On April 19, 2017, HCSB Corporation’s board of directors entered into a merger agreement to be acquired by United Community Banks, Inc. (UCBI). The merger agreement held that stockholders of HCSB corporation would receive .005 share of UCBI per share of HCSB Corporation. The merger was announced on the following day and on May 17, 2017, HSCB and UCBI filed a Registration Statement with the SEC in relation to the merger. The merger vote was slated to be held on July 27, 2017. Just 13 days before the stockholder vote, Paul Parshall, the owner of two one-hundred thousandths of a percent of HCSB, filed an Emergency Motion for Preliminary Injunction to temporarily stop the vote from taking place. In his motion, Parshall asserted that the Registration Statement filed with the SEC was materially misleading and incomplete. Since the Registration Statement was allegedly incomplete, the vote should be postponed until the statement is corrected. In this case, the plaintiff has a high burden of proof to fulfill.
JUDGE HARWELL Because of the extraordinary nature of injunctive relief, the United States Supreme Court has admonished that preliminary injunctions “may only be awarded upon a clear showing that the plaintiff is entitled to such relief.” …A plaintiff seeking a preliminary injunction must establish all four of the following criteria: (1) that the plaintiff is likely to succeed on the merits, (2) that the plaintiff is likely to suffer irreparable harm in the absence of preliminary injunctive relief, (3) that the balance of equities tips in the plaintiff’s favor, and (4) that the injunction is in the public interest.
The first Winter factor requires Plaintiff to clearly show he will likely succeed on the merits of his claims …Plaintiff first claims the Registration Statement omits material information regarding HCSB’s and UCBI’s financial projections. He alleges the Registration Statement “misleadingly fails to disclose or even include any information concerning” HCSB’s management projections. Specifically, Plaintiff seeks disclosure of projected financial forecasts that include:
dividends, earnings, total assets, loans, total deposits, book value, total equity, return on average assets, return on average equity, and cash flow and its constituent line items. He asserts “[t]his material omission is especially stark” because the individual defendants specifically considered the prospects of HCSB, and because Hovde reviewed financial projections when rendering its fairness opinion. Plaintiff further maintains that based upon a review of the Registration Statement, “it is clear that management’s financial forecasts played a significant role in the decision to approve the Merger Agreement.”
The Fourth Circuit has recognized “the SEC has not imposed a duty to disclose financial projections in disclosure documents generally.” …Here, for purposes of this preliminary injunction motion, the Court finds Plaintiff has not satisfied his burden of proof regarding his allegations of material omissions. Further, the Court finds Plaintiff has not carried his burden of showing negligence or injury.
The Court’s determination is …supported by the four shareholder declarations provided by HCSB, which state that the disclosures in the Final Proxy as written contain all information material to investors and that the additional details requested by Plaintiff are not material information needed by the shareholders.
Moreover, Ms. Hollar avers in her declaration that no shareholder other than Plaintiff has contacted HCSB and suggested the proxy disclosures are misleading or inadequate, or that he or she needs more information in order to decide how to vote on the proposed transaction. Ms. Hollar further states the holders of 83.86%
of HCSB common stock have delivered their proxies, and that 99.96% of these shares have been voted in favor of the proposed merger, which is well in excess of the two-thirds needed under South Carolina law.
Next, Plaintiff claims the Registration Statement “is materially misleading in that it fails to disclose both the amounts of Hovde’s ‘fairness opinion fee’ and ‘completion fee’ to be received in connection with its engagement with HCSB, as well as the amount of compensation Hovde has received for services it provided to HCSB and its affiliates in the last two years.” Plaintiff alleges these issues “represent important, potential conflicts of interest that could significantly taint the advice provided by the financial advisor to the Board.”
The omission of this information from the Registration Statement does not appear to be material for the following reasons …First, the Final Proxy discloses that Hovde has performed other services for HCSB for a fee over the past two years and would receive both a completion fee and fairness opinion fee for the merger. Furthermore, Ms. Hollar avers in her declaration that no shareholder other than Plaintiff has contacted HCSB and suggested the proxy disclosures are misleading or inadequate, or that he or she needs more information in order to decide how to vote on the proposed transaction. Moreover, Hovde states in its fairness opinion (included in the Final Proxy) that it has not provided investment banking and financial advisory services to UCBI in the past two years; and Mr.
Zych avers the same in his declaration. Finally, the shareholder declarations provided by HCSB state that the disclosures in the Final Proxy as written contain all information material to investors, and that the additional details requested by Plaintiff are not material information needed by the shareholders. And again, the Court notes Plaintiff has not submitted an affidavit or declaration from himself or any other shareholder or from an expert addressing the materiality of the alleged omissions. The Court finds Plaintiff has not clearly shown a likelihood of success on the merits regarding his allegation that the Registration Statement omits material information about Hovde’s relationship with HCSB and UCBI.
In sum, the Court finds Plaintiff has not made a clear showing that he is likely to succeed on the merits of his allegations that Defendants violated sections 14 (a) or 20 (a) of the Exchange Act.
The second Winter factor requires Plaintiff to clearly show irreparable harm will occur absent an injunction. Plaintiff claims he has identified material omissions that, if left unremedied, render the Registration Statement materially incomplete and misleading and prevent HCSB’s stockholders from casting a fully informed vote on the proposed transaction.
The Court finds Plaintiff has not made a clear showing of irreparable harm for multiple reasons. First, Plaintiff has not submitted an affidavit or declaration from himself (or an expert) detailing how the omitted disclosures would inform his vote. Second, Plaintiff has failed to show why monetary damages are not an adequate remedy; specifically, he appears to have an adequate remedy at law because he could be compensated with money damages for his current \($14\) holding, and therefore extraordinary injunctive relief is not appropriate. Finally, and perhaps most obviously, Plaintiff owns a minuscule share of HCSB stock and is the only stockholder claiming irreparable injury. This case has not been certified as a class action; Plaintiff has not moved for class certification; and Plaintiff has not identified any other stockholders claiming they need the same disclosures he seeks. Accordingly, the Court finds Plaintiff has not clearly shown irreparable injury will result absent a preliminary injunction.
The third Winter factor requires Plaintiff to show the balance of the equities tips in his favor. First, while not dispositive, the Court notes Plaintiff filed his motion just thirteen days before the scheduled stockholder vote. Other courts addressing similar scenarios have recognized the harm that defendants will likely suffer when a single shareholder plaintiff seeks to enjoin a shareholder vote at the eleventh hour. Second, Plaintiff is the only HCSB shareholder to raise any objection to the transaction. Third, Plaintiff owns 0.00002% of the outstanding shares of HCSB, which is equivalent to approximately \($14;\) in comparison, the merger of HCSB and UCBI is valued at approximately \($66\) million. In fact, if the merger is consummated, Plaintiff owns such a small percentage that he will receive cash instead of a fractional share of UCBI common stock. Fourth, other stockholders who own millions of shares of HCSB common stock have submitted declarations stating they are in favor of the merger and need no further disclosures; and HCSB shareholders overwhelmingly support the merger with UCBI, as 83.86% of voting shareholders and 100.0% of non-voting shareholders have voted to approve the merger.
Finally, while Plaintiff claims the “outer termination date” for the merger “is still more than 2.5 months away” and would “still leav[e] ample time” for consummation of the transaction, he fails to comprehend the immediate financial consequences to HCSB. Ms. Hollar avers in her declaration that “a 30-day delay in vote would likely cost HCSB more than \($420,000\) that would otherwise not be incurred if the vote proceeded as scheduled,” and that if the delay is longer than thirty days, “the cost will be even higher.” Ms. Hollar also avers a delay in vote could jeopardize the merger itself, impose significant logistical problems and expenses upon HCSB and its employees, result in a reduction in share value of the stock of either HCSB or UCBI, and potentially cause HCSB to lose employees if the merger is delayed. Significantly, Ms. Hollar points out HCSB has already incurred substantial expenses related to the proposed merger, most of which would not be recoverable if this merger opportunity is lost. In light of these considerations, the Court finds Plaintiff has not carried his burden to show the equities tip in his favor.
The final Winter factor requires Plaintiff to show preliminary injunctive relief is in the public interest. See Winter, 555 U.S. at 20. Here, the Court finds enjoining a stockholder vote on a \($66\) million dollar bank merger scheduled for this Thursday has the potential to be enormously disruptive and create public uncertainty regarding the entities involved. Accordingly, the Court finds Plaintiff has not met his burden to show a preliminary injunction is in the public interest.
The Court finds Plaintiff has failed to meet his burden on all four Winter factors. Accordingly, the Court DENIES Plaintiff’s Emergency Motion for Preliminary Injunction.
CRITICAL THINKING:
Why do you think the standards to grant a plaintiff’s motion for injunctive relief are so high?
ETHICAL DECISION MAKING:
Which stakeholders did the court mention and consider in its decision? What values are encapsulated in the third Winter factor?