On March 18, 2020, Judge Richard G. Andrews of the United States District Court for the District of Delaware dismissed a putative class action claiming violations of Sections 14(a) and 20(a) of the Securities and Exchange Act of 1934, SEC Rule 14a-9 and Regulation G, and breach of fiduciary duty, in connection with the acquisition of an oil and gas exploration company (the "Company"). Mack v. Resolute Energy Corp., No. CV 19-77-RGA, 2020 WL 1286175 (D. Del. Mar. 18, 2020). Plaintiffs alleged, among other things, that the proxy statement omitted certain financial projections. The Court dismissed the complaint, holding that it did not adequately plead materiality or loss causation.
On November 19, 2018, the Company proposed a merger with another energy company. On January 30, 2019, the Company's board of directors filed a definitive proxy statement ("Proxy") recommending that shareholders vote in favor of the merger based on, among other things, internal financial forecasts and the opinions of its financial advisors. On March 1, a majority of the Company's shareholders voted to approve the merger, which closed that day.
Plaintiffs alleged the Proxy presented an incomplete and misleading picture of the Company's valuation and prospects and omitted projections that would have alerted shareholders that the consideration was inadequate. Specifically, Plaintiffs alleged: (1) the Proxy contained material non-GAAP financial projections that failed to comply with Regulation G; (2) even if Defendants were exempt from complying with Regulation G, the Proxy's failure to include reconciliations of non-GAAP and GAAP measures was misleading; and (3) the fairness opinions were misleading due to, among other things, inconsistent use of certain financial measures.
Under Regulation G, a registrant that discloses a non-GAAP financial measure must also disclose the most directly comparable GAAP measure and a reconciliation of the non-GAAP and GAAP measures. An exemption to Regulation G applies, however, when (1) the financial measures are included in forecasts provided to financial advisors that render an opinion in connection with the merger, and (2) the forecasts were disclosed to comply with Item 1015 of Regulation M-A. The Court first held that this exemption to Regulation G applied. The Court next held that the Proxy was not misleading, even if Regulation G did apply, because the financial information that was disclosed in the Proxy was not rendered misleading simply because of the non-disclosure of how the non-GAAP and GAAP measures could be reconciled or because additional detail supporting the non-GAAP measures was not disclosed.
The Court also rejected Plaintiffs' claim that the fairness opinions were misleading because they did not adequately explain inconsistencies that arose from the use of multiple historical and projected cashflows. According to Plaintiffs, this made it impossible for shareholders to perform their own valuation analysis. However, the Court noted that financial disclosures need only provide a fair summary of a financial advisor's work and do not need to enable investors to perform their own valuation analysis. Further, the Court found that Plaintiffs had not explained how the alleged omissions made it impossible for shareholders to establish the propriety of the financial projections underlying the fairness opinions. The Court found it significant that Plaintiffs did not allege that the merger premium was too low, but only that the Company's shareholders required additional information to make that assessment.
In addition, the Court held that the complaint failed to plead loss causation because it did not adequately plead that the Company's shareholders would have voted against the merger had the Proxy not contained the alleged omissions nor that the Company's share price would have been higher had the merger not been approved. The Court found that Plaintiffs did not allege that the market value of the stock on the day the Company voted on the merger would have exceeded the price offered under the merger agreement, and any deficiency in the merger consideration would have been a result of a failure by the Company to negotiate a better deal.
Finally, the Court dismissed Plaintiffs' control-person liability claims, after finding no predicate violation, and declined to exercise supplemental jurisdiction of Plaintiffs' breach of fiduciary duty claims under state law under 28 U.S.C. § 1367 because it dismissed Plaintiffs' federal claims.
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