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Berg v. Akorn, Inc.

United States District Court, N.D. Illinois, Eastern Division

November 21, 2017

Robert Berg, individually and on behalf of all other similarly situated, Plaintiff,
Akorn, Inc.; John N. Kapoor; Kenneth S. Abramowitz; Adrienne L. Graves; Ronald M. Johnson; Steven J. Meyer; Terry A. Rappuhn; Brian Tambi; Alan Weinstein; Raj Rai; Frensenius Kabi AG; Quercus Acquisition, Inc., Defendants.


          Thomas M. Durkin, Judge

         Robert Berg filed this action, and several other individuals filed similar actions, against Akorn, Inc., the members of Akorn's board of directors, and Frensenius Kabi AG, in order to force Akorn to make certain revisions to the proxy statement it filed with the U.S. Securities and Exchange Commission in connection with Frensenius's bid to acquire Akorn. On July 10, 2017, Akorn made the changes to its proxy statement sought by Berg in this case and the plaintiffs in the other actions, making their claims moot. See R. 54-1 at 4. Shortly thereafter, all the cases were dismissed without prejudice by joint stipulations pursuant to Federal Rule of Civil Procedure 41(a)(1). See Id. at 5. Plaintiffs' counsel also informed Defendants that they intended to seek their fees from Defendants. See id.

         In this case in particular, Berg's counsel filed a “Motion for Entry of Stipulation and Voluntary Dismissal Without Prejudice.” R. 54. The motion document provided that the Court would “retain[] jurisdiction over all parties solely for the purposes of any potential further proceedings relating to the adjudication of any claim by any Plaintiff in the Akorn Section 14 Actions (as defined in the accompanying stipulation and proposed order) for attorneys' fees and/or expenses.” Id. As noted, the motion document attached a “Stipulation and Proposed Order” that included a more extensive recitation of the history of the cases. See R. 54-1. The Court granted the motion to dismiss by minute order on July 19, 2017, see R. 55, but did not enter the “Stipulation and Proposed Order.” Two months later, on September 15, 2017, the parties filed another “Stipulation and Proposed Order Closing Case for All Purposes.” R. 56. This document provided that “Plaintiffs in the Akorn Section 14 Actions have reached agreement with Defendants with respect to the Fee Claims and Defendants have agreed to provide Plaintiffs with a single payment of $322, 500 in attorneys' fees and expenses to resolve any and all Fee Claims, and thus there are no Fee Claims to be adjudicated by the Court.” Id. at 6. The document provided further, that “[t]his matter is fully resolved and no further issues remain in dispute, and, there being no reason for the Court to retain jurisdiction over this matter, the case should be closed for all purposes.” Id.

         Three days later, before the Court could take any action with respect to the September 15 proposed order, Theodore Frank, an owner of 1, 000 Akorn shares, filed a motion to intervene for purposes of objecting to the settlement of the attorneys' fee claims. R. 57; R. 66. Frank contends that the cases filed by Berg and the other plaintiffs are part of a “racket, ” pursued “for the sole purpose of obtaining fees for the plaintiffs' counsel, ” R. 66-2 at 1, which are successful “because victim defendants [like Akorn] find it cheaper, and therefore rational, to pay nuisance value attorneys' fees rather than contest them, ” R. 79 at 1, and further delay the merger. Frank contends that this is a “misuse of the class action device for private gain.” R. 66-2 at 6. Berg opposes Frank's motion to intervene. That motion is now fully briefed and before the Court.

         1. Jurisdiction

         Berg's primary argument against Frank's motion is that “[t]he Rule 41(a)(1) dismissal divested this Court of subject matter jurisdiction and, contrary to Frank's contention, there is no ancillary jurisdiction based on the subsequent agreement by Akorn to pay fees and expenses.” R. 78 at 3. It is generally true that a Rule 41 dismissal ends the case and strips the court of jurisdiction in a manner of speaking. But even Berg admits that there are a number of exceptions to this general rule, including motions for relief from judgment under Rule 60, see Nelson v. Napolitano, 657 F.3d 586, 588-89 (7th Cir. 2011); motions for sanctions under Rule 11, id.; and retention of jurisdiction in a case where the settlement precipitating the stipulated dismissal “falls apart, ” see Voso v. Ewton, 2017 WL 365610, at *3 (N.D. Ill. Jan. 25, 2017). Another exception is intervention by a shareholder in a derivative lawsuit in order to appeal a judgment. See Robert F. Booth Trust v. Crowley, 687 F.3d 314 (7th Cir. 2012). Notably, members of an uncertified putative class can appeal after the named plaintiffs have settled without intervening in the underlying case. See Devlin v. Scardelletti, 536 U.S. 1 (2002). Thus, the mere fact that the case was dismissed pursuant to Rule 41 does not prohibit Frank from seeking to intervene.

         2. Intervention

         Like this case, the Walgreen Company Stockholder Litigation case involved settlement of claims seeking to compel disclosure of information in the context of a merger. 832 F.3d 718 (7th Cir. 2016). Unlike this case, the parties in Walgreen settled the class claims and sought court approval of the settlement, including attorneys' fees, which the district court granted. The Seventh Circuit reversed. In doing so, the court adopted a standard devised by the Delaware Chancery Court requiring that the sought after disclosures be “plainly material.” Id. at 725 (quoting In re Trulia, Inc. Stockholder Litig., 129 A.3d 884, 894 (Del. Ch. 2016)). The Seventh Circuit observed that there was no “indication that the members of the class [had] an interest in challenging” the merger at issue, and that the “only concrete interest suggested by this litigation is an interest in attorneys' fees.” Walgreens, 832 F.3d at 726. The court opined that these types of cases that do not materially benefit the class but are designed only to generate attorneys' fees are “a racket” that “must end.” Id. at 725.

         In Trulia, the Delaware court also was concerned with the procedural posture of class settlement approvals, because once parties have settled, neither party has an incentive to advocate against its approval. Outside the normal adversarial process, it can be difficult for a court to determine whether the proxy disclosures at issue are material. As an alternative to the process for class settlement approval, the court suggested that:

plaintiffs' counsel apply to the Court for an award of attorney's fees after defendants voluntarily decide to supplement their proxy materials by making one or more of the disclosures sought by plaintiffs, thereby mooting some or all of their claims. In that scenario, where securing a release is not at issue, defendants are incentivized to oppose fee requests they view as excessive. Hence, the adversarial process would remain in place and assist the Court in its evaluation of the nature of the benefit conferred . . . for the purposes of determining the reasonableness of the requested fee.
[This] preferred scenario of a mootness dismissal appears to be catching on. In the wake of the Court's increasing scrutiny of disclosure settlements, the Court has observed an increase in the filing of stipulations in which, after disclosure claims have been mooted by defendants electing to supplement their proxy materials, plaintiffs dismiss their actions without prejudice to the other members of the putative class (which has not yet been certified) and the Court reserves jurisdiction solely to hear a mootness fee application. From the Court's perspective, this arrangement provides a logical and sensible framework for concluding the litigation. After being afforded some discovery to probe the merits of a fiduciary challenge to the substance of the board's decision to approve the transaction in question, plaintiffs can exit the litigation without needing to expend additional resources (or causing the Court and other parties to expend further resources) on dismissal motion practice after the transaction has closed. Although defendants will not have obtained a formal release, the filing of a stipulation of dismissal likely represents the end of fiduciary challenges over the transaction as a practical matter.
In the mootness fee scenario, the parties also have the option to resolve the fee application privately without obtaining Court approval. Twenty years ago, Chancellor Allen acknowledged the right of a corporation's directors to exercise business judgment to expend corporate funds (typically funds of the acquirer, who assumes the expense of defending the litigation after the transaction closes) to resolve an application for attorneys' fees when the litigation has become moot, with the caveat that notice must be provided to the stockholders to protect against “the risk of buy off” of plaintiffs' counsel. As the Court recently stated, “notice is appropriate because it provides the information necessary for an interested person to object to the use of corporate funds, such as by ‘challeng[ing] the fee payment as waste in a separate litigation, ' if the circumstances warrant.” In other words, notice to stockholders is designed to guard against potential abuses in the private resolution of fee demands for mooted representative actions. With that protection in place, the Court has accommodated the use of the private resolution procedure on several recent occasions and reiterates here the propriety of proceeding in that fashion.

Trulia, 129 A.3d at 897-98.

         Thus, the court in Trulia favorably contemplated the very scenario that has arisen in this case. And Plaintiffs' counsel have taken the advice of the court in Trulia and dismissed this case without prejudice, such that the class claims are no longer at issue. The court in Trulia also contemplated that an objecting shareholder like Frank would bring a “separate litigation” to ...

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