On June 1, 2023, the United States Court of Appeals for the
Fourth Circuit affirmed the grant of summary judgment dismissing
claims under Sections 14(a) of the Securities Exchange Act of 1934
against a financial company and certain of its directors. Karp
v. First Connecticut Bancorp, Inc., —F.4th—, 2023
WL 3743604, at *1 (4th Cir. 2023). Plaintiff alleged that the
company in which he held stock made misrepresentations in a proxy
solicitation in connection with a proposed stock-for-stock merger
with another company. The Fourth Circuit held that plaintiff failed
to allege any material omission from the proxy statement and also
failed to establish loss causation.
Plaintiff alleged that the proxy statement summarized different
financial analyses performed by the company's financial
advisor, which issued a fairness opinion, but omitted a prior
analysis by that financial advisor that—although prepared
without input from company management—had yielded more
optimistic cash-flow projections. Id. at *1. Plaintiff
thus contended that the company's shareholders approved the
merger based on an incomplete picture of the value of their shares.
His expert opined that the alleged omission undervalued
plaintiff's stock, but offered no opinion about whether the
alleged omission caused the putative class members any damages.
Id. at *2. The company's experts opined that proxy
statements in other transactions typically did not include any
cash-flow projections, that the merger counterparty would not have
agreed to a higher merger consideration, and that there was
"no reason to believe" that disclosure of additional
projections would have changed the result of the proxy
solicitation. Id.
The Court rejected plaintiff's argument that the district court
erred in holding that the omission of the cash flow projections was
not material under Section 14(a). The Court noted that "an
omitted fact is material if it's substantially likely that a
reasonable shareholder would consider it important in deciding how
to vote." Id. at *6. The Court, however, agreed with
defendants that "it's not enough to speculate that
shareholders might have found the projections helpful to the
deliberations, so long as the merger proxy provided a thorough and
accurate summary of the financial advisor's work."
Id. The Court relied on precedent from the Seventh
Circuit, which had similarly rejected a challenge to a proxy
statement in light of all the other information provided and
emphasized that "shareholders are not entitled to the
disclosure of every financial input used by a financial advisor so
that they may double-check every aspect of both the advisor's
math and its judgment." Id. (citing Kuebler v.
Vectren Corp., 13 F.4th 631 (7th Cir. 2021)). The Fourth
Circuit highlighted the "array of metrics" in the proxy
statement and concluded that plaintiff failed to offer a
"plausible theory for treating the ... projected cash flows as
material in light of all the other information provided to
shareholders." Id. at *7. In fact, the Court noted
that plaintiff himself "didn't testify that the cash-flow
projections would have actually affected [his] vote for or against
the proposed merger." Id. Indeed, plaintiff testified
that he did not recall how (or even whether) he had voted on the
merger or what information he would have relied upon, leading the
Court to observe that while the standard for materiality refers to
a "reasonable shareholder," "it's at least
relevant that the lead plaintiff in this case didn't even look
for the cash-flow projections." Id.
The Fourth Circuit also agreed with the district court that
plaintiff separately failed to establish loss causation.
Id. at *8. The Fourth Circuit explained that plaintiff
failed to establish that the omission of the cash flow projection
caused a loss, noting that the purchase price represented a nearly
$6 per share premium over the company's trading price, that the
buyer was willing to walk if its offer was not accepted, and that
no other bidders sought to purchase the company. Id. The
Fourth Circuit rejected plaintiff's contention that loss
causation and transaction causation were one and the same for
Section 14(a) cases, such that he need only "show that [the]
misleading proxy statement proximately caused the
merger." Id. (emphasis in original). To the
contrary, the Fourth Circuit held that loss causation requires a
plaintiff to show not only that the proxy statement was an
essential link in the transaction, but also to prove that the
challenged misrepresentations or omissions caused their economic
loss, joining several other Circuits that have held this framework
applies to both Section 10(b) and Section 14 claims. Id.
at *9.
Karp v. First Connecticut Bancorp, Inc.
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.