Shareholders Denied Suit After Losing Merger - Securities Exchange Act §14(a)

The Ninth Circuit has recently affirmed the district court’s dismissal of In Re Diamond Foods, Inc. Derivative Litigation (2012 WL 1945814). The shareholders claimed that Diamond Foods false proxy statements violated §14(a) of the Securities Exchange Act, resulted in the collapse of a proposed merger, and injured them.  The Ninth Circuit affirmed dismissal for lack of subject matter jurisdiction. A few years prior, Diamond Foods entered into an agreement to merge with P&G’s Pringle Company; this move would make Diamond Foods the second largest snack company in the United States. Prior to the planned merger, in 2011, Diamond Foods made significant expenditures that it reported to the 2012 fiscal year. The plaintiffs claimed these expenses were improperly accounted for to inflate the company’s value prior to consummation of the merger. Eventually the company reported improper accounting, the stock value dropped, and the merger collapsed. Plaintiffs brought suit.

The court held that a §14(a) claim requires that the misstated proxy statement be the “essential link in the accomplishment of the proposed transaction.” Put otherwise, the statement must have affected the shareholders' decision. The claim failed because the plaintiffs pleaded that the merger was to their benefit. If the plaintiffs would have voted for the merger regardless, there was no action they relied on that caused harm. Although it would have made the deal less desirable, it did not make it undesirable and therefore was not an essential link.