Robert Berg v. Akorn, Inc.

UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

ROBERT BERG, individually and on

behalf of all others similarly situated,

Plaintiff, No.17 C 5016

JORGE ALCAREZ, individually and on

behalf of all other similarly situated,

Plaintiff, No. 17 C 5017

SHAUN A. HOUSE, individually and on

behalf of all other similarly situated,

Plaintiff, No. 17 C 5018

SEAN HARRIS, individually and on

behalf of all other similarly situated,

Plaintiff, No. 17 C 5021

ROBERT CARLYLE,

Plaintiff, No. 17 C 5022

DEMETRIOS PULLOS, individually and

on behalf of all other similarly

situated,

Plaintiff, No. 17 C 5026

v.

AKORN, INC.; JOHN N. KAPOOR; Judge Thomas M. Durkin

KENNETH S. ABRAMOWITZ; ADRIENNE L.

GRAVES; RONALD M. JOHNSON; STEVEN

J. MEYER; TERRY A. RAPPUHN; BRIAN

TAMBI; and ALAN WEINSTEIN,

Defendants.

MEMORANDUM OPINION AND ORDER

Plaintiffs in these six cases are shareholders of Akorn, Inc. They filed these

cases (five of which were class actions) under the Private Securities Litigation Reform

Act ostensibly to force Akorn to supplement the proxy statement it issued related to

a proposed merger with another company called Fresenius Kabi AG. Before any of

the classes were certified, Plaintiffs voluntarily dismissed their cases after Akorn

agreed to pay $332,500 in attorneys’ fees. See 17 C 5016, R. 56 at 6.

After the cases were voluntarily dismissed, another Akorn shareholder, named

Theodore Frank, sought to intervene to argue that the $332,500 payment should be

disgorged as unjust enrichment because the original claims were frivolous. Frank

argued that the Seventh Circuit had condemned lawsuits like these, holding that

cases seeking immaterial supplements to proxy statements are generally “no better

than a racket” that “should be dismissed out of hand,” unless the disclosures achieved

are “plainly material.” See In re Walgreen Co. Stockholder Litigation, 832 F.3d 718,

724 (7th Cir. 2016). Faced with Frank’s challenge, three of the Plaintiffs’ attorneys

disclaimed their right to the fees Akorn had paid. On that basis, the Court found

Frank’s motions to intervene in those three cases to be moot.

In the remaining three cases, the Court denied Frank’s motion to intervene.

The Court found that Frank’s right to intervene could only be based on Plaintiffs’

counsel’s duty to him as a member of the putative class of Akorn shareholders. The

Court reasoned further that Plaintiffs’ counsel’s duty was limited to a “duty not to

prejudice the interests that putative class members have in their class action

litigation.” See House v. Akorn, Inc., No. 17 C 5018, 2018 WL 4579781, at *2 (N.D. Ill.

Sept. 25, 2018) (quoting Schick v. Berg, 2004 WL 856298, at *6 (S.D.N.Y. Apr. 20,

2004)). But the Court found that the harm Frank had identified was not a harm to

the class’s claims but instead was a harm class counsel caused to Akorn by extracting

the $322,500 payment, which could only be vindicated by a derivative action, which

Frank had not filed. And the Court concluded further that because Frank alleged that

the class claims were worthless, the value of the claims could not be prejudiced, and

so Frank could not allege that Plaintffs’ counsel had violated a duty to him as a

member of the putative class and his motion to intervene could not be granted.

The Seventh Circuit rejected the idea that the harm necessary to confer

Frank’s standing was necessarily derived from prejudice to the class’s claims.

Instead, the Seventh Circuit held that “since class counsel and Akorn are looking out

for their own interests rather than those of the class, intervention is appropriate.”

See Alcarez v. Akorn, Inc., 99 F.4th 368, 375 (7th Cir. 2024). The Seventh Circuit also

explained that Frank’s claim “that the representative plaintiffs and their lawyers

owed duties to him, personally, need not be processed through the mechanism for

derivative litigation.” Id. at 375. Instead, the Seventh Circuit agreed with Frank that

“class counsel violated their duties to him when they used the class allegations as

leverage to obtain private benefits.” Id. at 374. For that reason, the Seventh Circuit

remanded with instructions to permit Frank to intervene and seek relief under

Federal Rule of Civil Procedure 60(b).

Although this Court previously denied Frank the right to intervene, this Court

had permitted Frank to file a brief as a friend of the Court on the issue of whether

and how it should “exercise its inherent powers to police potential abuse of the judicial

process—and abuse of the class mechanism in particular—and require plaintiffs’

counsel to demonstrate that the disclosures for which they claim credit” satisfy the

standard set forth by the Seventh Circuit in Walgreen. See House v. Akorn, Inc., No.

17 C 5018, 2018 WL 4579781, at *3 (N.D. Ill. Sept. 25, 2018). After briefing from

Frank and Plaintiffs in the remaining three cases, the Court found that “the

disclosures sought in the three complaints at issue were not ‘plainly material’ and

were worthless to the shareholders.” See House v. Akorn, Inc., 385 F. Supp. 3d 616,

623 (N.D. Ill. 2019). On that basis, the Court exercised its inherent authority to order

counsel in the remaining three cases to return the attorneys’ fees Akorn paid.

On appeal, the Seventh Circuit held that it was unnecessary for this Court to

rely on its inherent power to apply the Walgreen standard. Instead, the Seventh

Circuit noted that the Private Securities Litigation Reform Act (“PSLRA”) requires

the following:

In any private action arising under this chapter,

upon final adjudication of the action, the court shall

include in the record specific findings regarding

compliance by each party and each attorney

representing any party with each requirement of

Rule 11(b) of the Federal Rules of Civil Procedure as

to any complaint, responsive pleading, or dispositive

motion.

15 U.S.C. §78u–4(c)(1). The Seventh Circuit explained that this judicial review

required by the PSLRA to assure compliance with Rule 11 incorporates the “plainly

material” standard the Seventh Circuit had articulated earlier in the Walgreens case.

The court also stated specifically that these two standards—from the PSLRA and

Walgreens—must be applied in this case because the “dismissal of each suit was a

‘final adjudication of the action,’” and so this Court is “obliged . . . to determine

whether each suit was proper at the moment it was filed.” See Alcarez, 99 F.4th at

376. The Seventh Circuit explained further that once Frank was permitted to

intervene on remand, he could make a motion under Rule 60(b) asking this Court to

comply with this obligation imposed by the PSLRA and give Plaintiffs’ counsel an

opportunity to be heard. See id. at 377. That is what Frank has done by filing this

motion.

Plaintiffs’ counsel argue that this is an inappropriate procedure because they

contend the voluntary dismissal in this case “is not a ‘final adjudication’ that invokes

Rule 11 review under the PSLRA.” R. 135 at 5; see also R. 136 at 6-7 (“[T]he PSLRA’s

sanctions provision is facially inapplicable and does not provide authority to issue

sanctions.”) But as Frank points out, this contention is “boldly” in contradiction of the

Seventh Circuit’s holding. See R. 140 at 2. True, Plaintiffs’ counsel cite case law in

support of their argument. See R. 135 at 5. But this Court is bound by the Seventh

Circuit’s direct command that the PSLRA standard applies here and that this Court

should apply it.

In its prior opinion, this Court analyzed whether the disclosures Plaintiffs’

sought in three of the lawsuits were “plainly material” as Walgreens requires. See

House v. Akorn, Inc., 385 F. Supp. 3d 616, 623 (N.D. Ill. 2019). And the Seventh

Circuit held that this analysis still “holds” in applying the PSLRA’s required review

under Rule 11. See Alcarez, 99 F.4th at 377. So the Court won’t repeat it here.

The Court, however, has not previously addressed certain other allegations

because they were only at issue in the three cases where counsel disclaimed fees and

the Court (incorrectly) found the cases to be moot. They are the following alleged

misrepresentations or omissions:

 failure to disclose whether Akorn’s chairman received or accepted an

investment agreement;

 failure to disclose Akorn’s projected net debt as of April 21, 2017;

 failure to disclose the timing and nature of post-merger employment offers and

communications;

 failure to disclose confidentiality agreements with any other potential bidders;

and

 failure to disclose the basis for Akorn’s rejection of the “contingent value right”

proposed by Fresenius.

The Court addresses them now in the first instance.

Investment Agreement. John Kapoor was Akorn’s board chairman. The proxy

statement provided that part of the merger negotiations involved a proposal that

Kapoor invest in the company that would result from the merger. Plaintiffs sought

disclosure of “the timing and nature of discussions regarding Kapoor’s opportunity to

invest . . . whether an agreement was ultimately reached, and the terms of such

agreement.” See 17-cv-05016, R. 1 at 13. The proxy statement was later amended to

clarify that there were “no other substantive discussions with respect to such an

investment by Dr. Kapoor and no agreement with respect to such an investment was

ever entered into.” See 17-cv-05016, R. 85-2 at 14.

Plaintiffs’ counsel argue that the “fact that the investment proposal was tied

to the merger consideration makes this information and the outcome of the

negotiations critical to weighing the fairness of the merger.” See 17-cv-05016, R. 135

at 21-22. But Akorn disclosed the fact that this offer was made to Kapoor.

Shareholders can safely assume that the offer was not accepted because if it had been

disclosure of that fact would also have been required. Indeed, it is difficult to conceive

of how such a fact could have possibly been concealed. With the offer having been

disclosed, common sense dictates that the lack of further mention of the offer

indicates that the offer was not accepted and was not an aspect of the final deal. Thus,

the disclosure of that fact was not material.

Net Debt. Plaintiffs sought disclosure of Akorn’s “projected net debt as of April

21, 2017.” See 17-cv-05016, R. 1 at 11-12. Plaintiffs’ counsel argue that this was a

material disclosure because an investigation by Fresenius uncovered “undisclosed

material deficiencies in the information that Akorn had produced to it during the deal

negotiations, which led to litigation between the two.” See 17-cv-05016, R. 135 at 19.

But Plaintiffs’ counsel does not contend that the projected net debt information

Plaintiffs sought was one of the “undisclosed material deficiencies” at issue.

Certainly, Fresenius possessed information about Akorn’s finances and business

beyond the information in the proxy statement. Fresenius’s lawsuit concerning

contractually required disclosures has little relevance to Akorn’s obligations to make

disclosures to its shareholders in the proxy statement. Without a more specific

argument about why the “projected net debt” Plaintiffs’ sought was material to the

shareholders’ decision to approve the merger, the Court cannot find that that

information was necessary to provide shareholders with a “fair summary” of the

company’s valuation, which is all that is required. See In re Trulia, Inc. S’holder

Litig., 129 A.3d 884, 901 (Del. Ch. 2016) (the company “does not need to provide

sufficient data to allow the stockholders to perform their own independent

valuation”).

Employment Offers. Plaintiffs sought disclosure concerning agreements for

post-merger employment because it was “necessary for stockholders to understand

potential conflicts of interest of management and the Board, as that information

provides illumination concerning motivations that would prevent fiduciaries from

acting solely in the best interests of the Company’s stockholders.” See 17-cv-05016, R.

1 ¶ 60. But the proxy statement provided that “there are no employment, equity

contribution or other agreements, arrangements or understandings between any of

the Company’s directors or executive officers, on the one hand, and Fresenius Kabi,

on the other hand, and the merger is not conditioned upon any of the Company’s

directors or executive officers entering into any such agreement, arrangement or

understanding.” Ex. 1 at 52-53. There simply was no basis to seek any further

disclosure on this issue. Notably, Plaintiffs’ counsel do not address this disclosure in

their briefs on this motion.

Confidentiality Agreements. Plaintiff Berg sought disclosure of any other

confidentiality agreements entered into with other potential bidders. But with regard

to other potential bidders, the proxy statement provided that the Board determined

that “it was highly unlikely that any of those counterparties would be interested in

an acquisition of the Company at that time due to competing strategic priorities and

recent acquisitions in the industry.” 17 C 5022, R. 1 ¶¶ 58-59. This statement speaks

for itself regarding why the Board rejected other potential buyers. And the proxy

gives much greater detail regarding the one other company (“Company E”) Akorn

actually considered. Detailed information about potential buyers Akorn did not

actually consider, and confidentiality agreements about the same, are not material.

Contingent Value Right. Plaintiff Berg argued that Akorn should disclose

the reason Akorn informed Fresenius that Akorn required removal of “the significant

contingent value right component from the proposed merger consideration.” 17 C

05016, R. 1 at 14. The “contingent value right” was a provision tying merger

compensation to certain sales targets. The board obviously believed that this

contingency was not in the best interests of shareholders. Further disclosure would

not have been material. Plaintiffs do not address this issue in their briefs on this

motion.

J.P. Morgan’s Compensation. In the Court’s original opinion on the

materiality of the disclosures Plaintiffs demanded, the Court found that Plaintiffs’

demand for disclosure of “the exact amount of money J.P. Morgan received and may

continue to receive from [Fresenius] while acting as Akorn’s financial advisor,” was

not material. See House, 385 F. Supp. 3d at 621. The Court explained that exact

historical payments are not material. See Bushansky v. Remy Int'l, Inc., 262 F. Supp.

3d 742, 753 (S.D. Ind. 2017) (“Additionally, Plaintiffs have not presented any evidence

or case law establishing that the inclusion of historical fees in similar situations is

material.”).

On this motion, Plaintiffs’ counsel argue that 17 C.F.R. § 229.1015(b)(4)

requires disclosure of “specific amounts” of compensation. To the contrary, the

regulation actually only requires “description” of “any compensation.” Courts have

held that, “[g]enerally the disclosure of the specific fees a financial advisor received .

. . is immaterial where the relationship and its rough scale are disclosed.” See, e.g.,

Assad v. Botha, 2023 WL 7121419, at *6 (Del. Ch. Oct. 30, 2023). As the Court found

in its initial opinion, Akorn made the necessary disclosures regarding J.P. Morgan’s

compensation. The specific compensation amounts were not material.

* * * *

The Court finds that none of the disclosures sought by Plaintiffs pursuant to

the PSLRA were “plainly material.” According to the Seventh Circuit, PSLRA claims

for disclosure of information that are not plainly material are frivolous and violate

Rule 11, and thus are sanctionable.

Frank suggests that it is necessary for him to file a complaint in this case in

order to seek sanctions. The Court does not see why. The Seventh Circuit clearly

stated that this Court has an inherent obligation to undertake the review provided

by the PSLRA. See Alcarez, 99 F.4th at 376 (“The district court must make the

required findings whether or not a litigant asks.”). Frank intervened and filed a Rule

60(b) motion to alert the Court to this obligation and to ask the Court to comply with

it. The Court has done so. Nothing more is left but to address the appropriate

sanction.

Conclusion

For these reasons, Frank’s motion [129] is granted. The Court finds that

Plaintiffs’ counsel violated § 78u-4(c)(1) and Rule 11 by filing complaints for an

improper purpose, and the Court affirms its order that attorneys’ fees should be

returned as a sanction. Plaintiffs’ counsel has had a sufficient opportunity to be heard

on these two issues in the briefs on these motions.

Frank suggests several additional sanctions that would be appropriate:

1. Requiring all signing Plaintiffs’ counsel and their firms

to disclose and cite the finding, along with the Alcarez

opinion, in any future lawsuits or demand letters

concerning corporate merger transactions, including

tender offers.

2. Requiring counsel to disclose retention agreements with

the Plaintiffs.

3. Requiring counsel to disclose all purported mootness fees

extracted by them in similar suits and demand letters,

which will allow courts, academics, and lawmakers to

evaluate the scope of the problem and whether reforms

should be enacted to curb the conduct.

4. Imposing monetary penalties.

See R. 129 at 24-25. The Court is inclined to order Frank’s first three suggestions but

disinclined to order the fourth of imposing further monetary sanctions. Plaintiffs’

counsel, however, only briefly responded to these suggestions, so the Court orders

further briefing on the propriety of additional sanctions. Each Plaintiffs’ attorney

implicated in these cases is permitted a brief of not more than ten pages, due by

4/21/2025. Frank is permitted a reply brief of no more than 20 pages, due by 5/5/2025.

ENTERED:

Arnie MN Luther

Honorable Thomas M. Durkin

United States District Judge

Dated: March 10, 2025

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