They're Baaaaack. Disclosure-Based 14(A) Claims Making a Ghostly Return

Following the Delaware Chancery Court's ruling in In re Trulia, Inc., C.A. No. 10020-CB (Jan. 22, 2016), that effectively closed the door to 14(a) disclosure-based settlements in Delaware state court, federal courts saw an influx of 14(a) "merger objection" litigation. More often than not, these suits, while a nuisance and often meritless, present a nominal exposure. The suits are quickly dismissed following the company's issuance of a supplemental proxy with additional disclosures and the parties negotiate a mootness fee. The transaction closes and all parties move on — or so we thought. An emerging trend suggests that exposure to 14(a) claims may coming back from the near dead.

Recently, the plaintiffs' bar has breathed new life into 14(a) claims by coupling them with a cause of action for violation of the Securities and Exchange Act Section 10(b) in post-stock-drop litigation. While the underlying circumstances may differ, generally, following the completion of a merger, the go-forward company makes an adverse disclosure that purportedly causes the go-forward company's stock to drop. What makes this disclosure different and gives rise to not only a 10(b) claim but also a 14(a) claim, is that the disclosure relates to information that was referenced in the proxy statement. For instance, the disclosure may relate to the value of projects or other assets acquired in the merger or the performance of a pre-merger operating unit or the accounting of a pre-merger contract.

As many of these suits work their way through the courts, insurance carriers, brokers and their clients have to stay tuned to see how successful the plaintiffs' bar is in using the 14(a) claim to seek additional recoveries for their shareholder clients. Since public company liability risk is one of QBE's areas of specialized expertise, QBE will be watching developments closely. Meanwhile, brokers, company risk managers and retained counsel need to consider the complex nature of these dual claims. Among the issues to address are:

• Different plaintiff classes. The 14(a) claim will be brought on behalf of, and seeks recovery for, the shareholders of the company that issued the proxy. The 10(b) claim will be brought on behalf of the go-forward company's shareholders. In terms of plaintiff classes, there will likely be two lead plaintiffs, one plaintiff representing the 10(b) class and another representing the 14(a) class. Similarly, it is possible that there will be two plaintiff firms — one for each class. It is also possible that a single firm will represent both classes, but will be tasked with ensuring that both classes are amenable to any resolution.
• Different standards of proof. The 10(b) plaintiffs must establish that the defendants acted with scienter while the 14(a) Plaintiffs may need only to establish that the defendants acted with negligence.
• Different damages models. The two claims are subject to different damages models with the 10(b) damages model being generally accepted and the 14(a) damages model being more susceptible to a defense challenge. Thus, while the plaintiffs may have an easier time proving liability in a 14(a) claim, the damages arising from such claim are less certain.

Key Coverage Questions

Turning to coverage, there are many considerations to keep in mind when analyzing a 10(b)/14(a) claim.

• Have all relevant carriers been noticed? This includes the carriers for the go-forward company as well as the acquired company(ies).
• Has run-off coverage been purchased and what does that coverage look like?
• Does the go-forward policy have a prior acts exclusion?
• Do the 10(b) and 14(a) claims involve interrelated or related wrongful acts?
• Does the new 10(b)/14(a) claim relate back to the prior 14(a) merger-objection suit(s)?
• What capacity are the individuals alleged to have acted in?
• What is the proper allocation of any settlement?
• Does the settlement, or any portion thereof, fall within the policy's "bump-up" exclusion?

The answer to these questions will depend on the underlying circumstances and policy wording.

While we once may have thought that the significance of Section 14(a) had faded away, the plaintiffs' bar has reminded us that the 14(a) claim may be coming back as a force that can alter the landscape and exposure of securities class actions. Considering the complexity and evolving nature of the risk, it is important for brokers and their public company clients to work with a carrier that specializes in M&A risk.

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Johanna (Jo) Fricano is Assistant Vice President, Claims Practice Leader, for QBE North America. She primarily handles Directors' and Officers' Claims for Public and Private Company clients. In addition, she has been instrumental in liaising with QBE's Underwriting Department to develop a reporting mechanism that provides underwriting visibility into pending claims and claims trends. She is also involved in other initiatives designed strengthen the relationship between Claims and Underwriting. This article is for general informational purposes only and is not legal advice and should not be construed as legal advice. The information in this article is descriptive only. Any examples herein are only hypothetical. Actual coverage is subject to the language of the policies as issued.