July 17, 2018
Appeal from the United States District Court for the District
of Delaware (D.C. Civ. No. 1-15-cv-00897) District Judge:
Honorable Richard G. Andrews
Deborah R. Gross, Esq. [Argued] Kaufman Coren & Ress,
Francis J. Murphy, Esq. Jonathan L. Parshall, Esq. Murphy
& Landon, Laurence D. Paskowitz, Esq. Counsel for
Appellants Belina Family and Jeff Krublit
T. Conway, III, Esq. Bradley R. Wilson Esq. [Argued] Jordan
L. Pietzsch, Esq. Wachtell Lipton Rosen & Katz, John C.
Cordrey, Esq. Brian M. Rostocki, Esq. Reed Smith, Counsel for
Appellees M&T Bank Corporation, The Estate of Robert G.
Wilmers, Rene F. Jones, Mark J. Czarnecki, Brent D. Baird,
Angela C. Bontempo, Robert T. Brady, T. Jefferson Cunningham,
III, Gary N. Geisel, John D. Hawke, Jr., Patrick W.E.
Hodgson, Richard G. King, Jorge G. Pereira, Melinda A. Rich,
Robert E. Sadler, Jr., and Herbert L. Washington
R. High, Esq. Sullivan & Cromwell, Kevin R. Shannon, Esq.
Potter Anderson & Corroon Counsel for Appellees Denis J.
Salamone, Michael W., Azzara, Victoria H. Bruni, Donald O.
Quest, Joseph G., Sponholz, Cornelius E. Golding, William G.
Bardel, and Scott A. Belair
Before: McKEE, VANASKIE and SILER, JR., [*] Circuit Judges
VANASKIE, CIRCUIT JUDGE
Hudson City Bancorp ("Hudson") merged with M&T
Bank Corporation ("M&T"), former Hudson
shareholders sued, alleging that the consumer banks had
violated securities laws by omitting from their joint proxy
materials several facts concerning M&T's purported
compliance with pertinent regulatory requirements. The
allegations presented two distinct theories of liability.
First, because the proxy materials did not discuss
M&T's non-compliant practices, M&T failed to
disclose significant risk factors facing the merger as
required by Item 503(c) of Regulation S-K, 17 C.F.R §
229.503. Second, M&T's failure to discuss the
allegedly non-compliant practices in the proxy materials
rendered M&T's opinion statements regarding its
adherence to regulatory requirements and the prospects of
prompt approval of the merger misleading under Omnicare,
Inc. v. Laborers District Council Construction Industry
Pension Fund, 135 S.Ct. 1318 (2015). The District Court
dismissed the suit on the ground that the allegations failed
to plead an actionable omission under either theory.
disagree in part. We conclude that the shareholders pleaded
actionable omissions under Item 503(c) but failed to do so
under Omnicare. Additionally, we conclude that the
shareholders plausibly alleged loss causation and thus reject
M&T's alternative ground for affirmance. Accordingly,
we will vacate dismissal of the claims concerning mandatory
disclosure under Item 503(c) and will affirm dismissal of the
claims concerning misleading opinions.
case arises out of the 2015 merger of consumer banks Hudson
and M&T. According to former Hudson shareholders, the
banks violated § 14(a) of the Exchange Act, 15 U.S.C.
§ 78n(a), and Rule 14a-9 of the Securities Exchange
Commission ("SEC"), 17 C.F.R. § 240.14a-9, by
omitting several facts concerning M&T's regulatory
compliance from their joint proxy materials. The alleged
omissions concerned two non-compliant practices: (1)
M&T's having advertised no-fee checking accounts but
later switching those accounts to fee-based accounts (the
"consumer violations"); and (2) deficiencies in
M&T's Bank Secrecy Act/anti-money laundering
compliance program, particularly its "Know Your
Customer" program (the "BSA/AML
deficiencies"). Beyond these general descriptions, the
parties do not provide any more detail about M&T's
allegedly non-compliant practices.
The Merger and Accompanying Disclosures
announced its proposed merger with M&T on August 27,
2012. According to the merger agreement, Hudson shareholders
would receive a combination of M&T stock and cash upon
the merger's close. The shareholder vote on the proposed
merger was scheduled for April 18, 2013.
to the shareholder vote, Hudson and M&T issued a joint
Proxy Prospectus (the "Joint Proxy"). The Joint
Proxy was filed with the SEC on February 22, 2013 and was
mailed to shareholders on or around February 27, 2013. The
Joint Proxy contained several references to regulatory
compliance. For instance, the Joint Proxy contained a section
titled "Regulatory Approvals Required for the
Merger." This section provided, in pertinent part:
Completion of the merger and the bank merger are subject to
the receipt of all approvals required to complete the
transactions contemplated by the merger agreement [including]
from the Federal Reserve Board . . . .
Although we currently believe we should be able to obtain all
required regulatory approvals in a timely manner, we cannot
be certain when or if we will obtain them or, if obtained,
whether they will contain terms, conditions or restrictions
not currently contemplated that will be detrimental to
M&T after the completion of the merger or will contain a
Federal Reserve Board. Completion of the merger is
subject, among other things, to approval by the Federal
Reserve Board . . . . As part of its evaluation . . ., the
Federal Reserve Board reviews: . . . the effectiveness of the
companies in combatting money laundering.
(App. A0304-05) (emphasis in original). The "Risk
Factors" section of the Joint Proxy addressed the recent
increase in banking regulations:
M&T is subject to extensive government regulation and
supervision and this regulatory environment is being
significantly impacted by the financial regulatory reform
initiatives in the United States, including the Dodd-Frank
Act and related regulations. . . .
The United States government and others have recently
undertaken major reforms of the regulatory oversight
structure of the financial services industry. M&T expects
to face increased regulation of its industry as a result of
current and possible future initiatives. M&T also expects
more intense scrutiny in the examination process and more
aggressive enforcement of regulations on both the federal and
state levels. Compliance with these new regulations and
supervisory initiatives will likely increase M&T's
costs, reduce its revenue and may limit its ability to pursue
certain desirable business opportunities.
. . .
Reforms, both under the Dodd-Frank Act and otherwise, will
have a significant effect on the entire financial industry.
Although it is difficult to predict the magnitude and extent
of these effects, M&T believes compliance with the
Dodd-Frank Act and its implementing regulations and other
initiatives will likely negatively impact revenue and
increase the cost of doing business, both in terms of
transition expenses and on an ongoing basis, and may also
limit M&T's ability to pursue certain desirable
business opportunities. Any new regulatory requirements or
changes to existing requirements could require changes to
M&T's businesses, result in increased compliance
costs and affect the profitability of such businesses.
Additionally, reform could affect the behaviors of third
parties that M&T deals with in the course of its
business, such as rating agencies, insurance companies and
investors. Heightened regulatory practices, requirements or
expectations resulting from the Dodd-Frank Act and the rules
promulgated thereunder could affect M&T in substantial
and unpredictable ways, and, in turn, could have a material
adverse effect on M&T's business, financial condition
and results of operations.
(Id. at A0239-41) (emphasis in original).
M&T's annual report on Form 10-K for the fiscal year
ending December 31, 2011, was incorporated into the Joint
Proxy. The Annual Report discussed M&T's current
state of compliance, explaining in part:
[The USA Patriot Act] imposes obligations on U.S. financial
institutions, including banks and broker dealer subsidiaries,
to implement and maintain appropriate policies, procedures
and controls which are reasonably designed to prevent, detect
and report instances of money laundering . . . . The
Registrant and its impacted subsidiaries have approved
policies and procedures that are believed to be compliant
with the USA Patriot Act.
(Id. at A1028.) Although the Joint Proxy discussed
the regulatory framework facing consumer banks, it did not
mention M&T's allegedly non-compliant practices.
April 12, 2013, six days before the scheduled shareholder
vote, Hudson and M&T filed a proxy supplement, announcing
that one of their regulators, the Federal Reserve Board, had
identified "certain regulatory concerns with
M&T's [BSA/AML] procedures." (Id. at
A1041.) The banks explained that they "expect[ed]
additional time [would] be required to obtain a regulatory
determination on the application necessary to complete their
proposed merger." (Id.)
days later, on April 15, 2013, M&T's CFO, René
F. Jones, provided an update to investors on the expected
delay. Jones explained that M&T "recently [was] made
aware" of the fact that the Federal Reserve Board had
identified "certain deficiencies in [its] BSA/AML
compliance program," which "would impact
[M&T's] ability to close the merger . . . in the near
term." (Id. at A0470.) He also stated that
M&T "ha[d] no reason to believe that the issues
involve[d] any wrongdoing or illegal conduct by anyone in
M&T or any identifiable instances of actual money
laundering activity using [M&T]," but that M&T
would need to "implement [a] plan [to] improve"
its compliance programs before approval could be secured and,
therefore, it did not "take regulatory approval for
granted." (Id.) None of the supplemental
disclosures mentioned the consumer violations.
the projected regulatory delay, Hudson and M&T decided
not to postpone the shareholder vote. On April 18, 2013,
Hudson shareholders voted to approve the merger. Regulators
eventually approved the merger more than two years later, and
the merger closed on November 1, 2015.
October 2015, David Jaroslawicz, a former Hudson shareholder,
filed a putative class action on behalf of Hudson
shareholders, claiming, inter alia, that the joint
proxy materials violated the Exchange Act's prohibition
against misleading omissions, 15 U.S.C. § 78n(a)(1); 17
C.F.R. § 240.14a-9(a). The original complaint named
M&T, Hudson, and their directors and officers as
defendants. In January 2016, the District Court
appointed the Belina Family, former Hudson shareholders, to
serve as lead plaintiffs. One month later, the Belina Family
and plaintiff Jeff Krublit, another former shareholder, filed
an amended complaint.
moved to dismiss the first amended complaint, which the
District Court granted. See Jaroslawicz v. M&T Bank
Corp., No. 15-897-RGA, 2017 WL 1197716 (D. Del. Mar. 30,
2017). The District Court reasoned that the first amended
complaint failed to plausibly allege an actionable omission.
However, in light of allegations made for the first time
during oral argument, the District Court granted leave to
amend so that the shareholders could assert allegations the
Court believed constituted misleading omissions.
Additionally, the District Court observed, in a conclusory
fashion, that the shareholders had plausibly alleged loss
causation and negligence.
shareholders then filed their second amended complaint,
adding the allegations which the District Court had
identified as potentially relevant. M&T moved to dismiss
the second amended complaint. The shareholders objected to
the motion as duplicative of the earlier motion to dismiss
and, alternatively, argued that the complaint was
sufficiently pled. Before resolving the motion, the District
Court requested additional briefing on the applicability of
Item 503(c) to the Joint Proxy. The parties
filed a joint response, stating that Schedule 14A, 17 C.F.R.
§ 240.14a-101, incorporated Item 503(c) and that,
therefore, M&T had been required to comply with Item
District Court then granted M&T's second motion to
dismiss. Jaroslawicz v. M&T Bank Corp., 296
F.Supp.3d 670 (D. Del. 2017). After rejecting the
shareholders' procedural arguments, the District Court
concluded that the second amended complaint failed to plead
an actionable omission under either a mandatory disclosure or
misleading opinion theory. In particular, the District Court
concluded that the complaint failed to plausibly allege that,
at the time the proxy materials issued, the consumer
violations posed a risk to regulatory approval of the merger.
Additionally, the District Court concluded that, as a matter
of law, M&T had adequately disclosed in the Joint Proxy
the risk that the BSA/AML deficiencies posed to the merger.
The District Court was silent with regard to loss causation
and negligence. Once again, the District Court granted the
motion to dismiss without prejudice, giving the shareholders
another opportunity to amend their
shareholders elected to stand on their second amended
complaint. Shortly thereafter, the District Court dismissed
the complaint with prejudice. The shareholders timely filed
their Notice of Appeal.
invited the SEC to participate in the appeal as
amicus. On July 13, 2018, we received a letter from
David R. Fredrickson, Chief Counsel of the SEC's Division
of Corporation Finance, declining to participate as
amicus but providing background information on the
legal obligations imposed by the federal securities laws at
issue in this case.
JURISDICTION AND ...