“Confirmed Judges, Confirmed Fears” is a blog series documenting the harmful impact of President Trump’s judges on Americans’ rights and liberties.
Trump 4th Circuit judge Marvin Quattlebaum dissented from the August decision in In re: Willis Towers Watson Proxy Litigation and claimed that shareholders could not sue for corporate officials’ violations of the Federal Securities Act that resulted in “false or misleading” documents relating to a corporate merger. The majority reversed the dismissal of the case by a district court and sent the case back so shareholders could pursue their claims.
Willis Towers Watson PLC, a large corporate and insurance management, brokerage, and investment company, was formed in 2015 as a result of a merger between two U.S. and British companies. More than a year after the merger, documents came to light suggesting that the head of the U.S. company, who became president of the combined corporation, had “undisclosed” conversations relating to what his compensation would be with British corporate officials, and as a result of this “conflict of interest,” the terms of the deal provided reduced value for the U.S. shareholders. Those shareholders, largely pension funds, filed suit less than a year after learning these facts. They contended that the corporation’s president and others had omitted these and other key facts from proxy statements used to convince shareholders to approve the merger, so that the statements were “materially false or misleading” in violation of federal securities law, and cost the U.S. shareholders millions of dollars. A federal district court dismissed the suit without a trial, and the shareholders appealed.
The 4th Circuit reversed in a 2-1 decision and sent the case back to the district court so that the shareholders could proceed with their case. The majority carefully explained what was wrong with the lower court decision, much of which was embraced by Quattlebaum in his dissent. Initially, the district court ruled, and Quattlebaum agreed, that the shareholders filed the suit too late in light of the one-year statute of limitations for such securities lawsuits. But the 4th Circuit majority explained that the Supreme Court had clearly held that the time period for such suits begins to run upon “discovery” of the key facts, which did not occur until less than a year before the suit was filed. Quattlebaum claimed that some facts suggested that the shareholders could have known earlier, but the majority responded that when a lawsuit is dismissed at an early stage without discovery, it is the allegations of the complaint that govern, and those clearly showed that the suit was filed “within one year of discovering the facts constituting the violation.”
The majority also reversed the determination that as a matter of law, the omissions were not “material” because shareholders knew that the U.S. company president would become the combined company president and therefore had a potential conflict of interest. As the majority explained, however, a jury could certainly find that it was “material” that the president had a real and “significant” conflict of interest because of the secret compensation discussions which, the complaint alleged, resulted in an actual, lucrative “secret compensation agreement.” Quattlebaum argued that other facts suggested that the agreement was not final and was not as favorable as the complaint alleged, but the majority pointed out that when a complaint is dismissed as a matter of law, the complaint’s allegations must be accepted as true and interpreted “in the light most favorable to the plaintiffs.” Based on this well-accepted standard, the majority ruled, dismissing the complaint was erroneous.
Securities and investment fraud, in connection with mergers and otherwise, is a serious problem in the U.S., with one estimate suggesting that it costs America $10-40 billion per year. Fortunately, shareholders in the Willis Towers case will be able to pursue their claims. But if Quattlebaum had his way, the corporation would have prevailed without any accountability for its misconduct in this case, as well as potentially many others.