Fourth Circuit Affirms Dismissal Of Putative Class Action Under Section 14(a) For Failure To Adequately Allege Material Omissions And Loss Causation

• Published date: 14 June 2023
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, M&A/Private Equity, Class Actions, Securities, Shareholders
• Law Firm: Shearman & Sterling LLP
• Author: Shearman & Sterling LLP

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...