On January 7, 2015, Judge Shirley Kornreich of the Supreme Court of New York, New York County, issued an opinion denying preliminary approval of a merger-related shareholder lawsuit. City Trading Fund v. Nye, No. 651668/14 (N.Y. Sup. Ct. 2015). As has become common with nearly every significant merger announcement, plaintiffs filed a lawsuit challenging the merger, alleging deficiencies in defendants’ mandatory merger-related public disclosures. Although defendants agreed to settle the case – the usual outcome in this type of litigation – Judge Kornreich rejected the settlement after concluding that the allegedly inadequate disclosures, and the amended disclosures proposed in the settlement, were immaterial. She additionally expressed discomfort regarding the state of merger-related shareholder lawsuits and plaintiffs’ specific motivations and actions in the case.
Plaintiffs filed their complaint shortly after Martin Marietta Materials, Inc filed its definitive proxy detailing its proposed acquisition of Texas Industries, Inc. Plaintiffs alleged that the proxy suffered from ten categories of inadequate disclosures. These categories included, among others, details on executive compensation, precise values of stakes in the companies held by advising banks, and additional information on board deliberations.
Judge Kornreich expressed both substantive and policy concerns with plaintiffs’ case. Substantively, the court noted that plaintiffs were only entitled to material disclosures – those facts where there was a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote on the merger. Simply “helpful” facts would not meet that standard. The court reviewed each of the ten disclosure categories and found each immaterial. The court’s analysis emphasized that plaintiff was not entitled to 1) “tell me more” information that simply provided additional detail and 2) information related to conflicts that plaintiffs did not allege existed. The court took the additional step of reviewing the supplemental disclosures that were required in the proposed settlement and concluded that each was “grossly immaterial” and even “frivolous.”
The court raised concerns about plaintiffs’ behavior in connection with the lawsuit generally. The court noted that the plaintiffs and their law firm regularly filed merger-related shareholder lawsuits. The plaintiffs would purchase a nominal amount of shares of a publicly-traded company and, when the company announced a merger, the plaintiffs would engage the law firm to file a lawsuit. The court noted that the law firm had been sanctioned in Delaware for its actions related to similar shareholder lawsuits filed on behalf of “a web of small investment partnerships for the sole purpose of bringing stockholder lawsuits.”
The court further raised concern that plaintiffs waited until the definitive proxy was issued to file their lawsuit rather than after the preliminary proxy, which was issued two months earlier and contained essentially the same disclosures. Waiting for the definitive proxy allowed plaintiffs to maximize the pressure on defendants to settle.
After analyzing the merits of this lawsuit, Judge Kornriech discussed the state of merger litigation, stating that merger lawsuits had become known as a “merger tax.” Companies almost always settled these cases, as “even a slight chance of an adverse outcome will induce a company to rationally settle given the costs.” In response to this trend, the court stated, “merger taxes may simply be a reality, an inevitable cost of doing business. However, even if that is the case, this court sees no reason to countenance frivolous litigation.”
Procedurally, although the court’s opinion focused on the merits of the underlying inadequate disclosure claims, it could not immediately dismiss the case because the motion before the court was for settlement approval. The court denied the plaintiffs’ motion for approval on the basis that it was not in the best interest of the class and directed the defendants to file a motion to dismiss the case within thirty days.