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They're Baaaaack. Disclosure-Based 14(A) Claims Making a Ghostly Return
Following the Delaware Chancery Court's ruling in In re Trulia, Inc., C.A. No. 10020-CB (Jan. 22, 2016), that effectively closed the door to 14(a) disclosure-based settlements in Delaware state court, federal courts saw an influx of 14(a) "merger objection" litigation. More often than not, these suits, while a nuisance and often meritless, present a nominal exposure. The suits are quickly dismissed following the company's issuance of a supplemental proxy with additional disclosures and the parties negotiate a mootness fee. The transaction closes and all parties move on — or so we thought. An emerging trend suggests that exposure to 14(a) claims may coming back from the near dead.
Recently, the plaintiffs' bar has breathed new life into 14(a) claims by coupling them with a cause of action for violation of the Securities and Exchange Act Section 10(b) in post-stock-drop litigation. While the underlying circumstances may differ, generally, following the completion of a merger, the go-forward company makes an adverse disclosure that purportedly causes the go-forward company's stock to drop. What makes this disclosure different and gives rise to not only a 10(b) claim but also a 14(a) claim, is that the disclosure relates to information that was referenced in the proxy statement. For instance, the disclosure may relate to the value of projects or other assets acquired in the merger or the performance of a pre-merger operating unit or the accounting of a pre-merger contract.
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