November 29, 2023

M&A Disclosure: 7th Cir. Says Information About Alternative Deal Structure Not Material

Earlier this month, in Smykla v. Molinaroli, (7th Cir.; 11/23) the 7th Circuit rejected disclosure claims premised on alleged misstatements and omissions in a proxy statement relating to the 2016 inversion transaction between Johnson Controls & Tyco International. Specifically, the plaintiffs claimed that Johnson Controls failed to disclose that it could have structured an alternative transaction more favorable to stockholders from a tax perspective than the one recommended by the board, and that this rendered the proxy statement’s disclosure about the deal materially false and misleading. This excerpt from the Court’s opinion summarizes why it rejected that argument:

The crux of plaintiffs’ argument in this litigation is that “there was another way to structure the merger that would have potentially avoided” the taxation of Johnson shareholders and that “the omissions regarding such an option were material.” Assuming there was, in fact, an alternative way to structure the merger, we take plaintiffs’ point that shareholders may have preferred a different deal than the one they got. But there is nothing in the Exchange Act that entitles investors to receive a list of alternative deal options that may provide a better return on their investment.

Indeed, the Supreme Court has been “careful not to set too low a standard of materiality, for fear that management would bury the shareholders in an avalanche of trivial information.” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 38, 131 S.Ct. 1309, 179 L.Ed.2d 398 (2011) (discussing Section 10(b) and Rule 10b–5(b) claims, which, like Section 14(a), require an inquiry into the materiality of an omitted fact and the “total mix” of information available to investors) (cleaned). Our inquiry, as described above, is limited to whether the proxy statement contained materially misleading statements or omissions regarding the deal that was before the shareholders.

The Court observed that if it adopted the plaintiffs’ position, it would in effect create a new rule requiring proxy disclosure of a “laundry list” of potential merger alternatives and the potential benefits and drawbacks of each of them. It said that this is not what Congress intended with the Exchange Act.

The Court also rejected allegations that the proxy statement was misleading because it failed to disclose the directors’ “true motive” in approving the transaction. It held that the directors weren’t required to disclose that they structured the merger, as the plaintiffs’ alleged, for their own benefit, and noted that courts typically reject claims like these because they involve an effort to bootstrap breach of fiduciary duty claims into disclosure claims actionable under the Exchange Act.

John Jenkins