• Second Circuit Reaffirms that Merger Negotiations Need Not Be Disclosed
  • May 25, 2010
  • Law Firm: Alston Bird LLP - Atlanta Office
  • On April 7, the Second Circuit Court of Appeals affirmed that merger negotiations generally need not be disclosed by public companies. The case, Vladmir v. Bioenvision, involved allegations by a shareholder that several of the company’s statements between February and May 2007 were rendered materially misleading by the company’s failure to disclose that it was engaged in merger negotiations.

    The case was an appeal from a district court judgment that the plaintiffs had failed to identify any legal duty requiring the company to disclose the fact that merger negotiations were being conducted. The plaintiff had argued that seven public statements were materially misleading because of the lack of disclosure related to the merger negotiations:

    • A press release stating that Bioenvision remained focused on continuing to execute on its global development and commercialization strategy for its product.
    • A prospectus and prospectus supplement that included disclosure regarding recent developments in the Bioenvision’s business, co-development of its product with another party, its stock price and volatility and mergers in the abstract.
    • A press release including a statement of the company’s goals as being the acquisition, development and marketing of compounds and technologies for the treatment of cancer.
    • A press release disclosing the exercise of $7.4 million in warrants and stating that the exercise was a vote of confidence in Bioenvision’s “execution capabilities and substantial future prospects.”
    • A press release stating that Bioenvision’s primary focus was working on methods to treat cancer.
    • An address to investors in which the company did not make any disclosure about the company’s progress toward an acquisition.
    • A Form 10-Q containing no “subsequent events” disclosure regarding acquisitions.

    In reaching its decision to grant Bioenvision’s Rule 12(b)(6) motion, the district court dismissed each of the plaintiffs allegations, finding that plaintiff had not alleged a duty to disclose or had failed to set forth their securities law claim with the required level of particularity. With regard to the Bioenvision’s statements concerning its business focus, the district distinguished those statements the statements from those in Weiner v. Quaker Oats Co., as Bioenvision’s statements did not point to a specific business rationale that would be affected by a merger.

    In its order affirming the district court’s decision, the Second Circuit’s three-judge panel stated that it was now axiomatic that “a corporation is not required to disclose a fact merely because a reasonable investor would very much like to know that fact” (citing In re Time Warner Inc. Sec. Litig., 9 F.3d 259 (2d Cir. 1993)), and that “ ‘[s]ilence, absent a duty to disclose, is not misleading¿.’ ” (quoting Basic Inc. v. Levinson).  The panel then went on to say that “no express duty requires the disclosure of merger negotiations, as opposed to a definitive merger agreement” (emphasis in original). Thus, the court said, the plaintiffs failed to identify any part of the statements made by the company that were rendered materially misleading by the failure to disclose merger negotiations.

    The district court’s conclusion that the plaintiff’s pleadings had failed to meet the particularity requirements for pleadings involving allegations of material omissions under the Private Securities Litigation Reform Act of 1995 was not addressed by the Second Circuit.