11th Circ. Weighs In On Duty To Disclose Merger Talks

Corporate merger negotiations are typically conducted under a veil of secrecy, with public disclosure withheld until the end when a definitive agreement has been signed. The fear is that premature disclosure of preliminary merger talks will negatively impact the deal. For example, early disclosure might encourage speculative investment in the target company's stock, driving up the price and diminishing shareholders' perception of the offered premium, or even cause potential bidders to be reluctant to make an offer in the first place.

In light of these problematic scenarios, courts widely recognize that typically, there is no duty to disclose merger negotiations prior to the execution of a definitive merger agreement. See, e.g., Thesling v. Bioenvision Inc., 374 F. App'x 141, 143 (2d Cir. 2010) (there is "no express duty [that] requires the disclosure of merger negotiations, as opposed to a definitive merger agreement"); Williams v. Dresser Industries Inc., 120 F.3d 1163, 1174 (11th Cir. 1997) ("In the context of sales of stock while negotiations for merger or acquisitions were pending, courts have found no duty to disclose the negotiations").

The Eleventh Circuit recently considered this issue and found that a duty to disclose can, in fact, exist with respect to merger discussions. In Finnerty v. Stiefel Laboratories Inc., 756 F.3d 1310 (11th Cir. 2014), a former employee (Finnerty) of a privately held pharmaceutical company (Stiefel) received notice that he was entitled to a distribution of vested benefits from Stiefel's employee stock bonus program. Finnerty also received a "put" option on the stock he received, which allowed him to direct Stiefel to repurchase the stock at fair market value.

Finnerty requested his distribution and sold his shares back to Stiefel in February 2009. Unbeknownst to him, Stiefel was at that time in the early stages of negotiating the sale of the company to a larger pharmaceutical company. After receiving bids from two suitors, Stiefel consummated a sale transaction with GlaxoSmithKline in April 2009, two months after Finnerty exercised his "put" and received fair market value for his stock. The value received by Stiefel shareholders in the GSK transaction was more than four times per share what Finnerty had received two months earlier. He brought suit for securities fraud, alleging that Stiefel had a duty to disclose its merger negotiations and had failed to do so.

At trial, the jury returned a verdict in...