POST-TRULIA FEDERAL COURT DECISIONS: ALLEGED OMISSIONS REGARDING MERGERS
This article highlights two recent Circuit Court of Appeals decisions that reversed district court dismissals of Section 14(a) claims based on purported omissions made in connection with merger transactions.
More than 80 percent of public mergers with values over $100m are challenged by plaintiffs, with most lawsuits being quickly resolved through a disclosure settlement, where in return for a voluntary dismissal a revised proxy statement is filed. Historically, almost all of these cases were brought in state courts, primarily in Delaware. But in 2016, the Delaware Chancery court refused to approve a “disclosure-only merger litigation settlement” on the basis that the additional disclosures provided in the proposed settlement were “immaterial” (In re Trulia, Inc. Stockholder Litig (2016)). This decision spurred merger plaintiffs to bring lawsuits in federal courts under Section 14(a) of the Securities Exchange Act of 1934 alleging violations of SEC Rule 14a-9, which prohibits false and misleading statements in proxy statements.
One disadvantage to plaintiffs moving their merger-related cases from Delaware Chancery court to federal court is that Delaware law is more lenient with respect to omission claims. In Delaware, plaintiffs can bring an omission claim even where the omission does not render a statement false. (Appel v. Berkman (2018) states that “directors of a Delaware corporation have a fiduciary duty to disclose fully and fairly all material information within the board’s control that would have a significant effect upon a stockholder vote when it seeks or recommends shareholder action, such as when a tender offer or vote is presented”.
Jan-Mar 2020 issue
Arnold & Porter Kaye Scholer LLP