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Karp v. First Conn. Bancorp, Inc., (4th Cir.)

Filed: June 1, 2023

Opinion By: J. Diaz


The United States Court of Appeals for the Fourth Circuit affirmed the United States District Court for the District of Maryland and held that summary judgment was properly granted on Appellant’s Section 14(a) claim of the Securities Exchange Act of 1934 (“Exchange Act”) because no reasonable jury could find that the omission of cash-flow projections in Appellee’s proxy statement (“Merger Proxy”) for a stock-for-stock merger were material.  Specifically, the Court found that there was no evidence establishing that a single shareholder generally felt that the information provided in the Merger Proxy was inadequate or that a reasonable shareholder would have considered the cash-flow projections important in deciding how to vote on the value of the shares.  The Fourth Circuit also found that Appellant’s evidence did not establish that he or any other shareholder suffered an economic loss, i.e., there was no ‘loss causation’ present, merely because the cash-flow projections were not in the Merger Proxy.  Lastly, the Court found that the Appellant did not establish any violation of Section 20(a) of Exchange Act, 15 U.S.C.S. § 78t, which provides for “controlling person liability,” as Section 20(a) must be based on a primary violation of the securities law and, since the Section 14(a) claim failed, no primary violation existed. 


Sewlyn Karp (“Appellant” or “Karp”), a shareholder of First Connecticut Bancorp, Inc. (“Appellee” or “First Connecticut”), sued First Connecticut and its directors, alleging that they violated the securities laws by misleading shareholders like him about the true value of their shares ahead of a stock-for-stock merger.  To comply with Section 14(a) of the Exchange Act, Appellant claimed that First Connecticut needed to disclose specific cash-flow projections—and particularly an earlier, more optimistic set of projections—in the Merger Proxy it circulated to investors. 


First Connecticut and People’s United Financial, Inc. (“People’s United”) proposed a merger to their shareholders in June 2018.  Under the merger agreement, First Connecticut shareholders would receive 1.725 shares of People’s United stock for each share of First Connecticut stock they held.  As a result, the exchange ratio reflected an implied cash value of approximately $32.33 per First Connecticut share—a 24.3% premium over the stock’s closing price on the day the merger was announced.  First Connecticut ultimately filed a 150-page Merger Proxy, which included ten (10) pages of different financial analyses, with the Securities and Exchange Commission (“SEC”) and disseminated it to the shareholders.  However, approximately seven (7) months earlier in November 2017, while First Connecticut was exploring a merger with a different brank, a certain set of cash-flow projections were presented to the Board, but were not disclosed to the shareholders in the current merger between First Connecticut and People’s United.  Unaware of these earlier projections, First Connecticut’s shareholders voted to approve the merger. 

Karp then filed a putative class action against First Connecticut and its individual directors, alleging that they violated Sections 14(a) and 20(a) of the Exchange Act, as well as SEC Rule 14a-9, because the Merger Proxy did not include the cash-flow figures used in the previous contemplated merger.  Karp believed that the November 2017 figures painted a more optimistic picture of First Connecticut’s financials and, because those figures were not disclosed to the shareholders, the shares were undervalued and the merger was approved. 

Karp moved for summary judgment, which First Connecticut opposed and then cross-moved for summary judgment against Karp.  The District Court of Maryland issued an opinion and order denying Karp’s motion and granting First Connecticut’s. 

In denying Karp’s motion for summary judgment, the District Court held that there was no genuine dispute of material fact about the main requirements of Karp’s Section 14(a) claim.  First, the District Court found that “no reasonable jury could find from the evidence put forward by Karp that omission of the cash flow projections was material.”  Karp v. First Conn. Bancorp, Inc., 535 F. Supp. 3d 458, 469 (D. Md. 2021).  The lower court noted that Karp did not offer “any evidence that a single First Connecticut shareholder was misled by the Merger Proxy, believed the projections were material, or generally felt that the information provided in the Merger Proxy was inadequate.”  Id. at 470.  Second, Karp had not demonstrated a “genuine dispute of material fact relevant to the issue of loss causation,” which “requires a showing of a casual connection between the material misrepresentation and the loss.”  Id. at 471.  In other words, Karp failed to show “how the omission of the cash flow projections actually caused the purported $3.18 per share loss.”  Id. at 472.  Finally, the lower court found that Karp failed to establish that First Connecticut or its directors were negligent in assessing the Merger Proxy and, further, noted a split in authority on the level of culpability required to establish Section 14(a) liability: Some courts have required only negligence, while others have required something more, at least for certain categories of defendants.  However, even assuming negligence was the correct standard, the lower could held that there was no evidence presented to demonstrate that the Board of Directors failed to exercise reasonable care, nor alleged what the applicable standard of care in the case would have been. 

At the summary judgment phase, the District Court also entered judgment on the Section 20(a) claim, explaining that “controlling person liability” must be based on a primary violation of the securities law and, because Karp failed to establish a primary violation of his Section 14(a) claim, a Section 20(a) claim could not survive.  Karp then appealed the District Court’s denial of his motion for summary judgment and, in turn, the court’s summary judgment award to First Connecticut, to the United States Court of Appeals for the Fourth Circuit. 


The Fourth Circuit reviewed the District Court’s decision to deny Karp’s motion for summary judgment and, in turn, to grant First Connecticut’s motion for summary judgment, as correct as a matter of law.  The Court found that there was no genuine dispute of material fact and that Karp failed to establish any of the elements of a Section 14(a) claim. 

Section 14(a) authorizes the SEC to adopt rules for proxy solicitations and prohibits their violations.  See 15 U.S.C. § 78n(a).  The SEC’s Rule 14a-9, in turn, prohibits proxy statements that are “false or misleading with respect to any material fact,” including statements that omit “any material fact necessary in order to make the statements therein not false or misleading.”  17 C.F.R. § 240.14a-9(a).  To prevail in a cause of action asserting a violation of Section 14(a) and Rule 14a-9, “a plaintiff must show that (1) the proxy statement contained a material misrepresentation or omission (2) that caused the plaintiff injury and that (3) the proxy solicitation was an essential link in the accomplishment of the transaction.”  Hayes v. Crown Cent. Petroleum Corp., 78 F. App’x 857, 861 (4th Cir. 2003) (per curiam).  The second and third elements have been termed “loss causation” and “transaction causation,” respectively.  See Grace v. Rosenstock, 228 F.3d 40, 47 (2d Cir. 2000).

In addition to the elements described above, the facts must give rise “to a strong inference that the defendant acted with the required state of mind,” though the Fourth Circuit noted that the Supreme Court and this circuit have so far declined to determine what that state of mind is. 

Upon reviewing the record, it was evident that Karp had not shown a genuine issue of material fact about materiality and loss causation (no one disputed transaction causation), nor about the defendants’ state of mind.  With respect to materiality (the first element), “[a] fact is material if there is a substantial likelihood that the disclosure of the fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.”  In re Willis Towers Walton plc Proxy Litig., 937 F.3d 297, 308 (4th Cir. 2019).  Stated differently, an omitted fact is material if it is substantially likely “that a reasonable shareholder would consider it important in deciding how to vote.”  TSC Indus v. Northway Inc., 426 U.S. 438, 449, 96 S. Ct. 2126, 48 L. Ed. 2d 757 (1976).  The Court explained that it was not enough to simply speculate that shareholders might have found the projections helpful to the deliberations, so long as the Merger Proxy provided a thorough and accurate summary of the financial advisor’s work.  In that vein, the Fourth Circuit was guided by the Seventh Circuit’s decision in Kuebler v. Vectren Corp., 13 F.4th 631 (7th Cir. 2021), which held that cash-flow projections were immaterial as a matter of law “given all the other information provided” in the proxy statement before it.  Here, the Merger Proxy contained a plethora of information, including projections of total assets, net assets, returns on average assets and tangible common equities, earnings per common share, and other financial analyses.  Importantly, the Seventh Circuit recognized that “superiority is not synonymous with materiality.”  Id. at 641.  In other words, merely because a piece of information may be helpful in making a more informed decision does not render it “material” to doing so.  Thus, the Fourth Circuit ultimately agreed with the Seventh Circuit that “shareholders are not entitled to the disclosure of every financial input used by a financial advisor so that they may double-check every aspect of both the advisor’s math and its judgment.”  Id. at 643-44.

Karp also failed to meet the second requirement under a Section 14(a) claim – loss causation.  In a private Section 14(a) action, a plaintiff must “prove that the defendant’s misrepresentation (or other fraudulent conduct) proximately caused the plaintiff’s economic loss.  There was no evidence that First Connecticut shareholders would have received $35.51 per share for their stock—Karp’s proffered fair value—if the cash flow projections had been disclosed.  Specifically, Karp failed to show that the disclosure of the projections would have either (1) caused another buyer to pay more than $32.33 per share, or (2) caused shareholders to reject the merger, and (in that case) that the share price on the day of the merger would have been $35.51.  Simply put, Karp failed to demonstrate that the omission of the November 2017 cash-flow projections caused a $3.18 per share loss.  As a result, because Karp could not raise a genuine issue of material fact with respect to the materiality of the November 2017 cash-flow projections or that the omission of such projections somehow caused the shareholders to agree on a lower share-value for their stock, Karp failed to show a violation of Section 14(a) of the Exchange Act and, in turn, a violation of Section 20(a) of the Exchange Act.  Thus, the District Court did not err in denying Karp’s motion for summary judgment and granting First Connecticut’s cross-motion for summary judgment. 

The full opinion is available in PDF HERE | MSBA Business Law Section Blog HERE.


Veronica J. Mina is an Associate Attorney with Kagan Stern Marinello & Beard, LLC in Annapolis, Maryland, where she works on and litigates a variety of business, civil, and employment disputes.  Her practice ranges over a variety of cases, including misappropriation of trade secrets, non-competes and non-solicitation agreements, wage disputes, shareholder claims, operating agreements and stockholder agreements, fiduciary litigation, business transactions, and more.