An opinion was released by the Eighth Circuit on Thursday. The case was filed by a variety of pension funds and other investors as a derivative action on behalf of managed care provider Centene, against the company’s board. The case was regarding possible securities violations and breach of fiduciary duty regarding the merger of Centene Corporation with Health Net Inc.
The plaintiffs argued that there was violation of § 14(a) of the Securities Exchange Act of 1934, violations of fiduciary duties, insider trading, and unjust enrichment involved in the merger actions and the formal reporting that was made to the SEC and shareholders. Specifically, they argued that the defendants had omitted crucial financial liabilities on the part of Health Net that would negatively affect the valuation of the merged company after the merger, including that Health Net had poorly designed and unprofitable policies, was subject to liability based upon its refusal to pay claims from substance abuse treatment centers in California, and had significant potential tax liabilities.
The plaintiffs argued that the board of directors had this information prior to the closing date, but concealed that information out of self interest and did not release an updated financial projection on this data. The stock later took a significant loss due to the amount of funds required to offset these liabilities.
At the trial court, the case was dismissed with prejudice after the court determined that the plaintiffs had failed to notify the board of directors prior to filing the derivative case in order to give the board an opportunity to pursue the liability directly, which is a required element of derivate litigation in order to obtain standing.
The plaintiffs appealed, arguing that a case for futility had been made. The Eighth Circuit affirmed the trial court’s dismissal, stating that the plaintiffs had failed to prove that the directors “face[d] a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand.”
In reviewing the proxy statements, the court found that the board of directors had properly warned the shareholders that the information used in preparation of the report was incomplete and should not be relied upon solely in the consideration process. The court also stated that there currently was no requirement that the proxy statement by updated once additional information was obtained. With this lack of an affirmative duty, the court held that there was not a likelihood of the board facing liability in their statements, and therefore presenting the case to the board for review was not a futile proposition that could be skipped.