United States District Court, E.D. Virginia, Richmond Division
ANDREW MALON, individually and on behalf of all others similarly situated, Plaintiff,
FRANKLIN FINANCIAL CORPORATION, et al., Defendants.
(DENYING PLAINTIFF'S MOTION FOR TEMPORARY RESTRAINING ORDER OR EXPEDITED
HENRY E. HUDSON, District Judge.
This is a putative class action filed by a single minority stockholder, Plaintiff Andrew Mahan ("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,  contending that Franklin's proxy statement is misleading.
The case is presently before the Court on Plaintiff's 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. After the Court partially granted Plaintiff's 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 Defendants 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 Plaintiff's request for injunctive relief, some backstory 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.) Plaintiff also alleges that the merger agreement undervalues Franklin's stock. ( Id. at 6.) Finally, in Plaintiff's view, the 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 ¶ 4.) The proposed transaction is expected to close January 2, 2015. (Aff. of Richard T. Wheeler, Jr. ¶ 6 ("Wheeler Aff."), ECF No. 51-1.) As of November 25, 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 Plaintiff's 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 collar provision. In his Amended Complaint, Plaintiff alleges 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 per share on September 30, 2014." (Am. Compl. ¶ 6.) Additionally, Plaintiff points out that "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. at ¶ 9.) The net effect, according to Plaintiff, was to bring "the aggregate value of the deal down to $216 million" from the initial valuation of $275 million. ( Id. ) In Plaintiff's view, given the reduction in stock value, the proposed consideration is inadequate. ( Id. at ¶ 10.)
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. at ¶ 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 merger process. 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, Plaintiff seeks 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 relief are 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 plaintiff seeking a preliminary injunction must establish that he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence of preliminary 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. of Statesville v. Seilig Manufacturing Co., 550 F.2d. 189, 195 (4th Cir. 1977). If the balance of hardship tips in Plaintiff's favor, the court then turns to plaintiff's 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 ¶ 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 Plaintiff's 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 Assn 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 Plaintiff's favor.
In evaluating a motion for preliminary injunction, this Court must weigh all considerations articulated in Winter. But as the Supreme Court also cautioned in Winter, a preliminary injunction "may only be awarded upon a clear showing that the plaintiff is 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 ...