Southern District Of Texas Dismisses Securities Claims For Purported Proxy Misstatements And Omissions Because Other Disclosures Contained In The Proxy And Prior SEC Filings Rendered At-Issue Information Immaterial
10/31/2016On October 21, 2016, Judge Sim Lake of the United States District Court for the Southern District of Texas dismissed with prejudice a putative securities class action against Eagle Rock Energy Partners, L.P. (“Eagle Rock”), Vanguard Natural Resources LLC (“Vanguard”), their affiliates and their directors. Braun v. Eagle Rock Energy Partners, L.P., 4:15-cv-01470 (S.D. Tex., Oct. 21, 2016). Plaintiffs, a purported class of Eagle Rock unitholders, asserted that the joint proxy filed in connection with Vanguard’s $474 million acquisition of Eagle Rock did not adequately warn about a potential debt covenant breach by Vanguard and was therefore false or misleading. The Court found that the disclosures in the proxy, taken together with Vanguard’s other public filings, rendered the alleged misstatements and omissions immaterial.
In May 2015, Eagle Rock and Vanguard announced a stock-for-stock merger whereby Vanguard would acquire Eagle Rock, which was approved by a vote of the Eagle Rock unitholders and closed in October 2015. Shortly after closing, Vanguard significantly reduced and then suspended its cash distributions to common unitholders—including plaintiffs. Plaintiffs alleged that the joint proxy failed to warn that the companies’ combined debt level post-merger would breach a debt covenant in Vanguard’s credit agreement unless unitholder cash distributions were reduced. Consequently, according to plaintiffs, the joint proxy misrepresented Vanguard’s financial condition and the combined company’s post-merger projections, particularly regarding the ability to continue to make consistent monthly cash distributions to its unitholders. Plaintiffs thus asserted claims under Sections 11 and 15 of the Securities Act of 1933 and Sections 14(a) and 20(a) of the Securities Exchange Act of 1934.
The Court, however, found that the joint proxy included sufficient warnings regarding those projections and contained meaningful cautionary language regarding debt covenants. The Court also highlighted that plaintiffs should have been able to—and indeed ultimately did—find the allegedly omitted debt covenant in Vanguard’s other SEC filings because “[i]t is an investor’s responsibility to combine available facts to derive estimates about a security’s value.” In this regard, the Court cited Second Circuit precedent indicating that prospectuses are not required to address reasonable investors “as if they were children in kindergarten.” In re ProShares Trust Securities Litigation, 728 F.3d 96, 102 (2d Cir. 2013). Thus, the Court held that the alleged misstatements and omissions were immaterial and inactionable.
Although this is a single opinion from the Southern District of Texas (relying on precedent from the Second Circuit), it does give defendants ammunition to use when arguably public information—even if not expressly incorporated or disclosed in a merger proxy—undercuts disclosure claims.CATEGORY: Disclosures