July 10, 2024

M&A Disclosure: 2nd Cir. Rejects Claims Based on Undisclosed Updated Projections

In Maso Cap. Invs. Ltd. v. E-House (China) Holdings Ltd., (2d. Cir. 6/24), the 2nd Circuit rejected Rule 10b-5 claims premised on allegations that the defendants’ proxy materials for a going private merger were false and misleading.  The plaintiffs contended that the company’s proxy materials included projections that were stale and had been supplemented by more recent projections that were undisclosed.  The plaintiffs also alleged that the company misled investors about the purposes of the deal and post-merger plans.

In rejecting those allegations, the 2nd Circuit observed that the plaintiffs were unclear as to the source of the updated projections and stressed the proxy statement’s inclusion of cautionary language about them.  The Court’s opinion also highlights the impact of the SCOTUS’s recent Macquarie decision on “pure omissions” disclosure claims. This excerpt from A&O Shearman’s blog on the decision summarizes the Court’s reasoning:

The Court first addressed plaintiffs’ allegations that the Company’s projections contained in the Proxy were artificially low and supplanted by newer projections that allegedly would have supported a higher Company valuation and, thus, more lucrative share price. The Court held, as a threshold matter, that plaintiffs’ failure to explain who created those new projections, for what purpose they were prepared, and to whom they were made available doomed plaintiffs’ claim.

But even assuming plaintiffs could explain the origination of the allegedly stronger projections, the Court found that the Proxy contained express cautionary language that would have put the reasonable investor on notice that the projections did not take into account events or circumstances that occurred after the projections were prepared. Finally, the Court rejected plaintiffs’ assertion that the Company had an independent duty to disclose the allegedly newer projections under a “pure omission” theory, opining that, following Macquarie Infrastructure Corp. v. Moab Partners L.P., 601 U.S. 257, 265 (2024), it is no longer a viable theory of liability.

The Court also rejected the plaintiffs’ allegations relating to the failure to disclose post-merger plans, noting that all of the statements cited by the plaintiffs in support of those allegations were made after the merger closed, and that the proxy statement itself included language disclosing actions that the company might take following the merger.

John Jenkins