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Court Abrogates Disclosure Settlement Related to Merger Transaction

By | June 25, 2019

In House v. Akorn, Inc. the United States District Court for the Norther District of Illinois Eastern division related to the proposed acquisition of Akorn by Frensenius Kabi AG.  The plaintiffs in these cases sued Akorn and members of its board of directors seeking certain disclosures regarding the proposed acquisition. Akorn revised its proxy statement and issued a Form 8-K.  Plaintiffs then dismissed their lawsuits and settled for attorney’s fees.  Theodore Frank, an owner of 1,000 Akorn shares, then sought to intervene to object to the attorneys’ fee settlement.  The Court denied Frank’s motion to intervene, but in light of Frank’s arguments, ordered the defendants to file a brief addressing whether the Court should exercise its inherent authority to abrogate the settlement agreements under the standard set forth In re Walgreen Co. Stockholder Litigation.

In determining whether the settlement agreement should be abrogated, the Court considered the requirements of SEC Rule 14a-9 and the standard of materiality set forth in TSC Indus., Inc. v. Northway, Inc. The Court noted that “[o]mitted facts are not material simply because they might be helpful.”

Citing the Walgreen case, the Court stated the Seventh Circuit heightened the foregoing standards in the context of reviewing approval of a class settlement of claims for disclosures under Rule 14a-9. In Walgreen the Court adopted the Delaware Trulia standard which held that disclosures must be “plainly material . . . . mean[ing] that it should not be a close call that the . . . information is material.”

In the Akorn case, no class had yet been certified. Therefore the Court expressed its view that  the Court must assess whether the disclosures plaintiffs’ sought in their complaints—not the disclosures Akorn made after the complaints were filed in the revised proxy and Form 8-K—are plainly material.

All three plaintiffs sought GAAP reconciliations for projections included in the proxy statement.  Certain projections showed a sudden drop in Akorn’s near term performance.  The Court found disclosure of a lower projection already constitutes disclosure of the company’s opinion that the company will earn lower net income. Plaintiffs did not explain why the specific net income numbers were material to shareholders’ ability to evaluate the merger. Therefore, the Court found a GAAP reconciliation was not plainly material.

The Court also examined the plaintiffs’ other disclosure claims, noting generally that the information was already in the proxy statement, the disclosures were sufficiently clear or that the plaintiffs settled the case without the disclosures being made.

The Court found that the disclosures sought in the three complaints at issue were not “plainly material” and were worthless to the shareholders. The Court noted the plaintiffs’ attorneys were rewarded for suggesting immaterial changes to the proxy statement. Akorn paid plaintiffs’ attorney’s fees to avoid the nuisance of ultimately frivolous lawsuits disrupting the transaction with Frensenius. The settlements provided Akorn’s shareholders nothing of value, and instead caused the company in which they held an interest to lose money. The Court expressed its view that the quick settlements obviously took place in an effort to avoid the judicial review the decision at hand imposed. According to the Court, this is the “racket” described in Walgreen, which stands the purpose of Rule 23’s class mechanism on its head; the Court stated this sharp practice “must end.”

The Court stated plaintiffs’ cases should have been “dismissed out of hand.” Since the Court failed to take that action, the Court exercised its inherent authority to rectify the injustice that occurred as a result.  The Court abrogated the settlement agreements and ordered plaintiffs’ counsel to return to Akorn the attorney’s fees provided by the settlement agreements.

Contact Steve Quinlivan for more information.