Securities Regulation Daily Settlement agreements abrogated because disclosures sought by plaintiffs were not material
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Tuesday, June 25, 2019

Settlement agreements abrogated because disclosures sought by plaintiffs were not material

By Jeffrey H. Brochin, J.D.

Disclosures sought in three complaints were not ‘plainly material’ and should have been dismissed out of hand. Therefore, court abrogated the settlement agreement and ordered attorney fees refunded to company.

A federal district court in Illinois has ordered the attorneys for three shareholders who previously filed suit seeking disclosures regarding a proposed acquisition of Akorn, Inc. by Frensenius Kabi AG, to refund to Akorn the attorney fees received in settlement of the lawsuit. Upon further review, the court determined that the disclosure lawsuit should never have been filed in the first place, as the disclosures sought were not ‘plainly material.’ The court therefore abrogated the shareholders’ settlement agreement with Akorn and ordered the refunds (House v. Akorn, Inc., June 24, 2019, Durkin, T.).

Lawsuits sought merger disclosures. Three Akorn shareholders previously filed suit against Akorn and its board of directors seeking certain disclosures regarding a proposed acquisition by Frensenius Kabi AG. After Akorn revised its proxy statement and issued a Form 8-K, the shareholders dismissed their lawsuits and settled for attorney fees. Shortly thereafter, a different shareholder sought to intervene to object to the attorney fees settlement, and although the court denied his motion to intervene, in light of arguments raised by the movant the court ordered briefing as to whether the court should exercise its inherent authority to abrogate the settlement agreements under the standard set forth in In re Walgreen Co. Stockholder Litigation, 832 F.3d 718, 725 (7th Cir. 2016). For the reasons set forth below, the court abrogated the settlement agreements.

‘Material facts ’under Rule 14a-9. SEC Rule 14a-9 requires disclosure in proxy statements of all material facts necessary in order to make the statements not false or misleading. See 17 C.F.R. § 240.14a-9(a). The Supreme Court has held that an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). In other words, omitted information is material if there is a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. There must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available. Omitted facts are not deemed material merely because they might be helpful.

What the shareholders sought. All three shareholders sought GAAP reconciliation of the proxy’s projections, arguing that such reconciliation was necessary because GAAP is the format in which Akorn had traditionally disclosed its financial results. However, the court noted that while such reconciliation might be helpful, the applicable SEC regulation requiring GAAP reconciliation did not apply to a disclosure relating to a proposed business combination. 17 C.F.R. § 244.100(d). Although the regulation does not directly address materiality, the court found it highly persuasive in that regard.

Specific net income not ‘plainly material.’ The shareholders also argued that the GAAP reconciliation revealed that the November 2016 Projections assumed steady increases in Akorn’s net income consistent with Akorn’s past performance, while the lowered March 2017 Projections assumed a sudden drop in Akorn’s near term performance, which was inconsistent with Akorn’s recent financial performance. However, the court found that it was obvious that a lower projection implied lower net income, and disclosure of a lower projection already constituted disclosure of the company’s opinion that the company would earn lower net income. The shareholders failed to explain why the specific net income numbers were material to shareholders’ ability to evaluate the merger, and the court therefore found that the GAAP reconciliation requested was not plainly material.

Disclosures ‘worthless to shareholders.’ The court concluded that the disclosures sought in the three complaints were not ‘plainly material’ and were worthless to the shareholders. Yet, Plaintiffs’ attorneys were rewarded for suggesting immaterial changes to the proxy statement, and, Akorn paid the attorney fees in order to avoid the nuisance of ultimately frivolous lawsuits disrupting the transaction with Frensenius. The settlements provided Akorn’s shareholders nothing of value, and instead caused the company to lose money. The court further determined that the quick settlements obviously took place in an effort to avoid the judicial review that the instant decision imposed.

Shareholder ‘racket’ must end. The court went on to admonish the shareholders by noting that the case demonstrated the ‘racket’ described in Walgreen, which stands the purpose of Rule 23’s class mechanism on its head, and that this sharp practice must end. The disclosure lawsuits should have been dismissed out of hand. Accordingly, the court exercised its inherent authority by abrogating the settlement agreements and ordering the shareholders’ attorneys to return to Akorn the attorney fees provided by the settlement agreements.

The case is No. 1:17-cv-05018.

Attorneys: Lewis S. Kahn (Kahn Swick & Foti LLC) for Shaun A. House. Robert B. Bieck, Jr. (Jones Walker LLP) for Akorn, Inc.

Companies: Akorn, Inc

MainStory: TopStory CorporateGovernance CorpGovNews GCNNews FraudManipulation InvestorEducation MergersAcquisitions Proxies IllinoisNews

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