• In needed guidance, the Delaware Court of Chancery held that supplemental disclosures for merger transactions must be “material” to warrant a mootness fee, a substantially higher threshold than the previous standard awarding fees so long as the disclosures provided “some benefit.”
• The Court denied plaintiff’s request for a US$1.1 million mootness fee under the former test because supplemental disclosures providing at most “some clarity” warranted fees of only US$75,000, and suggested that the disclosures would not have warranted any fees under the new test.
• While additional action may be needed to give it full effect, the Court’s decision provides a powerful tool for merger parties opposing plaintiffs’ attorneys seeking a “merger tax” of mootness fees based on supplemental disclosures of questionable materiality.

Chancellor McCormick of the Delaware Court of Chancery issued an Opinion on July 6, 2023, in Anderson v. Magellan Health, Inc., imposing a new, heightened standard of review of requests for mootness fees predicated on supplemental disclosures made in connection with a merger.¹ Before Magellan, such supplemental disclosures needed to provide “some benefit” to warrant a fee. Now, such disclosures must meet the legal threshold of being “material.” However, even under the now-discarded standard, the Court rejected the “eye-popping” US$1.1 million award plaintiff’s counsel sought, explaining that US$75,000 in mootness fees adequately compensated plaintiff’s counsel for the “clarifying” disclosures they obtained.

Background²

In 2019, defendant Magellan Health, Inc. (“Magellan”) conducted a sale process in which prospective bidders entered confidentiality agreements containing “don’t ask, don’t waive” provisions that forbade the bidders from requesting that Magellan waive the agreements’ standstill provisions. That sale process ended without Magellan receiving an acquisition offer. The next year, Centene Corporation (“Centene”) proposed acquiring Magellan. After due diligence, Magellan and Centene executed a merger agreement on January 4, 2021. At that time, and as disclosed in Magellan’s proxy statement, five confidentiality agreements containing “don’t ask, don’t waive” provisions remained in effect.

On March 9, 2021, a Magellan stockholder filed suit, alleging that the outstanding confidentiality agreements containing “don’t ask, don’t waive” provisions tainted the sale process by preventing superior offers from potential bidders. Ten days later, the plaintiff agreed to dismiss the lawsuit as moot in exchange for Magellan waiving the “don’t ask, don’t waive” provisions in three of the outstanding agreements and issuing supplemental disclosures. The supplemental disclosures provided a “more easy-to-read summary” of the “don’t ask, don’t waive” provisions, including why Magellan did not believe that certain of its standstill obligations impeded the sale process.³

No other bidders to acquire Magellan emerged, and stockholders approved the merger on March 31, 2021.

On July 2, 2021, the parties stipulated to dismiss the action, and the Court retained jurisdiction to hear a petition for fees and expenses. Plaintiff’s counsel requested US$1.1 million in mootness fees. Magellan argued instead that an award between US$75,000 and US$125,000 was appropriate. Two law professors also appeared, filing an amicus brief arguing that the Court of Chancery should reform its jurisprudence regarding mootness fee awards to reduce “merger tax” litigation harming Delaware corporations and to guide federal and state courts hearing requests for such awards.

On June 6, 2023, the Court issued a bench ruling awarding Movants US$75,000 in fees, and its July 6 Opinion followed.

The Court’s Decision

Going Forward, Supplemental Disclosures Will Need to Be Material to Justify Mootness Fees

For almost a decade, the Court of Chancery has sought to curb the potential for abuse of the merger litigation process. Before 2016, virtually every public company merger was the target of litigation that would almost always settle before a stockholder vote on the merger. These settlements typically would be “disclosure-only” settlements in which the target company would issue supplemental disclosures in return for a release of all claims against the target’s directors and officers, the acquiror, and their advisors, followed by an application by plaintiff’s counsel for a hefty fee (which application defendants often would not oppose). But it had become clear that “[a]lthough supplemental disclosures provided no discernable benefit to stockholders, the resulting attorneys’ fees provided meaningful benefits to the plaintiff’s attorneys directly involved in the litigation.”⁴ Thus, in early 2016, the Court announced in In re Trulia, Inc. Stockholder Litigation that it would be “increasingly vigilant” in assessing disclosure-only settlements, and that such settlements would be approved only where the disclosures were “plainly material,” subject to other limitations.⁵

Later in 2016, the Court of Chancery in In re Xoom Corp. Stockholder Litigation declined to apply Trulia’s “plainly material” standard to evaluate petitions for mootness fees.⁶ The Court instead held that mootness fees could be awarded where the disclosure “provides some benefit to stockholders, whether or not material to the [merger approval] vote.”⁷

As Chancellor McCormick explained in Magellan, Xoom “created a risk that plaintiffs’ counsel would pursue weak disclosure claims with the expectation that the defendants would rationally issue supplemental disclosures and pay a modest mootness fee as a cheaper alternative to defending the litigation.”⁸ Moreover, Trulia prompted many plaintiffs’ counsel to seek more favorable for a rather than pursuing merger suits in Delaware. As a result, the “merger tax” of mootness fee applications for less-than-material disclosures “continue[d] to plague Delaware corporations.”⁹ With this in mind, the Court issued the “last call for Xoom” and announced that, moving forward, mootness fees based on supplemental disclosures would only be awarded when the disclosures provide information satisfying the legal test for materiality.¹⁰ In providing her explanation for this new rule, Chancellor McCormick noted the importance of providing guidance (albeit, nonbinding) to courts outside of Delaware to curb plaintiffs’ counsel from filing elsewhere.

The Court Awards a Modest Fee Award for “Marginally Helpful” Disclosures

Because the Xoom standard was still in place at the time of Magellan’s supplemental disclosures and neither party briefed the issue of the Court abandoning Xoom, the Court applied Xoom’s standard to Magellan’s supplemental disclosures. The Court held that the disclosures provided “some benefit” in the form of additional clarity related to the “don’t ask, don’t waive” provisions.¹¹ Taking into account the minimal benefit of Magellan’s supplemental disclosures, and pre- and post-Trulia decisions for “marginally helpful” disclosures, the Court held that US$75,000, and not the US$1.1 million plaintiff’s counsel sought, was an appropriate mootness fee award.¹²

No Fees for Waiving the “Don’t Ask, Don’t Waive” Provisions

Last, the Court rejected plaintiff’s counsel attempt to bolster their US$1.1 million fee application due to Magellan waiving the “don’t ask, don’t waive” provisions in three confidentiality agreements.¹³ The Court held that the waivers added only three potential bidders “to the mix,” none of whom “had ever expressed any serious interest in Magellan.”¹⁴ Thus, “the increased likelihood of a topping bid was close to zero.”¹⁵ As a result, the waivers did not warrant any fee award.

Conclusion and Takeaways

The Court’s decision in Magellan should provide a useful tool to merger parties by imposing a more exacting standard for awarding mootness fees.

There remains, however, a question as to the impact Magellan will have in practice. Plaintiffs’ counsel may still threaten suit in federal court and in state courts outside of Delaware, where Magellan will not be binding. Further, as long as fee demands are priced at levels where the merger parties would rather pay than incur the costs and risks of opposing fee applications, the market for mootness fees for supplemental disclosures may continue in some form.

Ultimately, the extent of the Magellan decision’s impact on the “merger tax” of mootness fees may require additional action. For starters, target boards should consider whether, to the extent they do not do so already, their company’s bylaw forum provisions should be amended to require lawsuits challenging merger disclosures to be brought in the Delaware Court of Chancery to the maximum extent permitted.¹⁶ Second, insurance carriers may want to provide additional coverage options related to mootness fee applications, such as a sublimit of coverage with no retention solely for the fees and expenses incurred in defending against a mootness fee application, much the way many D&O policies now provide a sublimit of coverage to respond to books and records demands. And finally, meaningful change will require merger parties to accept Chancellor McCormick’s invitation and litigate in opposition to fee applications seeking supplemental disclosures of questionable materiality.

1. C.A. No. 2021-0202-KSJM (Jul. 6, 2023).
2. The following background and facts of the case are taken from the Court’s Opinion.
3. Slip Op. at 25.
4. Id. at 18.
5. 129 A.3d 884, 898 (Del. Ch. 2016).
6. 2016 WL 4146425 (Del. Ch. Aug. 4, 2016).
7. Slip Op. at 20-21 (citing Xoom, 2016 WL 4146425, at *3).
8. Id. at 22.
9. Id. at 23.
10. Id. at 24.
11. Id.
12. Id. at 25-28.
13. See id. at 8.
14. Id. at 12.
15. Id.
16. Two United States Courts of Appeals split on whether analogous bylaw forum provisions requiring derivative suits be brought in the Delaware Court of Chancery could foreclose derivative claims brought pursuant to Section 14(a) of the Exchange Act. Dechert has previously written about the circuit split caused by the decisions in Lee v. Fisher, 70 F.4th 1129 (9th Cir. 2023) and Seafarers Pension Plan v. Bradway, 23 F.4th 714 (7th Cir. 2022).