Shareholder Can’t Stop Merger Vote

In plaintiff shareholder’s suit alleging defendants violated federal securities law by providing false, misleading and incomplete information in a proxy statement and that defendant board members had conflicts of interest, a Richmond U.S. District Court denies plaintiff’s motion for a temporary restraining order to halt a vote on a proposed merger, after having granted discovery in the case.

The underlying controversy evolves from the negotiation of a merger agreement between two Virginia-based financial institutions. Plaintiff now seeks to enjoin a vote by Franklin Financial Corporation’s stockholders on its proposed merger with TowneBank, contending that Franklin’s proxy statement is misleading.

The epicenter of the underlying controversy is the content and adequacy of the Schedule 14A Definitive Proxy Statement preceding a scheduled stockholder vote. In essence, plaintiff maintains that the Proxy, which is approximately 200 pages long, with over 100 pages detailing the mechanics of the proposed merger transaction, is misleading and incomplete. Plaintiff alleges the merger agreement undervalues Franklin’s stock, and that the judgment of the Franklin board of directors and its financial advisor was infected with conflicts of interest. Defendants valued the proposed transaction at $275 million in total, or $23.04 per Franklin share based on the closing price of TowneBank on the last trading date before the announcement of the proposed transaction. The value of both Franklin and TowneBank stock has fluctuated in the interim. Plaintiff also takes issue with several elements of the merger agreement designed to limit “other bidders from making a successful competing offer for the company.”

Obviously, postponing the shareholder vote would entail significant hardship to Franklin, which has undoubtedly expended considerable money and time to arrange the process. If Franklin is required to file and distribute a supplemental proxy, it will incur additional expenses and attorney’s fees to appease a single shareholder with only a .0000276 percent interest. The merger with TowneBank is the only viable pending offer on the table. There is no assurance in a fluctuating market that the opportunity will remain available on the terms negotiated.

Plaintiff has no warrant to cast his claim as one on behalf of all stockholders; the court is not persuaded that the balance of hardship tips clearly in plaintiff’s favor.

The court is of the opinion that plaintiff has failed to demonstrate a clear showing that he is likely to succeed on the merits or suffer irreparable harm.

Board’s decision-making

The record evidence at this stage does not demonstrate the Franklin board failed to engage in an informed decision-making process or cast sage judgment into the wind. The Proxy details various meetings, both formal and informal between 2012 and 2014, of the board and its CEO, regarding a potential sale of Franklin after the expiration of the three-year post-mutual-to-stock conversion period. The Proxy presents the reasoning underlying the decision of the boards of directors of both Franklin and TowneBank to approve the merger, as well as a thorough assessment of the risk factors associated with that decision. The consideration offered to the Franklin stockholders by TowneBank – 1,400 shares of TowneBank common stock per share of Franklin common stock – is fully disclosed in the Proxy, and the per-share value of the shares of each corporation is a matter of public information. It appears the stockholders have all the information necessary to cast an informed vote and plaintiff’s claims that the Franklin board breached their fiduciary duties appear unlikely to succeed on the merits. Plaintiff’s suggestion of conflicts of interest of Franklin board members appears to stand on equally tenuous footing.

While it appears to the court that the Proxy itself provides, as required, a fair summary of the analysis of Franklin’s financial advisor, inclusion of the financial advisor’s full fairness opinion would cure any deficiency that may exist. The court is not convinced that plaintiff could clearly demonstrate that the financial forecasts presented in the Proxy are false, misleading or omit material facts, or that Franklin’s decision to include mathematically certain figures rather than future estimates renders the Proxy misleading.

While there appears to be a disagreement among the federal circuits as to the disclosure of financial projections, there appears to be a consensus that current data that is mathematically certain should be given more weight than projections. A potential erroneous assumption by a stockholder is not the equivalent of a material false statement or omission. It appears to be the prevailing view that a proxy need only disclose that a financial advisor’s fees are contingent. The cover letter accompanying the Proxy approximate the financial advisor’s fee to be roughly $2.6 million, substantially all of which is contingent on the deal closing. Perhaps in hindsight, a collar provision could have been beneficial to insulate Franklin’s stock from value reduction pending closure of the transaction, but the Franklin board had no duty under Virginia law to maximize the price in connection with the merger.

In the final analysis, plaintiff’s request for injunctive relief fails to clearly demonstrate the requisite entitlement to such extraordinary remedy.

Motion for temporary restraining order denied.

Malon v. Franklin Financial Corp. (Hudson) No. 3:14cv671, Dec. 2, 2014; USDC at Richmond, Va. VLW 014-3-624, 21 pp.