On the Public Availability of Merger Agreement Schedules

With the Bank of America case squarely in the front of corporate news, the custom of not filing merger agreement disclosure schedules as part of SEC exhibit filings has been spotlighted. In that case, as you may recall, the SEC claims that overall disclosures to shareholders in connection with the merger were materially misleading on the issue of Merrill Lynch's lucrative executive bonus program. The complaint in the Bank of America case alleges a violation of Rule 14a-9, the proxy regulation antifraud rule.

Typically, representations and warranties--and sometimes covenants and conditions-- in merger agreements are qualified by reference to a set of disclosure schedules that provide background information on, e.g., exceptions, limitations, clarifications, and other informational enhancements, to the text of the merger agreement. Some of these disclosures represent information that the parties desire to keep confidential--threatened litigation and claims, for example. The relevant filing Rule, Item 601 of Regulation S-K allows for the omission of these types of schedules under certain conditions. Specifically, the description of the relevant exhibit (Exhibit 2) provides that "[s]chedules (or similar attachments) to these exhibits shall not be filed unless such schedules contain information which is material to an investment decision and which is not otherwise disclosed in the agreement or the disclosure document." Most corporate counsel, in my view, have believed that the clear references to disclosures omitted from filing under the rule (especially when combined with a statement disclaiming third-party reliance) would be a signal to shareholders that reliance on the absolute truth of the qualified text of the merger agreement is unwarranted.

However, the non-filing of merger agreement disclosure schedules also was an issue in a recent Ninth Circuit case, Glazer Capital Management, LP v. Magistri, 549 F.3d 736 (9th Cir. 2008) (Adobe Acrobat required for viewing), where the court finds that representations and warranties in a merger agreement qualified by unfiled disclosure schedules referenced in the agreement are actionable under Rule 10b-5 (the general antifraud rule relating to purchases and sales of securities), expressly stating that the fact "that the merger agreement was a private document and included reference to a non-public disclosure schedule would not, as a matter of law, prevent a reasonable investor from relying on its terms."

Although some may view this ruling as harsh, it would seem that the existing rules appropriately balance the issues relevant to both cases. If the corporation can prove that all material information necessary to a voting or other investment decision has been accurately and completely disclosed in the disclosure document (Schedule 14A proxy statement, Form 10-K annual report, etc.), then the corporation should be able to avoid ultimate liability. The problem for the corporation is that it may be unlikely to be able to rid itself of this type of claim on a motion to dismiss (since materiality is a mixed question of law and fact typically not easily determinable on a motion to dismiss). One possibility, however, is for the corporation to argue one of the key defenses to materiality--in this case, likely the truth on the market defense. In fact, former SEC Commissioner (now Professor) Joseph Grundfest made just such an argument in an affidavit filed in the Bank of America case.

I am curious about others' thoughts on this issue, which is important to public company M&A practice. Is it also your view that the current playing field is well balanced between corporate issuers/registrants and investors?