Suppose you represent a potential corporate acquirer who is filing or updating a Schedule 13D disclosure document. In a close cases in which reasonable people could differ as to whether disclosure is required, involving information your client would prefer not to make public if possible, should you err on the side of disclosure or non-disclosure? I was taught to err on the side of non-disclosure. Why?
In Rondeau v. Mosinee Paper Corp., 422 U.S. 49 (1975), the issuer brought suit for the defendant's failure to file a Schedule 13D. The Seventh Circuit granted an injunction that for a period of 5 years would have prevented the defendant from voting any shares purchased between the date when a Schedule 13D should have been filed and the date on which it was in fact filed. The Supreme Court reversed, on the grounds that the plaintiff had not shown such irreparable harm that a sterilizing injunction was appropriate. The Court suggested that less severe remedies might be available under appropriate fact settings, such as enjoining the defendant from voting, acquiring additional shares or commencing a takeover bid pending compliance. Since Rondeau, however, courts finding a § 13(d) violation generally have been quite conservative in fashioning a remedy. Typically, they merely issue an order directing that the violation be cured, either by amending the filing or by filing a Schedule 13D not previously filed. Courts have been unwilling, in the belief that they are unauthorized, to grant more effective relief. See, e.g., Dan River, Inc. v. Icahn, 701 F.2d 278, 287 (4th Cir.1983) (court would not order "sterilization" of shares due to the prior insufficient disclosure); Treadway Companies, Inc. v. Care Corp., 638 F.2d 357, 380 (2d Cir.1980) (refusing an injunction where defective filing was cured and "shareholders had ample time to digest th[e] information"); Chromalloy American Corp. v. Sun Chemical Corp., 611 F.2d 240, 248–49 (8th Cir.1979) (court would not require "cooling‑off" period after submission of corrected Schedule 13D); Energy Ventures, Inc. v. Appalachian Co., 587 F.Supp. 734, 743–44 (D.Del.1984) (interim injunctive relief deemed inappropriate where corrective filing had been made); University Bank & Trust Co. v. Gladstone, 574 F.Supp. 1006, 1010 (D.Mass.1983) (injunction denied where purchaser had made curative disclosure). A rare exception authorized disgorgement in a parking case brought by the SEC. SEC v. First City Fin. Corp., Ltd., 890 F.2d 1215 (D.C.Cir.1989).
The upshot is that if you fail to disclose, get sued, and the court determines that you should have disclosed the information, the worst case scenario is a slap on the wrist injunction requiring corrective disclosure. BFD.
Indeed, as I tell my Mergers & Acquisitions class, it gets better. If you get sued, you file an amendment to your Schedule 13D, containing an infodump that basically says: "The target has sued us alleging that we should have disclosed the following information. Blah, blach, blach. Yada, yada, yada. We believe that we were not required to disclose that information, but are voluntarily providing it now so as to return to the real issues that matter to the shareholders of Target."
You then file a motion to dismiss the target's lawsuit on grounds that it is moot. 99 times out of 100, you'll win. (To reiterate, I only endorse this where there is a colorable legal argument that disclosure is not required.)
Interestingly, as Alison Frankel reports, that seems to be the approach William Ackman is taking in response to the Allergan lawsuit we mentioned the other day:
If Allergan’s insider trading and disclosure suit against the hostile bidders Valeant and Pershing Square is a bluff, Pershing just called it.
William Ackman’s hedge fund dumped a pile of documents that Allergan complained it had improperly withheld on the Securities and Exchange Commission on Wednesday, including Pershing’s original confidentiality agreements with the Canadian drug company Valeant, as well as the share call option and forward contracts in which the hedge fund acquired its 9.7 percent stake in Allergan.
Pershing and Valeant also filed a brief in federal court in Santa Ana, California, agreeing to expedited discovery so it can dispose quickly of Allergan’s claims. ... [A]fter accusing Allergan of suing to impede shareholders from calling for a special meeting to oust directors, Pershing and Valeant said they’re raring to defend themselves against Allergan’s accusations.
This one'll get coverage in next year's M&A class.