Reinhardt v. Cortland Bancorp Inc.

Background

Charles Reinhardt alleged that Cortland Bancorp Inc. and the individual defendants violated Section 14(a) of the Securities Exchange Act of 1934, Securities and Exchange Commission Rule 14a-9, and Section 20(a) by distributing a materially incomplete proxy statement concerning Cortland’s proposed acquisition by Farmers National Banc Corp. Reinhardt alleged that the proxy statement omitted internal financial projections, including estimated net-income growth and dividends per share.

Cortland’s board unanimously approved the merger agreement, recommended that shareholders approve it, and issued a joint press release. Cortland later filed a definitive proxy statement that was 181 pages long. The statement included historical financial information, eight pages of pro forma information about the proposed combination, and eleven pages describing Piper Sandler & Co.’s fairness opinion, including the information considered, assumptions used, and analyses performed. It did not include all data underlying those analyses or the companies’ internal financial projections.

Reinhardt filed a motion for a preliminary injunction under Rule 65(a) of the Federal Rules of Civil Procedure. He sought to prevent or delay the shareholder vote scheduled for October 26, 2021. On October 22, the court denied the motion and canceled the scheduled hearing; the October 28 opinion explained the reasons.

Legal standard

A preliminary injunction is an extraordinary remedy. The person seeking one must clearly show a likelihood of success on the merits, a likelihood of irreparable injury without the injunction, that the balance of equities favors the request, and that an injunction would not harm the public interest.

Court’s analysis

The court concluded that Reinhardt had not shown a likelihood of success on his federal securities claims. It held that federal securities laws do not require companies to disclose specific financial projections in proxy materials merely because the projections might interest investors or were used by a financial adviser.

Under Rule 14a-9, an omission violates the rule when it makes statements that appear in the proxy statement false or misleading. Reinhardt did not identify any false or misleading statement in the proxy statement. He instead argued that the omitted projections were important inputs in Piper Sandler’s analyses and should have been disclosed so shareholders could independently evaluate the merger consideration.

The court rejected that argument at the preliminary-injunction stage. It stated that investors generally are not entitled to disclosures that allow them to make their own independent valuation of a stock. It also explained that a proxy statement need provide only a fair summary of the underlying bases for a financial adviser’s fairness opinion. In the court’s view, the proxy statement’s detailed descriptions of Piper Sandler’s analyses satisfied that requirement, even though the underlying projections were omitted.

Disposition and effect

The court DENIED Reinhardt’s motion for a preliminary injunction. The opinion did not state that the underlying lawsuit was dismissed or finally resolved. It stated that if Reinhardt later discovered that the omitted projections made the proxy statement misleading, he would be entitled to damages. The court’s ruling therefore denied the requested immediate effort to prevent or delay the shareholder vote while addressing Reinhardt’s likelihood of success at that stage.