Jaroslawicz v. M&T Bank Corp.
| Decision Date | 18 June 2020 |
| Docket Number | No. 17-3695,17-3695 |
| Citation | 962 F.3d 701 |
| Parties | 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 |
| Court | U.S. Court of Appeals — Third Circuit |
Deborah R. Gross [ARGUED], Kaufman Coren & Ress, 2001 Market Street, Two Commerce Square, Suite 3900, Philadelphia, Pennsylvania 19103, Francis J. Murphy, Jonathan L. Parshall, Murphy & Landon, 1011 Centre Road, Suite 210, Wilmington, Delaware 19805, Laurence D. Paskowitz, Suite 380, 208 East 51st Street, New York, New York 10022, Counsel for Appellants Belina Family and Jeff Krublit
George T. Conway, III, Adam L. Goodman, Bradley R. Wilson [ARGUED], Jordan L. Pietzsch, Wachtell Lipton Rosen & Katz, 51 West 52nd Street, New York, New York 10019, John C. Cordrey, Brian M. Rostocki, Reed Smith, 1201 Market Street, Suite 1500, Wilmington, Delaware 19801, 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 R. Rich, Robert E. Sadler, Jr., and Herbert L. Washington
Tracy R. High, Sullivan & Cromwell, 125 Broad Street, New York, New York 10004, Kevin R. Shannon, Potter Anderson & Corroon, 1313 North Market Street, Hercules Plaza, 6th Floor, P.O. Box 951, Wilmington, Delaware, 19801, Counsel for Appellees Denis J. Salamone, Victoria H. Bruni, Donald O. Quest, Joseph G. Sponholz, Scott A. Belair, Michael W. Azzara, William G. Bardel and Cornelius E. Golding
Before: McKEE, MATEY, and SILER, JR.,† Circuit Judges.
It is a familiar story in the life of a publicly held business. A corporation identifies an opportunity and decides to ask its shareholders for their approval to pursue. But the business runs in a highly regulated space like finance. So the company proceeds through a thick web of laws and regulations that detail how to explain both the risks and the rewards of the opportunity to the shareholders. With a bit of good fortune, all the hard work pays off when the shareholders give their blessing. And then, after the deal is done, only the class action hurdle remains. That is because for more than five decades, these transactions have been subject to a three-tier system of enforcement: oversight by Congress, supervision by regulators like the Securities and Exchange Commission, and "private attorneys general"1 pursuing "a private right of action." Gen. Elec. Co. v. Cathcart , 980 F.2d 927, 932 (3d Cir. 1992) (citing J.I. Case Co. v. Borak , 377 U.S. 426, 430–31, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964) ).
We consider that final frontier of enforcement in this appeal. Hudson City Bank ("Hudson") and M&T Bank Corporation ("M&T") successfully merged in 2015. But their union triggered a protest by a few Hudson shareholders, who filed a putative class action (together, the "Shareholders"). The complaint alleged the banks didn't disclose material information about M&T's practice of adding fees to no-fee "free" checking accounts or its failure to comply with federal anti-money laundering regulations. And despite a healthy return on their investment, the Shareholders argue these omissions or misstatements caused all Hudson shareholders financial harm. In a comprehensive opinion, the District Court dismissed these claims. We now vacate and remand for further proceedings based on prior decisions allowing suits alleging inadequate transparency or deception. We reiterate the longstanding limitations on securities fraud actions that insulate issuers from second-guesses, hindsight clarity, and a regime of total disclosure.
Chartered in 1868, Hudson grew to become one of the largest savings banks in New Jersey. Avoiding modern products and trends in favor of steady deposits and safe mortgages, Hudson enjoyed a strong reputation of stability. But, following the 2008 recession, Hudson struggled to hold its footing. It launched reforms, shedding debt, eying diversification, and considering opportunities to merge. Eventually, Hudson found a partner in M&T and the two banks struck a deal. Investors appeared to welcome the announcement with M&T's stock price rising on the news.
The merger agreement promised Hudson shareholders a mixture of cash and M&T stock, and required approval by the shareholders of both banks. To provide the required notice, Hudson and M&T opted to issue a Joint Prospectus ("Joint Proxy") and filed a single Form S-4 in accordance with SEC rules.2 That form requires issuers to provide, among other things, "the information required by Item 503 of Regulation S-K." Item 503, since recodified as Item 105,3 asks for "the most significant factors that make an investment in the registrant or offering speculative or risky." 17 C.F.R. § 229.105. Each "risk factor" requires an individual topic heading supported by information that is both "concise and organized logically." Id. Specificity is key, as the regulation cautions filers to omit "risks that could apply generically to any registrant or any offering." Id. And Item 105 is where the Shareholders direct their attack, alleging this portion of the Joint Proxy was misleading and incomplete. We turn to those disclosures.
As required, the Joint Proxy included a section titled "Risks Related to M&T" (App. at 0237), with subsections on "Risks Relating to Economic and Market Conditions," "Risks Relating to M&T's Business," and "Risks Relating to the Regulatory Environment." (App. at A0237–48.) Discussing the regulatory environment, the Joint Proxy noted that "M&T is subject to extensive government regulation and supervision" because of "the Dodd-Frank Act and related regulations." (App. at A1010 (emphasis omitted).) It cautioned that "M&T expects to face increased regulation of its industry as a result of current and possible future initiatives." (App. at A1010.) That will lead to "more intense scrutiny in the examination process and more aggressive enforcement of regulations on both the federal and state levels," which would "likely increase M&T's costs[,] reduce its revenue[,] and may limit its ability to pursue certain desirable business opportunities." (App. at A1010.) The Joint Proxy also stated that "from time to time, M&T is, or may become, the subject of governmental and self-regulatory agency information-gathering requests, reviews, investigations and proceedings and other forms of regulatory inquiry, including by the SEC and law enforcement authorities." (App. at A0248.) That ongoing oversight, in turn, might lead to "significant monetary damages or penalties, adverse judgments, settlements, fines, injunctions, restrictions on the way in which M&T conducts its business, or reputational harm." (App. at A0248.) And the Joint Proxy noted operational risks "encompass[ing] reputational risk and compliance and legal risk, which is the risk of loss from violations of, or noncompliance with, laws, rules, regulations, prescribed practices or ethical standards, as well as the risk of noncompliance with contractual and other obligations." (App. at A0245.) That dense fog of possible problems, as we will see, looms large.
A few additional statements related to risk appeared elsewhere in the Joint Proxy. A section titled, "Regulatory Approvals Required for the Merger" advised that "[c]ompletion of the merger ... [is] subject to the receipt of all approvals required to complete the transactions contemplated by the merger agreement ... from the Federal Reserve Board." (App. at A1017.) And the Federal Reserve Board, "[a]s part of its evaluation ..., reviews: ... the effectiveness of the companies in combatting money laundering." (App. at A1018.) While M&T "believe[d]" timely regulatory approval was realistic, it was unsure. (App. at A1017; see also App. at A1009.) Rather, M&T offered that:
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.
(App. at A1017.)
At M&T's election, the Joint Proxy incorporated M&T's 2011 Annual Report on Form 10-K as permitted by Form S-4. There, M&T warned that the Patriot Act requires that "U.S. financial institutions ... implement and maintain appropriate policies, procedures and controls which are reasonably designed to prevent, detect and report instances of money laundering." (App. at A1028.) But investors could take comfort, the Joint Proxy explained, because M&T's "approved policies and procedures [are] believed to comply with the USA Patriot Act." (App. at A1028.)
M&T filed the Joint Proxy with the SEC, which was declared effective on February 22, 2013, mailed it to all shareholders five days later, and scheduled a vote on the proposal for April. Then, a few days before the ballots, M&T and Hudson announced that "additional time will be required to obtain a regulatory determination...
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