New Scrutiny for Supplemental Disclosures In Proxy StatementsSean Griffith in The American Lawyer, March 17, 2014
Because supplemental disclosures contained in proxy statements prepared in the context of corporate mergers do not affect shareholders one way or the other, they should not provide plaintiffs lawyers with the means to get paid in shareholder litigation, three law professors argue in a paper summarized on the Harvard Law forum for corporate governance and financial regulation that is also available for download on SSRN.
Doing away with such supplemental disclosures might have the added bonus of dampening shareholder litigation altogether, the law professors suggest.
According to Steven Davidoff, professor at the Ohio State University College of Law, Jill Fisch of the University of Pennsylvania, and Sean Griffith of Fordham University, nearly every merger these days leads litigation, and these disputes are often settled by agreeing to include supplemental disclosures in the proxy statement.
As the professors write, “In a negotiated settlement, plaintiffs will characterize supplemental disclosures in the merger proxy as producing a corporate benefit, and defendants will typically not oppose the characterization, as they are happy to pay off the plaintiffs’ lawyers and get on with the deal.”
“The supposed benefits of these settlements,” they continue, “thus are rarely tested in adversarial proceedings. Knowing this creates a strong incentive for plaintiffs’ attorneys to file claims, put in limited effort, and negotiate a settlement consisting exclusively of corrective disclosures. But is there any real value to these settlements? Our answer to this question, based on a new empirical study, is no.”
In their study, the professors looked at a sample of 453 large public company mergers negotiated over a period from 2005 through 2012 and found that supplemental disclosures did not, as some might suppose, cause shareholders to feel less positive about the merger, and therefore vote against it. The disclosure had no effect, the professors write.
“We therefore conclude that courts should reject disclosure-only settlements as a basis for attorney fee awards. We argue that the simplest mechanism for achieving this result would be for courts to stop recognizing supplemental disclosures as a basis for “corporate benefit.” This change would strike directly at the engine that empowers excess litigation activity.”