M&T v. Jaroslawicz

REGULATION S-K
M&T Bank Corp. v. Jaroslawicz 
Date: Dec. 17, 2020

Issue: Whether Item 105 of Regulation S-K, 17 C.F.R. § 229.105(a) (Item 105), requires a company to (1) disclose facts they did not know at the time of disclosure, or (2) acknowledge misconduct that the company does not believe it committed, and which no regulator accused it of committing.

Case Summary: ABA, Bank Policy Institute, and SIFMA (Amici) filed an amicus brief urging the Supreme Court to reverse a Third Circuit decision that held plaintiffs may rely on Item 105 to hold issuers of publicly traded securities liable for failing to disclose risks that the issuer did not know or believe to exist.
Item 105 requires public companies to disclose material risk factors in registration statements, so investors may evaluate the speculative nature of the investment.

The dispute arises from M&T’s acquisition of Hudson City. M&T and Hudson City issued their joint proxy soliciting shareholder approval for the merger. Under Item 105, M&T advised investors that it believed its Bank Secrecy Act and anti-money laundering (“BSA/AML”) compliance program was compliant. M&T also warned that the Federal Reserve would evaluate the effectiveness of the program as part of its review of the merger and could withhold or substantially delay its approval. Hudson City’s shareholders overwhelmingly approved the merger in April 2013. However, the Federal Reserve withheld approval of the merger until September 2015, based on concerns about M&T’s BSA/AML program.

Although the Federal Reserve’s decision to withhold approval occurred after M&T and Hudson City filed their joint proxy, plaintiff shareholders filed a putative class action after the merger closed. Plaintiffs alleged that M&T violated Section 14(a) of the Exchange Act by failing to disclose the BSA/AML deficiencies under Item 105. Plaintiffs theorized that M&T “failed to detect” its own alleged noncompliance.

The district court granted M&T’s motion to dismiss, finding that M&T adequately disclosed the risk that the merger could be delayed or withheld. However, the Third Circuit reversed. The Third Circuit ruled that plaintiffs’ Item 105 theory was viable, because “M&T knew that the state of its compliance program would be subject to extensive review from federal regulators.” According to the Third Circuit, “whether M&T had actual knowledge of the shortcomings in its BSA/AML compliance or its consumer checking practices was of no moment.” The Third Circuit split with the First and Second Circuits regarding the scope of Item 105’s disclosure obligation. In the First Circuit, the filer discloses facts under Item 105 actually known by the filer at the time of disclosure. In the Second Circuit, a filer need not disclose uncharged wrongdoing under Item 105, even if an investigation is underway.

Amici filed a brief urging the Court to grant M&T’s certiorari petition and reverse the Third Circuit’s novel interpretation of Item 105. Amici argued the Third Circuit’s decision creates a circuit split and thus creates confusion among securities market participants. In addition, Amici argued that the Third Circuit’s interpretation creates a “significant broadening of potential securities liability for underwriters and investment banks.” According to Amici, underwriters and investment banks may be potentially liable for failing to investigate, identify, and disclose risks of the issuer’s business that were otherwise unknown or unperceived by the issuer itself. Amici also asserted that if the Third Circuit’s decision stands, the potential expansion of securities liability could lead to an explosion of securities class action lawsuits against underwriters and investment banks.

Bottom Line: As of January 4, 2021, Jaroslawicz did not file an opposing brief. Jaroslawicz’s brief was due December 17, 2020.

Download the amicus brief to read the full text.