Malon v. Franklin Financial Corporation et al
Filing
54
MEMORANDUM OPINION. Signed by District Judge Henry E. Hudson on 12/2/2014. (jsmi, )
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF VIRGINIA
Richmond Division
ANDREW MALON, individually and
on behalf of all others similarly situated,
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Plaintiff,
v.
FRANKLIN FINANCIAL
CORPORATION, etal.,
Defendants.
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Civil Action No. 3:14CV671-HEH
MEMORANDUM OPINION
(Denying Plaintiffs Motion for Temporary Restraining Order
or Expedited Preliminary Injunction)
This is a putative class action filed by a single minority stockholder, Plaintiff
Andrew Malon ("Plaintiff), alleging violations of federal securities law and related state
law claims. The underlying controversy evolves from the negotiation of a merger
agreement between two Virginia-based financial institutions. Plaintiff now seeks to
enjoin a vote by Franklin Financial Corporation's ("Franklin") stockholders on its
proposed merger with TowneBank,1 contending that Franklin's proxy statement is
misleading.
The case is presently before the Court on Plaintiffs Motion for Temporary
Restraining Order or Expedited Preliminary Injunction (ECF No. 38), filed November 19,
2014—approximately 100 days after the proposed merger was publically announced.
1Franklin Financial Corporation is a Henrico County based Virginia corporation which operates
as the holding company for Franklin Federal Savings Bank. TowneBank is headquartered in
Portsmouth, Virginia.
After the Court partially granted Plaintiffs Motion to Expedite Discovery and
Proceedings, enabling limited discovery, both parties filed detailed memoranda of law,
accompanied by exhibits, supporting their respective positions on the motion for
injunctive relief. After affording Defendants2 a reasonable opportunity to file responsive
pleadings, the Court heard oral argument on December 1,2014. This opinion hastily
followed.
To provide context to evaluate Plaintiffs request for injunctive relief, some back-
story is necessary. The epicenter of the underlying controversy is the content and
adequacy of the Schedule 14A Definitive Proxy Statement (the "Proxy") filed by
Franklin with the Securities and Exchange Commission ("SEC") preceding a scheduled
stockholder vote. In essence, the plaintiff-stockholder maintains, in pertinent part, that
the Proxy, which is approximately 200 pages in length, with over 100 pages detailing the
mechanics of the proposed merger transaction, is misleading and incomplete. Plaintiff
contends that "the Proxy provides stockholders with materially misleading information
and fails to disclose material information critical to stockholders' ability to make an
informed decision on whether to vote in favor of the Merger." (PL's Mem. Support of
Prelim. Inj. 8 (PL's Mem. Support"), ECF No. 39.) Plaintiffalso alleges that the merger
agreement undervalues Franklin's stock. (Id. at 6.) Finally, in Plaintiffs view, the
2The remaining defendants in this matter are Franklin Financial Corporation, Franklin Federal
Savings Bank, and Richard T. Wheeler, Jr., HughT. Harrison, II, Warren A. Mackey, Elizabeth
W. Robertson, George L. Scott, Richard W. Wiltshire, Jr., and Percy Wootton, as officers and
directors of Franklin. This Court dismissed TowneBank as a defendant by Order entered
November 24, 2014 (ECF No. 49).
judgment of the Franklin Board of Directors (the "Franklin Board" or "Board"), as well
as its financial advisor, was infected with conflicts of interest. (Id. at 5.)
The immediate focal point of this case is a merger agreement, entered into on July
14, 2014, facilitating the proposed acquisition of Franklin by TowneBank. The
anticipated $275 million transaction was publically announced on July 15, 2014. Under
the terms of the contemplated merger, TowneBank would acquire all the outstanding
shares of Franklin in a stock-for-stock transaction as valued on the date the deal closed.
(Am. Compl. ^ 3, ECF No. 17.) If consummated, Franklin stockholders will receive
1.400 shares of TowneBank stock for each share of Franklin stock that they own.
Defendants valued the proposed transaction at $275 million in total, or $23.04 per
Franklin share based on the closing price of TowneBank on the last trading date before
the announcement of the proposed transaction. (Id.) The value of both Franklin and
TowneBank stock has fluctuated in the interim.
Franklin filed its Schedule 14A Definitive Proxy Statement with the SEC on
October 24, 2014, after filing its Preliminary Proxy Statement with similar content on
September 17, 2014. The Franklin stockholder vote on the proposed merger is scheduled
for December 3, 2014 at 11:00 a.m. (Id. at % The proposed transaction is expected to
4.)
close January 2, 2015. (Aff. of Richard T. Wheeler, Jr. f 6 ("Wheeler Aff."), ECF No.
51-1.) As of November25, 2014, 62% of Franklin's shareholders have already cast their
votes, with 99% favoring the merger. (Id. at ^ 24.) No other stockholder has expressed
concerns about the sufficiency of the Proxy. (Id.)
While Plaintiffs request for injunctive relief centers on the adequacy of the Proxy,
Plaintiff also maintains that the Franklin Board had conflicts of interest and breached
their fiduciary duties in failing to include a provision in the agreement to lock-in the
value of Franklin stock between the date of the merger agreement and the closing date—a
so-called collarprovision. In his Amended Complaint, Plaintiffalleges that "Franklin's
stock traded at a high of $24.60 per share on July 2, 2014,just before the announcement
of the proposed transaction. Since the deal was announced, Franklin's stock has steadily
declined - trading at a low of $18.52 pershare on September 30, 2014." (Am. Compl. 1
6.) Additionally, Plaintiff points outthat "since the announcement of the Proposed
Transaction, TowneBank's stock price has tumbled - from a closing price of $16.64 per
share on July 14, 2014 to its 52-week low of $12.93 per share on September 8,2014."
(Id. atU9.) The net effect, according to Plaintiff, was to bring "the aggregate value ofthe
deal down to $216 million" from the initial valuation of $275 million. (Id.) In Plaintiffs
view, given the reduction in stock value, the proposed consideration is inadequate. (Id. at
110.)
Plaintiff also takes issue with several elements of the merger agreement designed
to limit "other bidders from making a successful competing offer for the company." (Id.
at1 11.) According to Plaintiff, these protective measures (1) precluded Franklin from
soliciting other potential acquirers during the course of negotiations; (2) required
notification of TowneBank of any unsolicited bona fide proposals; and (3) allowed
TowneBank to provide a matching competing proposal in the event of an unsolicited
offer from another entity. (Id.) Plaintiff also implies that the Board and executive
officers of Franklin breached their fiduciary duties by agreeing to vote their shares in
favor of the proposed transaction. (Id. at ^ 12.) He infers that these provisions, which are
apparently common in merger agreements, are not in the stockholders' best interest.
With respect to the Proxy, which Plaintiff maintains is misleading and omits
information critical to the exercise of reasoned judgment by a voting stockholder, he
focuses on four general areas. These include the failure of management to disclose the
details of several financial forecasts relied upon in the Board's decision to enter into the
merger agreement, alleged conflicts of interest on the part of Franklin's financial advisor,
the omission of material information used in the financial advisor's Pro Forma Financial
Impact, Selected Companies, and Selected Transactions Analyses, and the failure to
include other details of the mergerprocess. On close review of the Amended Complaint,
Plaintiff does not contend that the Proxy fails to mention any of these alleged
deficiencies. Instead, Plaintiff contends that a reasonable stockholder reviewing a nearly
200-page proxy statement would need more detailed amplification of these areas to make
an informed decision. In his view, the failure to provide such exhaustive detail renders
the disclosures misleading. Accordingly, Plaintiffseeks to enjoin the stockholders' vote
until such information is disclosed. At this time, no other stockholder has stepped
forward to join this litigation.
Motions for preliminary injunctive reliefare reviewed under the well-established
standard restated succinctly by the United States Supreme Court in Winter v. Natural
Resources Defense Council, Inc., 555 U.S. 7 (2008). "A plaintiffseeking a preliminary
injunction must establish that he is likely to succeed on the merits, that he is likely to
5
suffer irreparable harm in the absence ofpreliminary relief, that the balance of equities
tip in his favor, and that an injunction is in the public's best interest." Id. at 20. In
writing for the Court in Winter, Chief Justice Roberts noted that, "[a] preliminary
injunction is an extraordinary remedy never awarded as of right
In exercising their
sound discretion, courts of equity should pay particular regard for the public
consequences in employing the extraordinary remedy of injunction." Id. at 24 (quoting
Weinberger v. Romero-Barcello, 456 U.S. 305, 312 (1982)).
The analytical framework for applying the teachings of Winter was clearly
articulated by the United States Court of Appeals for the Fourth Circuit in Real Truth
About Obama, Inc. v. Federal Election Commission, 575 F.3d. 342, 346-47 (4th Cir.
2009), vacated on other grounds, 130 S. Ct. 2371 (2010). The Fourth Circuit instructed
trial courts to employ the"balance-of-hardship test." "The first step in a Rule 65(a)
preliminary injunction situation is for the court to balance the 'likelihood' of irreparable
harm to the plaintiff against the 'likelihood' of harm to the defendant." Blackwelder
Furniture Co. ofStatesville v. Seilig Manufacturing Co., 550 F.2d. 189, 195 (4th Cir.
1977). If the balance of hardship tips in Plaintiffs favor, the court then turns to
plaintiffs likelihood of succeeding on the merits. Id.
Obviously, postponing the shareholder vote would entail significant hardship to
Franklin, which has undoubtedly expended considerable money and time to arrange the
process. If Franklin is required to file and distribute a supplemental proxy, it will incur
additional expenses and attorneys' fees to appease a single shareholder with only a
.0000276% interest. (Wheeler Aff. ^ 20.) The merger with TowneBank is the only
viable pending offer on the table. (Id. at 1 8.) There is no assurance in a fluctuating
market that the opportunity will remain available on the terms negotiated. This hardship
is significantly aggravated by Plaintiffs delay in filing his motion seeking a preliminary
injunction—fourteen days before the appointed date for the shareholder vote and twelve
days before a hearing could be scheduled, with the intervening Thanksgiving holiday.
Those seeking equity should do so with haste and dispatch. Quince Orchard Valley
Citizens Ass 'n v. Hodel, 872 F.2d. 75, 80 (4th Cir. 1989). Plaintiff has not done so.
Even though Plaintiff has failed to particularize the harm he will suffer, it is true
stockholders theoretically face irreparable harm when they are required to make
important voting decisions on the basis of inadequate proxy disclosures. In re Netsmart
Techs., Inc. Shareholder Litigation, 924 A.2d 171, 207 (Del. Ch. 2007). However, in the
immediate case, the Court is not confronted with a group of stockholders—only a single
disgruntled stockholder with a de minimis ownership interest. Plaintiff has no warrant to
cast his claim as one on behalf of all the stockholders; therefore, the Court is not
persuaded that the balance of hardship tips clearly in Plaintiffs favor.
In evaluating a motion for preliminary injunction, this Court must weigh all
considerations articulated in Winter.A Butas the Supreme Court also cautioned in Winter,
a preliminary injunction "may only be awarded upon a clear showing that the plaintiff is
3Given the fractional interest owned by Plaintiff, 373 out of 11,776,750 outstanding shares, a
compelling argument could be made that he has an adequate remedy at law foreclosing
injunctive relief. See Hughes Network Sys. v. Interdigital Commc 'n Corp., 17 F.3d 691, 699 (4th
Cir. 1994).
4The adequacy ofthe Proxy is measured by Section 14A ofthe Securities Exchange Act and the
Rules promulgated thereunder. 17 CFR 240.14A-9; 15 U.S.C. §§ 78n, 78t, 78u. The decision
making process ofthe Franklin Board is governed by the Virginia Stock Corporation Act. Va.
Code§ 13.1-691, eiseq.
entitled to such relief." 555 U.S. at 22; see also Dewhurst v. Century Aluminum Co., 649
F.3d 297, 290 (4th Cir. 2011). This standard applies to both the likelihood of suffering
irreparable harm and the likelihood of prevailing on the merits at trial. League of Women
Voters N.C. v. North Carolina, 769 F.3d 224, 250 (4th Cir. 2014). After reviewing the
pleadings and hearing the argument of counsel, the Court is of the opinion that Plaintiff
has failed to demonstrate a clear showing that he is likely to succeed on the merits or
suffer irreparable harm. Even though Plaintiff trips on the first hurdle, out of an
abundance of caution, the Court will explain its assessment of the merits.
In the Commonwealth of Virginia, the fidelity with which a corporate director
discharges his or her duties is not measured by "what a reasonable person would do in
similar circumstances or by the rationality of the ultimate decision. Instead, a director
must act in accordance with his/her good faith business judgment of what is in the best
interest of the corporation." Willard v. Moneta Bldg. Supply Inc., et ai, 258 Va. 140, 151
(1999).5 The standard by which a director is to discharge his orher duties is delineated in
Virginia Code § 13.1-690(A). If a director acts in accordance with that standard, Virginia
Code § 13.1-690(C) provides a "safe harbor" that shields a director from liability for any
action taken as a director, and for failure to take action. Commonwealth Transp. Comm 'r
v. Matyiko, 253 Va. 1, 6 (1997). Employing this standard, the Supreme Court of Virginia
has held that section 13.1-690 does not require a director to maximize profits by
accepting the highest bid when selling the assets of a corporation. Willard, 258 Va. at
5Since theanalysis of Plaintiffs substantive state law claims at this stage is limited to a strength
assessment weighing his entitlement to preliminary injunctive relief, the Court will assume that
Plaintiff has standing—at this stage only—as to those counts.
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150. The wisdom of the Board's action is contextually viewed with all aspects of the
deal factored into the equation.
The record evidence at this stage does not demonstrate that the Franklin Board
failed to engage in an informed decision-making process or cast sage judgment into the
wind. The Proxy details various meetings, both formal and informal between 2012 and
2014, of the Board and its chief operating officer ("CEO"), regarding a potential sale of
Franklin after the expiration of the three-year post-mutual-to-stock conversion period.
(Proxy 47-51.) The Board held at least four formal strategic planning meetings in 2012
and 2013 at which Franklin's financial advisors and legal counsel reviewed available
options with the Board members. (Id. at 27.) Once the Board began entertaining the
possibility of a merger in 2013, Franklin representatives began meeting with financial
advisors regarding Franklin's valuation, projections, performance trends, strategic
options, and the national and Southeast markets for merger and acquisition transactions.
(Proxy 48.)
Additionally, "[djuring 2013 and 2014, Franklin's CEO met informally with the
chief executive officers of four financial institutions, each of whom expressed interest in
talking more formally with Franklin should it decide to pursue a sale," and between
January and April of 2014, he had similar discussions with officers of six institutions. (Id.
at 47—48). In April 2014, the Board formally engaged a financial advisor and formed a
merger committee. (Id. at 48.) Franklin collaborated with its financial advisor to identify
qualified financial institutions likely to have an interest in a potential merger with
Franklin. (Id) Franklin's financial advisor met with seven such institutions, including
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TowneBank. (Id. at 49.) Following these discussions, the Board held a series of
meetings to discuss potential opportunities. (Id. at 49-50.)
On June 30, 2014, the Franklin Board, along with its legal and financial advisors,
met to discuss all potential merger options, including TowneBank's offer of an all-stock
transaction with a proposed fixed exchange ratio of 1.375. The Board extensively
discussed the efficacy of each offer, and also considered whether it was in Franklin's best
interest to proceed independently. After further negotiations and careful deliberation, the
Board requested that TowneBank revise its offer to include an exchange ratio of 1.400.
When they complied, the Board decided that it was in Franklin's best interest to negotiate
exclusively with TowneBank. While Plaintiff may deem the transaction more desirable if
it yielded a greater return on his money, this Court concludes that the Franklin Board's
recommendation of the merger agreement appears to be a defensible business decision
premised on their good faith perception ofthe best interests of the corporation. The
Proxy presents the reasoning underlying the decision ofthe Boards of Directors of both
Franklin and TowneBank to approve the merger, as well as a thorough assessment of the
risk factors associated with that decision. (Id. at 51-54). Furthermore, the consideration
offered to the Franklin stockholders by TowneBank—1.400 shares of TowneBank
common stock per share of Franklin common stock—is fully disclosed in the Proxy, and
the per-share value of the shares of each corporation is a matter of public information.
Thus, it appears the stockholders have all the information necessary to cast an informed
6 Franklin trades on the NASDAQ Global Select Market under the symbol FRNK. (Wheeler
Aff. H5.) TowneBank is listed on the NASDAQ Russell 300 Index under the symbol TOWN.
(Aff. of G. RobertAston, Jr. ("Aston Aff."), Ex. A at 1, ECFNo. 51-3.)
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vote, and Plaintiffs claims that the Franklin Board breached their fiduciary duties appear
unlikely to succeed on the merits.
Plaintiffs suggestion that the judgment of the Franklin Board was tainted by
conflicts of interest appears to stand on equally tenuous footing. The fact that Board
members will receive a number of post-merger benefits, such as cash payments for vested
and unvested stock options and director appointments, is disclosed in the Proxy. (Proxy
74-77.) Most such compensation benefits were pre-existing contractual obligations
affected by the merger. (Wheeler Aff. H19.) The Proxy includes a section entitled,
"Interests of Certain Franklin Directors and Executive Officers in the Merger," which
spans over four pages disclosing such individuals' interests, and their consideration of
those interests, in approving and recommending the merger. (Proxy 74-77.) For
instance, the Proxy indicates that upon consummation of the merger, TowneBank will
establish the TowneBank Richmond Board, to which Franklin's current CEO and
potentially other Franklin Board members will be appointed. (Id. at 75.) Additionally,
the Proxy details the precise amounts Franklin's executive officers will receive in
severance benefits and "Golden Parachute Compensation," along with the formula which
will be used for converting the stock options of certain employees, officers and directors.
(Id. at 75-76.) The number of common shares beneficially owned by each Franklin
director and executive officer is also disclosed. (Id. at 107.) These benefits do not
appear atypical of a transaction of this type and the disclosure in the Proxy appears
sufficient to place voting stockholders on notice of any potential conflicts of interest.
Consequently, it is unlikely on the record evidence that Plaintiff could elevate this
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suggested impropriety to an actionable breach of any fiduciary duty or Exchange Act
claim.
Turning next to the allegedly material omissions from the Proxy,7 it is important at
this threshold to tease out information critical to an informed decision by a stockholder
from that which would simply be nice to know. A misrepresentation or omission is
material if there is "a substantial likelihood that the disclosure of the omitted fact would
have been viewed by a reasonable investor as having significantly altered the total mix of
information made available." TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449
(1976). "To prevail in a private cause of action asserting a violation of Rule 14a-9, a
plaintiff must show that(1) the proxy statement contained a material misrepresentation or
omission; (2) that caused the plaintiff injury; and that (3) the proxy solicitation was an
essential link in the accomplishment of the transaction." Haynes v. Crown Cent. LLC, 78
F. App'x 857, 861 (4th Cir. 2003) (citing Gen. Elec. Corp. v. Cathcart, 980 F.2d 927, 932
(3d Cir. 1992)).
The first category of information purportedly omitted from the Proxy involves
financial forecasts and projections prepared by Franklin management personnel.
Although the Proxy includes management-prepared projections of net interest income,
total non-interest income, total non-interest expenses, provision for loan losses, and net
7Section 14(a) of the Exchange Act makes unlawful the solicitation of a proxy, by way of
interstate commerce, in contravention of the rules and regulations prescribed by the SEC. 15
U.S.C. § 78n(a). SEC Rule 14a-9 provides that a proxy statement shall not contain "any
statement which, at the time and in the light of the circumstances under which it is made, is false
or misleading with respect to any material fact, or which omits to state any material fact
necessary in order to make the statements therein not false or misleading." 17 C.F.R. § 240.14a9. Pursuant to Section 20(a) of the Exchange Act, controlling personsmay be held liable for
violations Section 14(a) and Rule 14a-9. 15 U.S.C. § 78t.
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income, Plaintiff faults the Proxy's omission of projected unlevered free cash flows,
projected total asset balances, and projected earnings per share ("EPS") multiples—
concepts probably foreign to the average stockholder. Plaintiff contends that such
information is essential for stockholders to accurately gauge the value of their shares and
weigh the wisdom of Franklin's financial advisor. Courts have consistently held that the
duty of disclosure does not extend to the provision of information so extensive and
detailed as to permit stockholders to make an independent determination of fair value or
recreate the analysis of a financial advisor. As the Supreme Court of Delaware noted in
Skeen v. Jo-Ann Stores, Inc., "[ojmitted facts are not material simply because they might
be helpful [and shareholders are not entitled to demand]... all the financial data they
would need if they were making an independent determination of fair value." 750 A.2d
1170, 1174 (Del. 2000).
With respect to Franklin's unlevered free cash flows, Plaintiff complains that
because Franklin's financial advisor relied uponthose figures in performing a discounted
cash flow ("DCF") analysis, omission of those figures is material. Although the Supreme
Court of Virginia has never addressed this issue directly, under Delaware law, which
Plaintiff urges this Court to follow, stockholders are entitled to no more than a fair
summary ofthe financial advisor's work. See In re Pure Resources, Inc., Shareholders
Litigation, 808 A.2d 421,450 (Del. Ch. 2002); see also In re Checkfree, 2007 WL
3262188 (Del. Ch. 2007). Here, the Proxy statement includes the entire fairness opinion
rendered by Franklin's financial advisor (Proxy, App'x C), as well as the opinion
rendered by TowneBank's financial advisor. (Proxy, App'x B.) While it appears to the
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Court that the Proxy itself provides, as required, a fair summary of the analysis of
Franklin's financial advisor, inclusion of the financial advisor's full fairness opinion
would cure any deficiency that may exist.
As for the projected total asset balances, Plaintiff argues that disclosing the
projected net income without the projected total assets paints an unduly pessimistic
financial picture. Plaintiff argues that omission of projected total assets skews the
significance of projected net income; and thus, omission of this estimate renders the
proxy misleading. But as the name implies, projected data isper se, an estimate.
Plaintiffprovides no indication of how this alleged undue pessimism as to a single data
point renders the entire Proxy materially misleading. Once again, shareholders are
entitled to no more than a fair summary of the financial advisor's work. Skeen, 750 A.2d
at 1174; Gottlieb v. Willis, 2012 WL 5439274, at *6 (D. Minn. 2012).
Next, Plaintiff faults the Proxy for not containing projected stock price to EPS
multiples for 2014 and 2015. The Proxy discloses the ratio for the last twelve months
("LTM"), but omits the same projection for 2014 and 2015, which Plaintiff contends
were available to the financial advisors for both Franklin and TowneBank. The EPS
projections for 2014 and 2015, according to Plaintiff, were considered by Franklin's
financial advisor in its fairness analysis, and so the stock price to EPS multiples could
have been included in the Proxy. Plaintiff concludes, "the EPS projections are material to
a stockholder's evaluation of the financial fairness of the Merger and should have been
disclosed in the Proxy." (PL's Mem. Support 13.) While such information may have
provided some insight into the fairness calculus used bythe financial advisor, it falls far
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short of necessary to enable the stockholders to make an informed decision. It appears
the Franklin stockholders were provided with a fair summary of the data underlying the
conclusion of Franklin's financial advisor, in addition to the entirety of that advisor's
fairness opinion. Stockholders are not entitled to the extensive financial data necessary to
recreate the financial advisor's determination of fair value. This Court is not convinced
that Plaintiff could clearly demonstrate that the financial forecasts presented in the Proxy
are false, misleading, or omit material facts, or that Franklin's decision to include
mathematically certain figures rather than future estimates renders the proxy misleading.8
Turning next to the Pro Forma Financial Impact Analysis prepared by Franklin's
financial advisor, Plaintiffs expert opines that the Proxy's summary of the analysis is
misleading "by failing to disclose certain unduly pessimistic assumptions used by [the
financial advisor]." (PL's Mem. Support 17.) Plaintiff maintains that given Franklin's
reduced credit mark, a "reasonable stockholder may consider these [] assumptions in light
of Franklin's improved circumstances, and draw the conclusion that the Pro Forma
8Plaintiff also criticizes other aspects of thefairness analysis prepared by Franklin's financial
advisor—namely, theSelected Companies and Selected Transaction analyses. (Proxy 68-72.)
His expert points to discrepancies in financial datain the financial advisor's analysis and
information contained in Franklin's historical financial statements without further explanation.
The expert also impugns the valuation analysis methodology employed by Franklin's financial
analyst. Onpages 68 through 73 of the Proxy, Franklin's financial advisor compares financial
information pertaining to Franklin with thirty-three (33) other financial institutions and
TowneBank with eleven (11) other similar banking organizations. In its analysis, the financial
advisor focuses on minimum, average, medium, and maximum figures. Plaintiffs expert
maintains that those data points disclosed by Franklin's financial advisor are inadequate and all
of thefigures corresponding to each company and transaction analyzed should be included.
However, much of the financial information utilized, as well as most if not all the underlying
data, appears to be publically available. Moreover, while the additional data points suggested by
Plaintiffs expert may be of value to a financial analyst, it is doubtful they would inform the
decision of a reasonable shareholder.
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Financial Impact Analysis actually supports the financial unfairness of the Merger
Consideration offered in the Merger." (Id. at 17-18) (emphasis in original). Aside from
the speculative nature of Plaintiffs expert's conclusions, any possible misconception on a
stockholder's part would be allayed by referring to the financial advisor's report itself-—
which is appended to the Proxy.
It is also important to keep in mind in assessing the weight to be given to
assumptions and projections that they are—as the label implies—no more than
assumptions and projections—not concrete facts. Their accuracy is predicated on
uncertain future events, as opposed to current facts. While there appears to be
disagreement among the federal circuits as to the disclosure of financial projections, there
appears to be a consensus that current data that is mathematically certain should be given
more weight than projections. Of course in disclosing any estimate, material underlying
facts that may affect the accuracy of the projection must be disclosed. But due to the
uncertainty associated with future projections, their disclosure is often considered
misleading and their omission is rarely considered material in proxy statements. Walker
v. Action Indus., 802 F.2d 703, 709 (4th Cir. 1986).
On another front, Plaintiff contends that the Proxy fails to fully disclose what
Plaintiff perceives to be a potential conflict of interest on the part of Franklin's financial
advisor. Plaintiff asserts that:
The Proxy misleadingly states that [Franklin's financial advisor] will
collect "a total cash fee of approximately 1% of the aggregate merger
consideration, of which a portion became payable to [Franklin's financial
advisor] upon the rendering of the opinion, and the majority of which is
contingent upon the consummation of the merger." (Proxy at 74.)
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However, this disclosure is materially incomplete and misleading as a
reasonable investor may assume that the amount of [Franklin's financial
advisor's] contingent fees are merely 51% of its aggregate fees, when in
fact, the contingent amount is actually much higher.
(PL's Mem. Support 13-14.)
A potential erroneous assumption by a stockholder is not the equivalent of a
material false statement or omission. It appears to be the prevailing view that a proxy
need only disclose that a financial advisor's fees are contingent. Centy. of York Emps.
Ret. Plan v. Merrill Lynch & Co., 2008 WL 4824053, at *11 (Del. Ch. October 28, 2008);
see also Gottlieb, 2012 WL 5439274, at *6 (D. Minn. 2012). Delaware courts, which
again Plaintiff urges this Court to follow, have "held that the precise amount of
consideration need not be disclosed, and that simply stating that the advisor's fees are
partially contingent on the consummation of a transaction is appropriate." Centy. of York,
2008 WL 4824053 at *11. Although the Proxy does not provide the level of detail
Plaintiffbelieves to be appropriate, it does provide the stockholder with a mathematical
methodology to approximate the financial advisor's compensation: a total cash fee of
approximately one percent (1%) of the aggregate merger consideration. (Proxy 74.) In
fact, the cover letteraccompanying the Proxy approximates the financial advisor's fee to
be roughly $2.6 million, substantially all of which is contingent on the deal closing. This
amount, of course, is dependent upon the value of TowneBank's stock at the time the
merger is consummated, but the disclosure is sufficient to allow a reasonable stockholder
to assess the potential conflicts of interest that could impact the financial advisor's
opinion.
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Plaintiff identifies a number of other alleged deficiencies in the Proxy relating to
details of the negotiation process and the Board's deliberations. Specifically, Plaintiff
contends that Franklin should have explained in the Proxy (1) why it failed to negotiate a
collar provision insulating Franklin's stock from value reduction pending closure of the
transaction; (2) why TowneBank reduced its initial offer after additional on-site due
diligence; and (3) why the Proxy doesn't explain what banks Franklin targeted as
potential buyers and why those banks did not follow up, as well as the identities of those
institutions whose offers the Board chose not to pursue.
Perhaps in hindsight, a collar provision could have been beneficial, but as
discussed above, the Franklin Board had no duty under Virginia law to maximize the
price in connection with the merger. Their statutory responsibility was to exercise good
faith business judgment. Just as Plaintiffmay speculate that the Franklin Board never
considered a collar provision,9 it is equally plausible that had Franklin demanded a collar
provision, TowneBank may have altered otherterms of the deal in a manner less
favorable to Franklin stockholders. With only a single merger offer, Franklin's
negotiating strength was limited. Furthermore, the fluctuation in the share prices of
Franklin and TowneBank stock between the date of the merger agreement and the closing
date of the deal is a matter of public record. Armed with this information, an informed
shareholder has the option of voting against the merger if he or she believes the
9Plaintiff refers to the minutes of only two meetings of the Franklin Board in support of his
argument that Franklin failed to negotiate for a collarprovision. This evidence is insufficient,
and borders on disingenuous, to conclude that the Franklin Board failed to consider a collar
provision at any point throughout, what appear to the Court to be, extensive negotiations of the
terms of the proposed merger.
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consideration offered is inadequate. So far, only one percent (1%) has voted to reject the
offer. (Wheeler Aff. U24.)
Plaintiffs argument that the Proxy should disclose why TowneBank reduced its
initial offer and what other banks were targeted by Franklin as potential buyers, pushes
Plaintiffs perception of Proxy requirements beyond the outer limits. Neither relevant
case law nor logic would necessitate that a proxy statement delve into such a subjective
and conjectural realm. Simply because Franklin and its financial advisor identified an
institution as a potential buyer, does not mean that institution had any actual interest. The
identification in the Proxy of other banks Franklin targeted as potential buyers who
expressed no interest is immaterial under any reasonable standard of measure.
Finally, Plaintifffinds fault with the failure of Franklin to disclose in the Proxy—
or to advise stockholders—that the Virginian-Pilot, a newspaper of general circulation in
Virginia's Tidewater region, had reported an investigation into potential conflicts of
interest and the resignation of some TowneBank directors. Assuming that such
information was material, Franklin would have no obligation to address it in the Proxy
statement. Franklin's responsibility is to disclose information that is not otherwise
available in the public domain. Hillson Partners Ltd. P'Ship, 42 F.3d at 212 (citing
Sailor v. Northern States Power Co., 4 F.3d 610, 613 (8th Cir. 1993)). Furthermore,
disclosure of such unsubstantiated allegations is not required, as "[w]ide authority
10 The Proxy does describe another company, "Company A," that tendered an initial indication of
interest in merging with Franklin. Company A's proposal was delivered to Franklin almost a
month past Franklin's requested deadline. The Proxy discloses existence of that offer and
enough detail for the reasonable stockholder to recognize that Company A's proposal was of a
different character than TowneBank's proposal. (Proxy 49). Its rejection was well within the
Board's discretion.
19
establishes that while pending litigation may be material under certain circumstances, the
mere possibility of litigation is not." Gen. Elec, 980 F.2d at 935. The Proxy discloses
all pending litigation—specifically, this suit—that may affect the merger. Id. at 936.
In the final analysis, Plaintiffs request for injunctive relief fails to clearly
demonstrate the requisite entitlement to such extraordinary remedy. Initially, Plaintiff
urges this Court to adopt a disclosure requirement that is both unrealistic and beyond the
grasp of even well-educated investors. While prevailing standards assume some
sophistication on the part of the reasonable stockholder, Plaintiffelevates useful
information to the stature of essential to an informed decision. Despite Plaintiffs
insistence to the contrary, he identifies no information contained in the Proxy that is
materially misleading, or any omitted facts that are truly material." Mere relevance is
insufficient to trigger a duty to disclose. An omitted fact is material if there is a
substantial likelihood a reasonable shareholder would consider it important in deciding
how to vote. TSCIndus., 426 U.S. at 449. This is not the sort of situation where
stockholders have only a banker's unadorned opinion of the deal and the market price of
the stock tojudge the adequacy of the proposed merger. Here, Franklin stockholders
have approximately 200 pages of detailed financial data on which to base their decision.
The minutia Plaintiff contends should have been disclosed in the Proxy seems too
abstract to enlighten the typical stockholder. See Roberts v. Gen. Instrument Corp., C.A.
No. 11639, 1990 Del.Ch. LEXIS, at *36 (Del. Ch. Aug. 13, 1990). This Court is,
11 Conspicuously absent from the record is an affidavit by Plaintiffexplaining how the alleged
omitted disclosures would inform his vote, that he has personally read the Proxy, and that he has
a fundamental understanding of the technical concepts about which he seeks further information.
20
therefore, of the opinion that Plaintiff has failed, as well, to make a clear showing that he
is likely to succeed on the merits.
Having found that Plaintiff is unable to demonstrate either a clear showing of
irreparable harm or a likelihood of prevailing on the merits, Plaintiffs Motion for
Temporary Restraining Order or Expedited Preliminary Injunction will be denied. An
appropriate Order will accompany this Memorandum Opinion.
&tl
/s/
Henry E. Hudson
United States District Judge
DatelW^^/y
Richmond, Virginia
21
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