Saturday, April 30, 2022

I'm talking about proxy solicitations

Look, I know the Tesla/SolarCity decision just came down, and I’m, like, contractually obligated to blog about it, but to tell you the truth, this was the last week of classes, exams are next week, and I just got back from a conference thing, so comments on the Tesla decision will have to wait (though, yes, I did appreciate the wink in footnote 377).

So, proxy solicitations.  Specifically, the Eighth Circuit’s decision in Carpenters’ Pension Fund of Illinois v. Neidorff, 30 F.4th 777 (8th Cir. 2022), which I was alerted to by the Deal Lawyers’ blog.

In Neidorff, the plaintiffs brought a derivative Section 14(a)/Rule 14a-9 claim alleging that Centene Corporation solicited a vote in favor of a merger by way of a misleading proxy statement that failed to disclose known problems with the target company. Rule 14a-9 prohibits proxy statements from:

containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading.

In this case, the preliminary proxy statement was filed on August 19, 2015, the final proxy statement was filed on September 21, 2015, and the vote was taken on October 23, 2015.  The Eighth Circuit decision is very light on the specific allegations (and the briefs, as far as I can tell, are under seal), but apparently among them was the claim that even if the proxy statement was true as of September 21, the defendants violated Rule 14a-9 by failing to update it with newly discovered facts before the shareholder vote.  In response to that argument, the Eighth Circuit held:

As to Appellants’ argument that the failure to update the Proxy Statement rendered it materially misleading, Appellants have not cited, and we have not found, any authority supporting the proposition that § 14(a) requires a company to update its proxy statement. Moreover, this argument is inconsistent with the text of Rule 14a-9(a), which provides that a proxy statement may not contain “any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact,” 17 C.F.R. § 240.14a-9(a) (emphasis added), and the language of the Proxy Statement itself, which provides in all capital letters that neither Centene nor Health Net intends to update the Proxy Statement and that both companies disclaim any responsibility to do so, R. Doc. 79-3, at 118.

For the reasons set forth above, Appellants have failed to plead facts showing that the Proxy Statement contained a material misrepresentation or omission and, consequently, have failed to plead particularized facts demonstrating that at least half of the Board faces a substantial likelihood of liability on their § 14(a) claim.

The reason I find this incredible is that there is ample precedent for the notion that proxy statements must be updated to avoid being false.  This is because, unlike, say, a 10-K, which represents a snapshot in time - and thus will rarely be rendered “false” due to a failure to update with subsequent information - a proxy statement is supposed to provide the basis of action on a particular date, namely, the shareholder meeting.  If proxy statements do not have to be up to date as of the meeting, they will not serve their primary purpose of providing shareholders with sufficient information to cast their ballots.  Thus, in Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281 (2d Cir. 1973), the Second Circuit held, “we cannot suppose that management can lawfully sit by and allow shareholders to approve corporate action on the basis of a proxy statement without disclosing facts arising since its dissemination if these are so significant as to make it materially misleading, and we have no doubt that Rule 14a-9 is broad enough to impose liability for non-disclosure in this situation.”  See also SEC v. Parklane Hosiery, 558 F.2d 1083 (2d Cir. 1977) (quoting Gerstle).

The SEC has also made clear that companies must update their proxy statements to ensure they are accurate as of the date of the shareholder vote.  See SEC Release No. 34-23789, 1986 WL 722059 (“When there have been material changes in the proxy soliciting material or material subsequent events (in contrast to routine updating), an additional proxy card, along with revised or additional proxy soliciting material, should be furnished to security holders … to permit security holders to assess the information and to change their voting decisions if desired.”); SEC Release No. 34-16343, 1979 WL 173161 (“Even in a situation wherein a statement when made was true and correct, and is rendered incorrect due to a change in circumstances or other subsequent event, appropriate action should be taken to correct the misstatement prior to the meeting….Rule 14a-9 has been construed by courts to require either that proxy solicitation materials which have become false and misleading should be corrected or that other steps be taken to ensure that shareholders not vote on matters on the basis of incomplete or inaccurate information.”).

Further to this, Stephen Quinlivan at Stinson compiled this list of typical SEC comments on merger proxy statements.  I’ve excerpted out a relevant one:

We note the disclosure on page X that ABC does not intend to revise its projections. Please revise this disclosure, as publicly available financial projections that no longer reflect management’s view of future performance should either be updated or an explanation should be provided as to why the projections are no longer valid.

(emphasis added).

I realize a lot of this precedent is kind of old, but I have no reason to think it’s no longer good law, which makes the Eighth Circuit’s decision here bit of an eyebrow-raiser (assuming it meant what I think it meant, because, again, the opinion is light on details).

Ann Lipton | Permalink


You seem upset that a court would apply the actual text of a law or rule instead of expanding it to address perceived loopholes. But shouldn’t the SEC have to amend the rule to require updates if that is what it thinks is a good idea?

Posted by: Phillip Goldstein | Jun 21, 2022 4:01:17 AM

Post a comment