4th Circuit Case Alleging Misled Shareholders Offers Legal Boost for Merger-Interested Corporations

August 7, 2023

The 4th U.S. Circuit Court of Appeals on June 1, 2023, issued a strong defense opinion in Karp v. First Connecticut Bancorp, a case involving allegations under Section 14(a) of the Exchange Act that defendant First Connecticut Bancorp and its directors misled shareholders before the bank’s stock-for-stock merger with People’s United Financial.

Certain shareholders alleged that First Connecticut, in its June 2018 proxy statement, had to disclose specific cash-flow projections provided by the bank’s financial advisor in November 2017. These projections, shareholders asserted, painted a favorable picture of First Connecticut’s financial prospects. The shareholders alleged that, in essence, had they known of the company’s more favorable financial outlook, they might not have voted in favor of the merger — instead requiring a higher price from People’s United.

The case proceeded through discovery to summary judgment, which the U.S. District Court for the District of Maryland granted in favor of First Connecticut. The district court concluded that no reasonable jury could determine, from the evidence submitted by the shareholders, that the omission of cash-flow projections was material. Important as well for the district court was expert testimony that cash-flow projections were disclosed in only one of 44 comparable bank mergers. Nor, the district court determined, was there a genuine dispute of material fact on loss causation — in other words, the shareholders failed to adduce evidence that the alleged cash-flow misrepresentations caused a loss of approximately $3 per share in the transaction.

The 4th Circuit affirmed. With respect to materiality, it found that the proxy statement at issue already “contained a bevy of information, including projections of total assets, net assets, returns on average assets and tangible common equities, and earnings per common share.” The statement similarly “included the results of several other analyses that [the financial advisor] performed, all of which concluded that the … merger price was within or above the estimated valuation range.” At bottom, the 4th Circuit relied on the well-established principle in Delaware corporate law that shareholders are not entitled to “double-check every aspect of the advisor’s math,” as long as the proxy contains a fair statement of the advisor’s work.

Second, even if the proxy statement was misleading, the 4th Circuit determined that omission of the November 2017 cash-flow projections caused a loss of about $3 per share. First Connecticut stock traded at $26 per share the day before the merger was announced, far below the merger consideration of $32.33. Nor was there a superior offer on the table for First Connecticut; in fact, People’s United was “willing to walk” if First Connecticut balked at the $32.33 offer. In rejecting the plaintiff’s argument, the 4th Circuit emphasized the distinction between transaction causation and loss causation — the former is synonymous with reliance, whereas the latter requires a showing that the misrepresentation caused an economic loss. Here, the appellate court concluded, there was no such loss (for the reasons noted earlier in this paragraph).

This is a good decision for merger-interested corporations and the directors who oversee them. The 4th Circuit critically assessed the factual underpinning of claims routinely filed by plaintiffs post-merger, and followed defense-friendly Delaware law about the obligations of businesses when it comes to disclosing financial information in connection with proxy statements. Expect Karp to be an arrow in defendants’ quivers going forward.