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.
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Karp v. First Connecticut Bancorp, Inc.
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