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In Mitchell v. Taro Pharmaceuticals, the SDNY dismissed disclosure claims under Section 13(e) of the Exchange Act challenging a going private merger between Taro Pharmaceuticals and its 85% stockholder, Sun Pharmaceutical Industries.  This excerpt from a Goodwin newsletter discussing the decision addresses the plaintiffs’ disclosure claims and the Court’s responses to them:

First, the plaintiff claimed the proxy failed to specify whether the financial adviser to Taro’s special committee “recommended” the merger consideration. The court rejected this argument because the proxy explicitly said that the deal price “was determined through negotiations between the Special Committee and Sun” and was not set by the financial adviser. While the plaintiff theorized that the adviser provided a “target” price that the special committee adopted, the court rejected this as speculative and lacking in the factual support required to plead misleading statements under the Private Securities Litigation Reform Act of 1995.

Second, the plaintiff alleged that the proxy statement provided a misleading explanation of the adviser’s financial analyses. The court agreed that, when viewed in isolation, the proxy’s description of one financial analysis could be misleading. But other passages in the proxy provided additional information that corrected any misleading impression. Moreover, as is typical in going-private deals governed by Section 13(e), the proxy attached the financial adviser’s final presentation to the board, which described the adviser’s financial analyses in further detail, as an exhibit. Given all these surrounding disclosures, it was “inconceivable” that any stockholder was misled.

Third, the plaintiff argued that the proxy failed to disclose that, in another pending securities lawsuit, Taro had received a settlement offer of $36 million. This allegedly rendered the proxy misleadingly incomplete because Taro had disclosed a loss contingency amount of $141 million in related antitrust litigation. But as the court observed, the securities litigation was distinct from the antitrust litigation. And the securities class action settlement became public more than a month before the stockholders voted, so stockholders could hardly claim to have been misled about the settlement.

Finally, the plaintiff claimed that the proxy misled investors by disclosing Glass Lewis’ and Institutional Shareholder Services’ recommendations in favor of the merger but not their full reports. The plaintiff relied on SEC rules requiring, in going-private transactions, detailed disclosure concerning reports and opinions that are received from outside advisers. The court reasoned that these rules apply to advisers engaged by the issuer (such as financial advisers) and not independent proxy advisers with no relationship to the company.

Despite the demanding disclosure requirements imposed on going private transactions by Exchange Act Rule 13e-3 thereunder, the SDNY noted that many courts have refused to imply a private right of action under Rule 13e-3, and that the issue remains unsettled.  However, the Court also concluded that it did not need to address this issue to resolve the case.

– John Jenkins