SS M&A Litigation Outlook - Flipbook - Page 32
Jaroslawicz v. M&T Bank Corp., (Continued)
No. 17-3695 (3d Cir. June 18, 2020)
Summary
Following the 2008 recession, Hudson City Bank
(Hudson) and M&T Bank Corporation (M&T)
agreed to merge, subject to shareholder approval.
Hudson and M&T issued a Joint Prospectus (Joint
Proxy) and filed a Form S-4 to comply with the
SEC’s notice requirement. The Form S-4 requires
that merging parties identify – pursuant to what has
been recodified as Item 105 of Regulation S-K – the
“most significant factors that make an investment
in the registrant or offering speculative or risky.” 17
C.F.R. § 229.105. In the Joint Proxy and Form S-4,
M&T disclosed several risks, including that increased
regulation may lead to loss of revenues and a delay
in closing the merger, and that regulatory approval
may not be obtained in the desired time frame.
M&T did not, however, disclose the specific risk that
regulatory scrutiny of M&T’s anti-money laundering
and Bank Secrecy Act compliance practices could
delay or derail the merger. M&T also did not
disclose that the bank had a practice of offering free
checking accounts and then switching customers to
accounts with fees, or the risk that scrutiny of this
practice could imperil the merger. The shareholders
approved the merger, but regulatory review by the
Federal Reserve Board and an enforcement action
commenced by the Consumer Financial Protection
Bureau, delayed the closing by two and a half years.
A few weeks before the merger closed, Hudson
Bank shareholders filed a putative class action
against M&T, Hudson, and their officers and
directors (collectively referred to as M&T) alleging
(1) breaches of fiduciary duty and (2) that the
information contained in the Joint Proxy was
misleading. They alleged that M&T had failed to
disclose deficiencies in M&T’s Bank Secrecy Act and
anti-money laundering compliance program, the
fact that M&T had imposed fees on “no fee” checking
accounts, and the risk that regulatory scrutiny into
these deficiencies could derail the planned merger.
The plaintiffs further alleged that the defendants
had misstated their compliance with regulatory
requirements, rendering the Joint Proxy misleading.
The District Court for the District of Delaware
dismissed the plaintiffs’ original and amended
complaints, finding that the regulatory risks
associated with the merger were sufficiently
disclosed. On appeal, the Third Circuit reversed,
holding that the plaintiffs had plausibly alleged
a violation of Rule 14a-9, which prohibits proxy
statements containing “any statement which, at the
time and in light of the circumstances in which it
is made, is false or misleading with respect to any
material fact, or which omits to state any material
fact necessary in order to make the statements
therein not false or misleading . . . .” 17 C.F.R. §
240.14a-9(a). The court held that to comply with
Item 105, the Joint Proxy needed to contain concise,
“plain English” explanations of material company,
industry, and investment risks that link each risk
to the industry, the company, or the merger “using
details that connected the pending merger review
to its existing and anticipated business lines.”
Statements of “generic and generally applicable
risks,” the court held, are not sufficient and should
not be included.
had provided misleading opinions in the Joint Proxy
were not sufficient to state a claim.
Despite this holding, the court expressed “caveats,
cautions and qualms.” In particular, the court noted
the continued rise in securities class action filings,
and emphasized that whether “that tide represents
an efficient current or ‘muddled logic and armchair
economics’ . . . is the sort of question that deserves a
more searching inquiry.”
The court found that M&T’s Joint Proxy contained
potentially material omissions under these standards.
It held that the plaintiffs adequately alleged that
M&T did not properly disclose problems with
its Bank Secrecy Act and anti-money laundering
compliance programs, and the risk that regulatory
scrutiny into those problems could delay or derail
the planned merger. The court also held that the
plaintiffs could proceed with their claim that M&T
omitted information about its checking account
practices, finding that it was “reasonable” to infer
“the consumer checking practices cast doubt on
M&T’s controls and compliance systems, and
posed an independent regulatory risk to the merger
material, enough that a reasonable shareholder
would consider it important in deciding how to
vote.” The court agreed with the District Court,
however, in holding that the allegations that M&T
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