This Article examines strategic disclosure behavior in the context of merger announcements. Merger transactions are frequent targets of litigation, including both fiduciary duty class actions and statutory appraisal actions. In either type of litigation, the fair value of the target company as a going concern is at least a part of the measure of damages. In recent years, courts have increasingly looked to market evidence of valuation—including the trading price of the target company’s stock prior to the announcement of the merger. This gives managers an incentive to minimize this trading price by strategically timing disclosures such that negative news is released prior to announcement of a merger while positive news is released simultaneously with or following a merger announcement. In many ways, the disclosure incentives managers face in the merger context mirror those they face in the securities fraud context. For years, securities fraud plaintiffs have typically been required to prove loss causation by using an event study to show a market decline upon corrective disclosure—a practice enshrined by the United States Supreme Court in Dura Pharmaceuticals, Inc. v. Broudo. Managers can make this task more difficult by bundling corrective disclosures with other potentially material news. Combining the corrective disclosure with additional bad news can make it impossible to determine what portion of any resulting price drop to ascribe to the corrective disclosure. Combining the disclosure with offsetting good news can reduce or eliminate the price reaction altogether. These types of strategic disclosure behaviors have important implications for the design of federal disclosure rules and judicial doctrine. To the extent that courts and regulators ascribe legal significance to the market’s reaction to information contained in corporate disclosures, those disclosures should be required to be made in a way that results in an informative market reaction. As such, this Article proposes that the Securities Exchange Commission should require several types of litigation-relevant information to be disclosed in standalone, unbundled fashion. In addition, this Article suggests refinements to judicial doctrine. These refinements are designed to: (1) minimize the incentive for managers to employ opportunistic disclosure strategies; and (2) preserve the flexibility to employ non-market valuation evidence where market evidence has been corrupted or obscured.
Charles R. Korsmo, Information Bundling, Disclosure, and Judicial Deference to Market Valuations, 62 B.C. L. Rev. 571 (2021), https://lawdigitalcommons.bc.edu/bclr/vol62/iss2/5