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(Article from Securities Law Alert, February/March 2019) 

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On March 1, 2019, the Eighth Circuit reversed the dismissal of a securities fraud action alleging that a company’s proxy statement in connection with a proposed merger was materially misleading in violation of Section 14(a) of the Securities Exchange Act of 1934 and SEC Rule 14a-9 where the proxy statement failed to disclose projected net income/loss information for the pre-merger target company. Campbell v. Transgenomic, 2019 WL 983676 (8th Cir. 2019) (Benton, J.). The Eighth Circuit reasoned that “projected net income/loss is not trivial information” and “may be of more significance to investors than revenue.”

The district court had noted that Section 14(a) and SEC Rule 14a-9 are not “so broad as to require the proxy statement to include every possible financial disclosure that may be relevant to the valuation of a business.” Campbell v. Transgenomic, 2018 WL 2063348 (D. Neb. May 3, 2018). The district court determined that “the crux of the analysis is this: where the proxy statement chooses to disclose a financial valuation, does it do so honestly?” The district court found that the net income/loss data did not “call into question the accuracy of the information disclosed” in the proxy statement, such as revenue distributions, and dismissed plaintiffs’ claims.

On appeal, the Eighth Circuit found the district court had applied “the wrong inquiry.” The Eighth Circuit explained that “Section 14(a) was intended to promote the free exercise of the voting rights of stockholders by ensuring that proxies would be solicited with explanation to the stockholder of the real nature of the questions for which authority to cast his vote is sought.” The Eighth Circuit stated that, for purposes of SEC Rule 14a-9, “[a]n omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.” The court further noted that “[u]nder this test it is not necessary to prove that disclosure of an omitted fact would have caused a reasonable investor to change his decision.”

The Eighth Circuit observed that it has “considered net income to be among the three most valuable figures in determining the fairness of an acquisition under the Clayton Act.” The Eighth Circuit found that the pre-merger company’s net income/loss figures were particularly relevant in the case before it because the proxy statement included gross profit projections for the pre-merger company. The Eighth Circuit found that “[b]y omitting the (allegedly) significantly lower projections for [the company’s] net income/loss, the proxy statement may have presented [the company] in a false light that was materially misleading.” The Eighth Circuit concluded that “a reasonable investor may have viewed disclosure of [the company’s] net income/loss as having significantly altered the total mix of information made available,” and therefore “the materiality of the omission was improperly resolved as a matter of law.” In so holding, the Eighth Circuit underscored that “[d]oubts as to the critical nature of information misstated or omitted” should be “resolved in favor of those [SEC Rule 14a-9] is designed to protect.”