June 4, 2021

M&A Projections: 3d Cir. Dismisses Claims Based On Downside Case Disclosure

Over the years, financial projections used in fairness opinions and board presentations have proven to be popular targets for the plaintiffs bar when bringing M&A disclosure claims. But popularity doesn’t necessarily translate into success, and in Garfield v. Shutterfly, (3d Cir.; 5/21), the 3rd Cir. affirmed a lower court’s decision to dismiss claims based on allegedly false and misleading disclosure of downside case projections included in the merger proxy for Shutterfly’s 2019 sale to affiliates of Apollo Management.

Shutterfly provided its financial advisor, Morgan Stanley, with two sets of projections prepared by the company’s management.  One set presented a base case scenario, while the other presented a more pessimistic downside case. Morgan Stanley reviewed both sets of projections in preparing its fairness opinion to Shutterfly’s board, and the merger proxy’s discussion of that opinion included estimates of value ranges based on both sets of projections.  The proxy statement also disclosed that Morgan Stanley’s analysis was based on both sets of projections.

The plaintiffs brought claims under Section 14(a) and 20(a) of the Exchange Act alleging a number of false and misleading proxy disclosures relating to the financial projections and the fairness opinion. The district court dismissed their claims, and plaintiffs subsequently appealed. Their appeal focused solely on the proxy statement’s inclusion of valuation ranges based on the downside case projections. Here’s an excerpt from this Goodwin memo summarizing the 3d Cir.’s decision to affirm the dismissal of the case:

The Third Circuit affirmed the district court’s dismissal, holding that the challenged statement “fail[ed] to establish a cause of action because it was not misleading,” and even if it was, it was not materially so.  The court first reasoned that “the only statements of fact” in the proxy were that Morgan Stanley calculated the share values and how it estimated those values based, in part, on Shutterfly’s downside projection—neither of which was false or misleading.

Notably, in each instance where the proxy included downside projection values, it: (1) disclosed that Morgan Stanley calculated those values; (2) described the analysis undertaken; (3) included them alongside base-case projection values; and (4) cautioned that the values should not be relied upon as an “independent assessment of Shutterfly’s actual value.”  Nor, according to the court, were the downside-projection values “inherently misleading,” as the proxy accurately disclosed values grounded in the base-case projection and that Shutterfly believed these projections more likely to occur.

The court also concluded that, even if the downside-share values were misleading, they were not material, because the proxy “included specific and substantive disclosures and warnings” such that no reasonable investor could conclude that the downside projections should be used to estimate Shutterfly’s actual value.

John Jenkins