United States: Third Circuit Affirms In Part And Vacates In Part Dismissal Of Putative Securities Class Action Resulting From Merger, Finding Sufficient Certain Allegations That Bank Failed To Adequately Disclose Non-Compliant Practices In Proxy Materials

On December 26, 2018, the United States Court of Appeals for the Third Circuit affirmed in part and vacated in part the dismissal of a putative securities class action against M&T Bank Corporation (the "Company") and certain of its officers and directors. Jaroslawicz v. M&T Bank Corp., et al., No. 17-3695 (3d Cir. Dec. 26, 2018). Plaintiffs alleged that defendants violated Section 14(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and SEC Rule 14a-9 by making misleading omissions in joint proxy statement materials ("Joint Proxy") leading up to the merger of the Company with another consumer bank. The alleged omissions concerned two non-compliant practices: "(1) M&T's having advertised no-fee checking accounts but later switching those accounts to fee-based accounts (the 'consumer violations'); and (2) deficiencies in M&T's Bank Secrecy Act/anti-money laundering compliance program, particularly its 'Know Your Customer' program (the 'BSA/AML deficiencies')." The United States District Court for the District of Delaware dismissed plaintiffs' first and second amended complaints for failing to plausibly allege an actionable omission. Plaintiffs appealed to the Third Circuit.

The two issues before the Court on appeal were whether plaintiffs adequately alleged a material omission and loss causation in support of their claims under Section 14(a) of the Exchange Act. The Court considered plaintiffs' two alternative theories for having adequately alleged an actionable omission: First, that the Company's alleged non-compliant practices posed significant risks to regulatory approval of the merger and therefore that disclosure of those risks was mandated by Item 503(c) of Regulation S-K, which requires issuers to provide under the caption "Risk Factors" a discussion of the most significant factors that make an offering speculative or risky; and second, that the allegedly omitted facts related to the alleged non-compliant practices made two statements of opinion contained in the Joint Proxy materially misleading.

The Third Circuit initially evaluated whether the second amended complaint plausibly alleged that the non-compliant practices were known to pose a significant risk to the merger at the time of the proxy statement, and whether the proxy materials sufficiently disclosed these risks. The Court found that plaintiffs' allegations that "the practice underlying the violations was curtailed prior to the date the Joint Proxy was filed with the SEC" and that the "Consumer Financial Protection Bureau ("CFPB") eventually took action against [the Company] for the consumer violations" were sufficient to draw an inference that "the consumer violations posed a [known] risk to regulatory approval of the merger, despite cessation of the practice by the time the Joint Proxy was issued." Accordingly, the Court found that the District Court erred when it concluded that the second amended complaint failed to plausibly allege that the consumer violations posed a significant risk to the merger at the time the Joint Proxy issued.

Turning to whether these risks were disclosed in accordance with Item 503(c), the Court noted that the Third Circuit had not previously determined the scope of adequate disclosure under Item 503(c). The Court then analyzed and discussed decisions from the First and the Second Circuits that have addressed the sufficiency of Item 503(c) disclosures—Silverstrand Investments v. AMAG Pharmaceuticals, Inc., 707 F.3d 95 (1st Cir. 2013), and City of Pontiac Policemen's and Fireman's Retirement Systems v. UBS AG, 752 F.3d 173 (2d Circ. 2014)—as well as relevant SEC guidance, and determined that adequate risk disclosures must contain facts specific to a company, such as its financial status, its products, any ongoing investigations, and its relationship with other entities. The Court rejected plaintiffs' argument, however, that Item 503(c) imposed a duty to disclose all material facts about a company or corporate wrongdoing, concluding that Item 503(c) on its own does not require either the speculative disclosure of risks or the disclosure of corporate wrongdoing; such disclosures, according to the Court, are only required where non-disclosure makes voluntarily disclosed information misleading. Based on this standard, the Court held that plaintiffs' allegations plausibly suggested that the Joint Proxy's voluntary disclosures concerning known risks posed by the alleged consumer violations to the merger "were too generic to be adequate," because "the Joint Proxy did not make any reference to the fraudulent practice underlying the violations, the dates the practice was in place, the extent of consumer accounts affected by the practice, or the subsequent CFPB investigation into the practice." While the Court acknowledged that the supplemental proxy did address the alleged BSA/AML deficiencies, and that the substance of these disclosures "was likely adequate as a matter of law," it nonetheless found that there is an issue of fact as to whether there was sufficient time for the information to be digested because the supplemental disclosures occurred just six days before the scheduled shareholder vote. Accordingly, the Court vacated the District Court's dismissal of the mandatory-disclosure claims relating to both the alleged consumer violations and the BSA/AML deficiencies.

The Court then addressed plaintiffs' second theory of liability, that two statements of opinion contained in the Joint Proxy were actionable under Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015). In Omnicare, the Supreme Court held that an opinion is only misleading under an omissions theory if the speaker omits material facts about its knowledge concerning a statement of opinion that conflicts with what a reasonable investor would take from the statement itself. The Third Circuit noted that it had not yet decided whether Omnicare applies to claims brought under the Exchange Act, but declined to reach that determination, because "even assuming Omnicare's applicability, [plaintiffs] failed to plausibly allege an actionable misleading opinion." In particular, plaintiffs maintained that two opinion statements were actionable: First, that the Company believed it should be able to obtain all required regulatory approvals in a timely manner; and second, that the Company had approved policies and procedures that it believed were compliant with the USA Patriot Act. Plaintiffs argued these statements were misleading because they were proven to be false, and because the Joint Proxy omitted facts concerning the Company's process for forming these opinions. The Third Circuit found unpersuasive the argument that there was liability because the statements were proven to be false, noting that the Supreme Court rejected a similar argument in Omnicare: "[A] sincere statement of pure opinion is not an 'untrue statement of material fact,' regardless [of] whether an investor can ultimately prove the belief wrong." Omnicare at 1327. Regarding the Company's process for forming these opinions, the Third Circuit found that the Joint Proxy contained facts concerning the due diligence conducted, and that a reasonable investor would not have been misled. Accordingly, the Court affirmed the dismissal of the allegedly misleading-opinion claims.

Finally, the Court considered whether plaintiffs had plausibly alleged loss causation under Section 14(a) of the Exchange Act. Plaintiffs maintained three theories of loss causation: (1) the lost opportunity of a more favorable merger premium; (2) the lost opportunity of a higher dividend; and (3) the lost opportunity to invest in a company without a "spotty regulatory record." The Court recognized that plaintiffs had earned a profit after the merger closed, but found that "this does not necessarily negate any alleged lost opportunity." Accordingly, the Court held that dismissing on loss causation grounds at the pleading stage would be "premature" because "[a]lthough loss causation may ultimately be difficult for [plaintiffs] to establish, we will not say that [plaintiffs'] allegations are facially implausible."

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