Friday, August 21, 2020

Court rejects argument that proxy statement should have been more optimistic

By Rodney F. Tonkovic, J.D.

A Fifth Circuit panel affirmed the dismissal of a challenge to a company's proxy statement that a shareholder argued was too pessimistic. The shareholder did not contest the accuracy of any of the statements in the proxy, but argued that it omitted pieces of information that would have painted a rosier picture of the company's growth potential. The omitted information, however, concerned what the court called "prophecy" and "rank speculation" about a future rise in oil prices. Since there is no obligation for companies to include projections based on assumptions about future price trends, the shareholder had no viable claims (Heinze v. Tesco Corporation, August 19, 2020, Owen, P.)

Tesco Corporation provided well-related services for the energy industry. In July 2017, a drilling company proposed to acquire Tesco and, after negotiations, Tesco's acceptance of the offer was announced to the public in August. Tesco filed its final proxy statement on October 26, 2017 and, at a special meeting, Tesco's shareholders approved the transaction by majority vote.

The plaintiff shareholder brought this action alleging violations of the Exchange Act's proxy provisions. According to the complaint, Tesco, it's board, and the acquiring company made omissions in the proxy statement that rendered it misleading. The district court dismissed all claims.

Proxy claims. The complaint first took issue with a statement that Tesco shareholders would receive a "significant" premium (19 percent) over the closing price on the last day before the transaction's announcement. The shareholder did not dispute the accuracy of the calculation but took issue with the description of the premium as "significant." The court made short work of this allegation, stating that a reasonable shareholder would have assessed the significance of the premium by its quantity. The use of the adjective "significant" was immaterial, and the court found that this claim was not plausible.

Projections. The shareholder next pointed to a table in the proxy statement containing Tesco's projections for revenue and EBITDA in 2017 and 2018. The plaintiff argued here that the projections were rendered misleading by four sets of omissions: 1) projections of unlevered free cash flows; 2) projections for 2019 and beyond; 3) implied per share equity value ranges for the "growth case" projection; and 4) details of a transactions analysis. The plaintiff conceded that the projections were accurate but argued that the alleged omissions left Tesco shareholders with a too-pessimistic view of the company's future growth potential because they left out, among other factors, industry expectations of a sharp rise in oil prices; the court remarked that the only allegation in support of this claim was the plaintiff's "prophecy" that oil prices would rise in 2019-2022. Under Fifth Circuit case law, a company has no obligation to provide existing information about commodity price trends and certainly has no obligation to speculate about future trends, the court said.

Another fundamental problem with the claims based on projections, the court continued, was that they were protected by the PSLRA safe harbor. The only forward-looking statement in the proxy was a table containing Tesco's revenue and EBITDA projections, which were expressly labelled as "forecasts" and "projections" and were followed by cautionary language and warnings. The projections thus fell within the safe harbor.

The shareholder then took issue with Tesco's financial advisor's fairness opinion, which, he asserted, should have included his "prophecy" of rising oil prices. The court rejected this argument for the same reason that it rejected it respecting the projections. The court finally concluded that amendment would be futile and accordingly affirmed the judgment of the district court.

The case is No. 19-20298.