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Securities—Proxy statement warnings made omissions immaterial

Securities—Proxy statement warnings made omissions immaterial

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Where a proxy statement given to shareholders to secure approval for a merger specifically warned that the financial information provided in the statement might be outdated and would not be updated, the shareholders could not claim that the failure to provide updated financial information rendered the proxy statement false and misleading.


AR Global Investments LLC, directly and through entities it owns, creates and sells ownership interests in real estate investment trusts. Consistent with this model, AR Global created American Realty Capital – Retail Centers of America Inc. and American Finance Trust Inc. through an affiliated company and sold ownership interests in them. One of AR Global’s affiliates managed the companies’ day-to-day operations.

When a number of real estate investment trusts terminated AR Global as their asset manager after, financial improprieties regarding several companies affiliated with AR Global became public in 2014 and 2015, AR Global feared that American Realty might do the same because its management contract provided for termination with only 60 days’ written notice. To prevent this from happening, AR Global sought to merge American Realty into American Finance, which was governed by a management contract with a twenty-year management term that would be difficult to terminate.  

On Sept. 7, 2016, American Realty announced that it would be merged into American Finance. The merger agreement provided that the American Realty shareholders would receive a combination of cash and American Finance stock, estimated to be $10.26, in exchange for each of their American Realty shares. This estimate, also used in a proxy statement disseminated to shareholders to solicit their votes, was based on the net asset value of the American Finance stock effective as of Dec. 31, 2015, which was $24.17 per share.

In February 2017, American Realty shareholders narrowly approved the merger. In the months that followed, American Realty shareholders learned information about American Finance’s financial condition that they did not know before the merger, including, among other things, that American Finance had lost $27.3 million as a result of SunTrust Bank’s decision not to renew leases for 45 bank branches, the estimated net asset value of its stock effective as of Dec. 31, 2016, had decreased to $23.37 per share, and it had used a higher capitalization rate for the sale of its Merrill Lynch properties on Jan. 31, 2017, than it had used to calculate the net asset value used in the merger agreement and proxy statement.

Plaintiffs filed this class action on behalf of former American Realty shareholders alleging that American Realty and its directors, along with the CEO of AR Global, violated Section 14(a) of the Securities Exchange Act and Securities and Exchange Commission Rule 14a-9 by disseminating a false and misleading proxy statement to solicit approval of the merger between RCA and AFIN. The district court granted defendants’ motion to dismiss, and this appeal followed.


As the proxy statement disseminated to the shareholders correctly stated the net asset value of American Finance’s stock effective as of Dec. 31, 2015, it was not misleading. Notably, the proxy statement specifically warned that the net asset value was not current and did not reflect events occurring after Dec. 31, 2015. These specific warnings were tailored to address the alleged misrepresentations or omissions complained of herein and, therefore, negate their materiality. As the American Realty shareholders cannot make a plausible claim that the proxy statements regarding American Financial’s net asset value were materially false or misleading, they fail to state a plausible claim for relief.

The allegations regarding the omission of the higher capitalization rate used for the sale of the Merrill Lynch properties on Jan. 31, 2017, are essentially the same as the allegations regarding the use of the Dec. 31, 2015, net asset value. The American Realty shareholders claim that an event that occurred after Dec. 31, 2015, which had the effect of lowering American Financial’s net asset value, should have been disclosed. But that is exactly what the proxy statement warned would not be done. Given those clear warnings, the American Realty shareholders cannot state a plausible claim for relief.

The failure to disclose the loss resulting from SunTrust Bank’s decision not to renew the leases for 45 branches is also not actionable. Notably, the loss was not finalized until after the merger. In addition, the proxy statement specifically disclosed that SunTrust had declared its intention to vacate when the subject leases expired. Thus, the omission of the specific amount of the loss was not materially misleading.

The American Realty shareholders’ claim that the standalone projections rendered the proxy statement misleading does not state a cause of action. It is well settled that standalone projections are not actionable as long as they are not worded as guarantees. In addition, the proxy statement included specific warnings that the projections should not be used to influence the shareholders’ votes, should not be considered material and were subject to change. As such, the alleged omissions cannot be deemed material.


Paradise Wire & Cable Defined Benefit Pension Plan v. Weil (Lawyers Weekly No. 001-054-19, 21 pp.) (Marvin Quattlebaum, J.) Case No. 18-1483. March 11, 2019. From D.Md. (Catherine Blake, J.) Jeffrey Simon Abraham for Appellants; George Stewart Webb Jr. for Appellees.

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