Robert Carlyle v. Akorn, Inc., et al

Filing 49

MEMORANDUM Opinion and Order: For the reasons stated in the attached order, Frank's motion 129 is granted. 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. Signed by the Honorable Thomas M. Durkin on 3/10/2025. Mailed notice. (ecw, )

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;
KENNETH S. ABRAMOWITZ; ADRIENNE L.
GRAVES; RONALD M. JOHNSON; STEVEN
J. MEYER; TERRY A. RAPPUHN; BRIAN
TAMBI; and ALAN WEINSTEIN,

Judge Thomas M. Durkin

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.

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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

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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
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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.

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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;

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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

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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

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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.

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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

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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

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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
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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:
______________________________
Honorable Thomas M. Durkin
United States District Judge
Dated: March 10, 2025

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