Summary
The Third Circuit held that shareholders plausibly alleged that M&T Bank's proxy statement omitted material risk factors required by SEC Item 105, specifically regarding known deficiencies in its anti-money laundering compliance and consumer checking practices that posed significant regulatory risks to a merger. The court vacated dismissal of the Section 14(a) and Rule 14a-9 omissions claims, finding the proxy's generic risk disclosures lacked the company-specific detail Item 105 requires, but affirmed dismissal of misleading opinion claims under *Omnicare* because the shareholders failed to allege insincerity or omitted facts about the opinion's basis. The decision clarifies that Item 105 demands concise, non-generic disclosure of known risks that make an investment speculative, and that a registrant's knowledge of regulatory scrutiny triggers a duty to disclose the specific compliance weaknesses that could affect merger approval.
Topics
Practice areas
Questions Presented
- Whether the Shareholders plausibly alleged an actionable omission under Section 14(a) and Rule 14a-9 based on failure to disclose material risk factors under Item 105.
- Whether the Shareholders plausibly alleged misleading opinion statements under Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund.
Holdings
- Yes, the Shareholders plausibly alleged that M&T omitted material company-specific risk factors about its BSA/AML compliance program and consumer checking practices, in violation of Item 105, making the proxy statement misleading.
- No, the Shareholders failed to allege that M&T's opinion statements about regulatory approval and compliance were misleading because they did not allege that the opinions were insincere or that the omitted facts conflicted with what a reasonable investor would take from the statements.
Key quotations
“Where appropriate, provide under the caption 'Risk Factors' a discussion of the most significant factors that make an investment in the registrant or offering speculative or risky. This discussion must be concise and organized logically. Do not present risks that could apply generically to any registrant or any offering. Explain how the risk affects the registrant or the securities being offered. Set forth each risk factor under a subcaption that adequately describes the risk. . . . The registrant must furnish this information in plain English.” (at 17)
“Before: Competition The lawn care industry is highly competitive. The Company competes for commercial and retail customers with national lawn care service providers, lawn care product manufacturers with service components, and other local and regional producers and operators. Many of these competitors have substantially greater financial and other resources than the Company. After: Because we are significantly smaller than the majority of our national competitors, we may lack the financial resources needed to capture increased market share. Based on total assets and annual revenues, we are significantly smaller than the majority of our national competitors: we are one-third the size of our next largest national competitor. If we compete with them for the same geographical markets, their financial strength could prevent us from capturing those markets. For example, our largest competitor did the following when it aggressively expanded five years ago: • launched extensive print and television campaigns to advertise their entry into new markets; • discounted their services for extended periods of time to attract new customers; and • provided enhanced customer service during the initial phases of these new relationships. Our national competitors likely have the financial resources to do the same, and we do not have the financial resources needed to compete on this level. Because our local competitors are better positioned to capitalize on the industry’s fastest growing markets, we may emerge from this period of growth with only a modest increase in market share, at best. Industry experts predict that the smaller, secondary markets throughout the mid-west will soon experience explosive growth. We have forecasted that about 17% of our future long- term growth will come from these markets. However, because it is common practice for lawn care companies in smaller markets to acquire customers through personal relationships, our competitors in nearly half of these mid-west markets are better positioned to capitalize on this anticipated explosive growth. Unlike us, these local competitors live and work in the same communities as their and our potential customers. For the foreseeable future, the majority of our sales people who cover these markets will work out of our two mid-west regional offices because we lack the financial resources to open local offices at this time. As a result, we may substantially fail to realize our forecasted 17% long-term growth from these markets.” (at 20-22)
“Completion of the merger . . . [is] subject to the receipt of all [regulatory] approvals... we cannot be certain when or if we will obtain [the regulatory approvals] or, if obtained, whether they will contain terms, conditions, or restrictions not currently contemplated.” (at 24-25)
Factual background
Hudson City Bank and M&T Bank Corporation agreed to merge in 2015. The joint proxy statement disclosed general regulatory risks but did not specifically discuss M&T's non-compliant Bank Secrecy Act/anti-money laundering (BSA/AML) compliance program or its practice of switching customers from free to fee-based checking accounts without notice. After the proxy was issued, the Federal Reserve identified concerns about M&T's BSA/AML compliance, delaying the merger. The Consumer Financial Protection Bureau also brought an enforcement action against M&T for the checking account practice. Shareholders sued, claiming the proxy omitted material risks.
Procedural history
The Shareholders filed a putative class action alleging violations of Section 14(a) and Rule 14a-9 based on omissions in a joint proxy statement for a merger. The District Court granted M&T's motion to dismiss with prejudice. The Shareholders appealed.
Remand instructions
The case is remanded for further proceedings consistent with this opinion, specifically on the Shareholders' claims that M&T violated Section 14(a) by omitting material risk factors.