Judge Posner Called It a ‘Racket’: Federal Judge Rejects Very Similar ‘Notional Fees’ Motion in Federal Merger Litigation | Seyfarth Shaw LLP
In a recent ruling by the United States District Court for the Southern District of New York, a federal judge rejected the common but abusive practice of “notional fee” payments in public mergers and acquisitions transactions. In the February 2022 opinion, Judge Oetken denied a $250,000 attorney’s fee request by plaintiff’s attorney in an investor challenge to Microsoft’s acquisition of Nuance Communications for $19.7 billion. The final court’s decision is to have the opportunity to both review and reject what some call a groundless shakedown or transaction tax on public M&A deals. This decision is significant in that it is increasingly rare for the payment of lapse fees to be subject to judicial review given the growing trend of voluntary dismissals by plaintiffs in such cases. For more information on the history of non-compliance fee payments and the need for reform Click here.
The 2016 decision of the Delaware Court of Chancery in In re Trulia, Inc. Shareholder disputewhich criticized so-called “disclosure-only settlements” paid to plaintiffs’ attorneys in exchange for additional disclosures that provided no material additional information, led to a sharp drop in merger litigation filings in the Delaware Court of Chancery. Following the Truly decision, there has been a sharp increase in merger challenges filed in Federal Court. A number of plaintiffs’ companies have filed cases in federal court very similar to those criticized in Truly for the sole purpose, apparently, of obtaining attorneys’ fees in exchange for voluntary dismissals and non-material additional disclosures. These voluntary termination cases, because they are dismissed prior to class action certification, are generally not subject to court approval.
Beginning in 2009, class action filings challenging mergers increased dramatically. Since 2015, the year before the Truly decision, approximately 95% of merger transactions valued at more than $100 million were challenged. 60% of these challenges were filed in Delaware courts, most often in Chancery Court, while only 19% were filed in federal courts in other states.
These cases were generally resolved in early settlements with remedial disclosures and broad releases of future class claims for defendants that required court approval. Plaintiffs’ claims for attorneys’ fees were often approved by the courts under the common law doctrine of employee benefits. The disclosures were meant to provide shareholders with important information to make an informed investment decision. In reality, however, the additional disclosure they provided was insignificant and more often than not a forgery to justify plaintiffs’ attorneys’ attorneys’ fees. In many cases, the corrective disclosures were nearly unnecessary and did not affect many shareholder votes. Thus, many class action lawsuits filed in M&A transactions have become a means for plaintiffs’ companies to obtain attorneys’ fees with little or no meaningful benefit to shareholders. Since class actions were created to benefit a class of aggrieved plaintiffs, there was a fairly obvious disconnect between the theoretical objective and the reality of the motive behind many merger cases. Seventh Circuit Judge Posner called the plaintiffs’ practice “no better than racketeering.” 
The Truly Decision
The decision of the Delaware Chancery’s Court in Truly sought to end this practice by limiting disclosure settlements only to those that resulted in disclosures that added significant value to class members and provided waivers of reasonable scope. The Truly The court declined to approve a proposed settlement, which included additional disclosures and attorneys’ fees in exchange for a broad release, finding that the proposed disclosure was not “obviously material” within the meaning of the law of the Delaware. The Truly The court warned that unless there was “a substantial likelihood that disclosure of the omitted fact would have been considered by the reasonable investor to have materially altered the ‘total mix’ of information made available “, the proposed disclosure-only settlements and accompanying attorney’s fees would not be approved by the Chancery Court in the future.
Post-Merger Federal LitigationTruly
Truly came as the culmination of several then-recent decisions by the Delaware Court of Chancery and it made clear that there was a new regime in the Delaware Court of Chancery for settling merger cases. However, Truly did not apply in other forums. As a result, some plaintiff firms have taken the opportunity to challenge mergers in other jurisdictions. In 2016, the rate of merger litigation fell nearly 50% in Delaware state court and continued to decline thereafter. This trend was accompanied by an immediate increase in merger litigation in federal courts. In 2018, only 5% of closed deals were challenged in Delaware Chancery Court, while 92% were challenged in federal court.
Not only has the rate of Federal Court filings increased, but the number of class action lawsuits resolved by voluntary layoffs before a group is certified has skyrocketed. Beginning in 2016, many merger filings were followed by voluntary dismissals and payment of attorneys’ fees to plaintiffs. In 2018, 92% of federal merger challenges resulted in voluntary dismissals and the payment of non-compliance fees.
These notional fee cases generally do not require court approval, as cases are usually dismissed prior to class action certification, and thus without a requirement for court approval, and fees are rarely contested by defendants who often choose to pay notional fee claims, even in often frivolous cases, in order to avoid delays in completing merger transactions and the costs of full litigation of a case on the merits.
Serion v Nuance Communications, Inc.
In the recent nuance decision, Judge Oetken denied plaintiff’s attorney’s claim for fees, finding that plaintiff’s attorney had failed to demonstrate a “substantial benefit” to shareholders from the additional disclosures, concluding that the additional disclosure that had been providing underlying metrics for data already disclosed did not confer a substantial benefit. The outfit is notable because the additional disclosures demanded by plaintiffs are typical of the truly marginal information added as part of most cases involving notional fee dismissals.
The payment of Plaintiff’s baseless fee claims, which individually are not material but in aggregate are far more than trivial, to end frivolous challenges to the agreements continues despite the Truly decision which criticized an almost identical practice. The cost of this frivolous transaction tax is borne not only by the businesses that pay them, but is also passed on to consumers and other businesses that do business with the paying business and the practice offers little or no benefit to shareholders in most cases. The nuance The ruling is an exception to the more common result of no court review of non-compliance fee settlements. Plaintiffs, due to the procedural posture, were required to seek court approval of costs. Since non-compliance charges are generally not reviewed by the courts, legislative reform is needed to address this practice. In the meantime, the “racketeering” in Judge Posner’s words will likely continue.
 In re Trulia, Inc. Shareholder dispute129 A.3d 884 (Del. Ch. 2016).
 Matthew D. Cain, Jill E. Fisch, Steven Davidoff Solomon and Randall S. Thomas, Mootness Fees, 72 Vand. L. Rev.1777, 1785 (2019).
 Trulia, 129 A. 3d. at 844.
 In re Walgreen Co. Stockholder Litig.832 F.3d 718, 724 (7th Cir. 2016).
 Trulia, 129 A.3d at 898-99.
 Identifier. at 899.
 However, in an unreported decision a few months later, the Delaware Chancery Court appeared to apply a different standard to moot terminations as opposed to court approval of proposed collective settlements. The court distinguished the Truly decision, stating:
This Court in Truly clarified that, to support a class-wide settlement and release based solely on disclosures, the materiality of shareholder disclosures must be clear. The mootness context, in my view, supports a different analysis. This is because, here, the individual plaintiffs ceded only their own interests; the dismissal is for them only, not for the shareholder class.
In the event of a dispute with the shareholders of Xoom Corp., No. 11263–VCG, WL 4146425, at *3 (Del.Ch. Aug. 4, 2016). The court upheld a notional compensation of $50,000 and noted that “compensation may be awarded if the disclosure provides a benefit to shareholders, whether or not it is material to the vote. In other words, useful disclosure may justify an award of fees in this context. » Identifier.
 Cain, supra note 2, 72 Vand. L.Rev. to 1781, 1788.
 The rate of merger challenges filed in state courts also increased, but the majority of filings occurred in federal court.
 Cain, supra note 2, 72 Vand. L.Rev. in 1782.
 Identifier. to 1792-93.
 Serion c. Nuance Comm’ns, Inc.21-CV-4701 (JPO), 2022 WL 356695, at *2 (SDNY February 7, 2022), reconsideration denied, 21-CV-4701 (JPO), 2022 WL 1166017 (SDNY April 20, 2022)