January 26, 2021
M&A Projections: Safe Harbor? Don’t Count On It
Anne Lipton has an interesting blog that addresses the lengths to which judges will go to avoid providing liability protection to projections that look to be. . . well . . . a little on the “shady” side. She focuses on two recent cases involving alleged “lowballing” of a seller’s projections in order to make a deal appear more favorable – the Chancery Court’s decision in In re Mindbody Securities Litigation, (SDNY 9/20), and a California federal court’s decision in Karri v. Oclaro, (ND Cal.; 10/20).
The court wouldn’t allow a straight-up projections claim to proceed [in Mindbody], but it did hold that the proxy materials contained an “actionable omission because Defendants’ statements about Vista’s 68% ‘premium’ implied that Mindbody had no non-public information that would materially affect its share price…. Here, the 68% measuring stick would only have been informative to shareholders if the Defendants believed that the December share price was an accurate reference point. By invoking the ratio of Mindbody’s share price to Vista’s offer, Defendants impliedly warranted that, to their knowledge, the share price as of December 21, 2018, was not undervalued.”
Get it? The court wouldn’t allow a lawsuit based on the false projections themselves – and didn’t want to just come right out and say there was a duty to update the false guidance (indeed, it denied so holding) – so, it threaded the needle by treating references to a premium as their own, present-tense half-truths about the true value of the stock.
But that’s nothing compared to the contortions in Oclaro. There, again, plaintiffs alleged that defendants lowballed projections in order to drive the stock down, thus justifying the merger. There, again, the court held that false projections were protected by the PSLRA safe harbor. But what wasn’t protected were valuation estimates derived from the projections, or representations about how the projections were prepared, including representations that they were prepared in good faith, and those claims were allowed to proceed.
Now, defining “forward-looking” has always been something of a challenge in securities cases, but saying the projection is protected by the safe harbor but the valuation based on that projection is not protected is some next-level hairsplitting.
These decisions illustrate that there are all sorts of semantic gymnastics available to a court that wants to avoid applying the PSLRA safe harbor or state law limitations on liability for forward-looking statements to projections that it views with suspicion. So, maybe the best way to reduce the risk of liability for projections is to be careful not to put yourself in a position where the plaintiff can argue that you viewed the safe harbor as a “license to lie.”
– John Jenkins