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Jaroslawicz v. M&T Bank Corp.

United States Court of Appeals, Third Circuit

December 26, 2018

DAVID JAROSLAWICZ
v.
M&T BANK CORPORATION; HUDSON CITY BANCORP INC.; *THE ESTATE OF ROBERT G. WILMERS, BY ITS PERSONAL REPRESENTATIVES ELISABETH ROCHE WILMERS, PETER MILLIKEN, AND HOLLY MCALLISTER SWETT; 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 R. RICH; ROBERT E. SADLER, JR.; HERBERT L. WASHINGTON; DENIS J. SALAMONE; MICHAEL W. AZZARA; VICTORIA H. BRUNI; DONALD O. QUEST; JOSEPH G. SPONHOLZ; CORNELIUS E. GOLDING; WILLIAM G. BARDEL; SCOTT A. BELAIR BELINA FAMILY; JEFF KRUBLIT, Appellants (*Amended pursuant to Clerk's Order dated 3/1/18)

          Agued July 17, 2018

          On 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

          George 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

          Tracy 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

          OPINION

          VANASKIE, CIRCUIT JUDGE

         After 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.

         We 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.

         I. BACKGROUND[1]

         This 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.

         A. The Merger and Accompanying Disclosures

         Hudson 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.

         Prior 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 burdensome condition.
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).

         Additionally, 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.

         On 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.)

         Three 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.

         Despite 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.

         B. Procedural History

         In 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.[2] 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.[3]

         M&T 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.

         The 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 503(c).

         The 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 pleadings.

         The 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.

         We 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.

         II. JURISDICTION AND ...


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