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United States: Regulatory: Mergers And Acquisitions And The Duty To Update - Projections Often Change Between The Proxy Statement Filing And The Shareholder Vote
Ongoing litigation around recent acquisitions highlights the
difficult disclosure decisions that public companies face,
particularly with regard to the duty to update prior public
disclosure in mergers and acquisitions.
In mergers and acquisitions, the difficult disclosure decision
generally relates to new information about the target. When the
acquirer files its proxy statement for the deal with the Securities
and Exchange Commission, its expectations for the target company
are based on information available at the time. The acquirer will
share with investors the expected impact the deal will have on
earnings and the acquirer as a whole. However, it is not uncommon
for new information to surface about the target company, sometimes
just days before shareholders are scheduled to vote on the proposed
transaction. This changes the acquirer's projections on the
impact of the transaction, making the acquirer's earlier
statements in the proxy statement inaccurate.
So, the acquirer faces a decision on whether or not to update
the prior disclosure in its proxy statement.
In analyzing whether or not the acquirer should update the
disclosure, it should be noted that there are a few cases that
support the idea that there is a narrow duty to update prior
disclosure when the disclosure involves a company's originally
expressed expectations regarding mergers, takeovers or
liquidations. This conclusion stems from wording in the cases that
suggests disclosure about such extraordinary events contains an
implicit representation by the company that it will update the
public with news of any significant changes related to the
disclosure. So, at a minimum, extra care is merited when making
decisions about whether or not to update disclosure related to
mergers, takeovers or liquidations.
In general, a company only has a duty to update if
The prior disclosure contained an implicit factual
representation that remained "alive" in the minds of
investors as a continuing representation
Such prior disclosure had become materially misleading in light
of subsequent events
In this regard, it is important to note that under existing law,
a company has neither a specific obligation to disclose internal
forecasts nor a general obligation to disclose all material
information. So, in most cases, the implicit representation in a
company's disclosure is that it was made reasonably and in good
faith, and not that such disclosure will continue to hold true even
as circumstances change.
A final factor to consider when deciding whether or not to
update prior disclosure is how such a decision may be viewed in
hindsight. In other words, a company should be certain it is
comfortable with its analysis and can support its decision should
it be subject to regulatory or judicial review.
In the end, the acquirer may be on solid legal ground if it
decides not to update its disclosure in the proxy statement, but in
hindsight it may appear to regulators and courts that the acquirer
has taken an overly aggressive position. Time will tell how the
courts come to view the current cases, and whether the courts'
findings add new insight on the duty to update in the context of
mergers and acquisitions.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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