An empty jury box is seen at the New York State Civil Supreme Court in Manhattan, New York City, U.S. REUTERS/Andrew Kelly

(Reuters) – The shareholder firm Rigrodsky Law may come to rue a pair of lawsuits it filed inviting judicial scrutiny of a controversial business model that rewards firms for accomplishing nothing more than beefed-up disclosures in M&A proxies.

Last summer, Rigrodsky sued two companies in New York State Supreme Court in Nassau County for refusing to fork over hundreds of thousands of dollars in mootness fees after the shareholder firm demanded enhanced proxy disclosures.

In June, Rigrodsky sued Acamar Partners Acquisition Corp, a special purpose acquisition company, as well as the used car company Acamar acquired in its de-SPAC deal, CarLotz Inc. Rigrodsky alleged that it was entitled to fees and expenses of $275,000 because Acamar amended its disclosures about the CarLotz deal after Rigrodsky filed a shareholder suit pointing to alleged deficiencies in proxy materials.

In August Rigrodsky brought a similar case against the Swedish optical sensor company Neonode Inc, claiming fees of$400,000 because it forced Neonode to amend proxy disclosures for a 2020 private offering.

Both companies have removed Rigrodsky’s lawsuits to federal court in Central Islip, New York.

Neonode and CarLotz paid fees to other plaintiffs firms that sued to obtain enhanced disclosures. Monteverde & Associates received $175,000 from Acamar. Neonode agreed to pay $400,000 to Purcell Julie & Lefkowitz and Andrew & Springer. The shareholder firms that received these mootness fees filed their disclosure cases in Delaware Chancery Court. Rigrodsky, by contrast, filed its underlying disclosure suit against Acamar in New York State Supreme Court and against Neonode in federal court in Delaware.

Rigrodsky’s complaints against Neonode and CarLotz assert that Rigrodsky deserves at least as much money as the shareholder firms that litigated in Delaware because it also exerted pressure on the companies to supplement their disclosures.

Neonode’s lawyers at Reed Smith haven’t yet addressed why the company paid a mootness fee to the shareholder lawyers who challenged the private offering in Chancery Court but balked at an additional fee for Rigrodsky. So far, they’ve only filed an Oct. 8 removal notice arguing that the federal court has jurisdiction over a fee demand stemming an underlying federal securities claim.

CarLotz, which is represented by Freshfields Bruckhaus Deringer, removed Rigrodsky’s fee suit to federal court in August. In subsequent filings, Acamar and CarLotz have told U.S. District Judge Joanna Seybert that Rigrodsky is not entitled to fees because its underlying disclosure challenge accomplished nothing for shareholders. At best, the company argued, Rigrodsky used questionable tactics to obtain immaterial disclosures that didn’t affect shareholders’ vote on the de-SPAC deal.

The shareholder firm never provided proof that its clients in the underlying disclosure challenge were actually Acamar shareholders, according to the company. Rigrodsky also improperly brought its disclosure lawsuit in New York, the company said, in defiance of Acamar’s Delaware forum selection clause. If Rigrodsky really believed it was entitled to fees, CarLotz argued, it should have intervened in the Chancery Court case brought by the Monteverde firm and asked for a share of the $175,000 that Monteverde received.

Rigrodsky lawyers Seth Rigrodsky, Timothy MacFall and Gina Serra did not respond to my email query. The firm has moved to remand the CarLotz suit to state court, arguing that there is no federal jurisdiction for its mootness fee demand. It also argued that CarLotz’s willingness to pay $175,000 to the Monteverde firm is evidence of the value of the enhanced disclosures that resulted from shareholders’ underlying claims. (According to Rigrodsky, Acamar’s lawyers essentially told the firm that the SPAC was willing to pay a total of $175,000 to make the disclosure litigation go away and didn’t much care how Monteverde and Rigrodsky divided that sum.)

The broader context of the Rigrodsky fee suits is important. As I’m sure you recall, so-called disclosure-only shareholder M&A suits have been controversial for nearly a decade. Delaware Chancery Court cracked down on fees for plaintiffs lawyers in disclosure-only class action settlements in 2016’s In re Trulia. Shareholder firms flocked to federal court for M&A challenges, only to run into skepticism from the 7th U.S. Circuit Court of Appeals, which labeled disclosure-only settlements “a racket” that “must end.”

The ever-resilient plaintiffs bar then figured out how to evade judicial review by resolving disclosure-only cases in private deals rather than class action settlements. A 2019 study by four law professors who have long tracked M&A litigation documented the strategy. In broad strokes, it goes like this: Plaintiffs lawyers file a shareholder suit alleging disclosure deficiencies in M&A proxy materials. Defendants quickly issue supplemental disclosures to correct the purported disclosure inadequacies. Plaintiffs lawyers then voluntarily dismiss their case in exchange for a mootness fee, before the dismissals even need sign-off from a judge.

Companies paid nearly $25 million in M&A disclosure-suit mootness fees in 2017, according to the law professors’ study. Defendants have managed to drive down fee demands over the last couple of years, but the general strategy has persisted.

The SPAC boom of 2020 and early 2021 was an additional opportunity for shareholder firms specializing in disclosure litigation. I told you earlier this year about dozens of shareholder suits challenging SPAC disclosures in just one seven-month stretch. Rigrodsky was the most prolific filer among all of the plaintiffs firms that sued over de-SPAC deals.

But the business model could be on its last legs. In 2019, U.S. District Judge Thomas Durkin of Chicago ordered shareholder lawyers to return the $322,500 fee they’d received from Akorn Inc as a mootness fee in a disclosure-only case challenging Akorn’s proposed merger with Fresenius Kabi AG. The judge said he should have used his inherent power to dismiss the disclosure challenge when it was first filed.

Durkin’s ruling is on appeal at the 7th Circuit, which heard oral arguments way back in April 2020. Defense lawyers have told me they’re hoping the appeals court upholds judges’ leeway to toss unwarranted disclosure challenges so that M&A participants won’t have to keep paying a deal tax to plaintiffs lawyers.

Rigrodsky’s new suits could be another route to the same end.

Opinions expressed here are those of the author. Reuters News, under the Trust Principles, is committed to integrity, independence and freedom from bias.

Read more:

The new ‘deal tax’: SPAC defendants are paying plaintiffs lawyers to drop N.Y. state suits

Decrying M&A class action ‘racket,’ judge tosses shareholders’ deal with Akorn

COLUMN-Appeals court bans ‘worthless’ M&A deal tax suits: Frankel

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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

Alison Frankel

Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A Dartmouth college graduate, she has worked as a journalist in New York covering the legal industry and the law for more than three decades. Before joining Reuters, she was a writer and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin. Reach her at alison.frankel@thomsonreuters.com