disclosures likely were not.
Implications
Magellan is likely to further the flight of M&A deal litigation from Delaware to other jurisdictions perceived as more favorable by plaintiffs’ counsel, especially federal court, including because fiduciary duty claims “repackaged . . . as federal securities claims” may not be subject to a Delaware forum selection provision in a charter or bylaws. Although the Court cautioned other jurisdictions that “[o]ften, pre-Trulia precedent pricing corporate benefits reflect inflated valuations and warrant careful review,” Delaware law is only persuasive authority in determining federal securities claims. Further, as the Court noted, mootness fees require judicial review in Delaware when the parties do not agree on the amount, but plaintiffs in federal courts are generally not required to disclose mootness fee agreements, reducing court oversight of these settlements. This may likewise limit the opportunity for courts to take notice of the guidance that the Magellan Court sought to provide.
If you have any questions concerning the material discussed in this client alert, please contact the co-authors or any other members of our Mergers & Acquisitions practice group.
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