When Progress Energy and Florida Progress merged back in 1999, their “proxy indicated that each share of Florida Progress stock would be exchanged for $54.00 in cash or stock as well as one Contingent Value Obligation ("CVO").” Sure, a CVO. Don’t feel bad if you don’t know what a CVO is because they made it up. That’s right, they invented their own security. What is it? Well, you’ll be sorry you asked because a CVO “represents the right to receive contingent payments based upon the net after-tax cash flow to Progress Energy generated by certain synthetic fuel plants operated by Progress," to be "equal to 50% of the net after-tax cash flow generated by the synthetic fuel plants in excess of $ 80 million per year for each of the years 2001 through 2007, as well as any payments thereafter associated with carryforward credits, which were defined as any synthetic fuel credits earned during an Operation Year and carried forward as part of defendant's minimum tax credit (within the meaning of Section 53 of the Internal Revenue Code) and utilized in one or more tax years after 2007.”
My God. Talk about over-complicating things. Why not just make the price, oh say, $54.30 and call it a day? Anyway, a couple years later, after the merger was completed, Progress told investors that “because of the operation of the alternative minimum tax ("AMT"), synthetic fuel credits earned from the operation of its synthetic fuel plants could not completely eliminate its income tax burden, and, in fact, could not reduce that liability below twenty percent.” The CVOs, which had been trading at 54 cents each, immediately dropped to 42 cents. Plaintiffs filed a 10(b) class action soon thereafter.
In evaluating Plaintiffs' claims, Judge John E. Sprizzo (S.D.N.Y.) held that “it is indisputable that there can be no omission where the allegedly omitted facts are disclosed,” as “defendants disclosed in the proxy the limitations on the use of the synthetic fuel credits which were imposed by the Internal Revenue Code.” “Although the proxy did not mention the AMT by name, it directed investors to the relevant Internal Revenue Code provisions, and it indicated that synthetic fuel credits that could not be used in a given year would be carried over to future years as part of defendants' minimum tax credit.”
Second, the court found that “even if this disclosure was deemed inadequate, the information allegedly omitted here is not of the type which defendants had a duty to disclose,” as it is a “publicly known” “generally applicable tax provision that applies to all corporations.” Finally, the court held that “even if it is assumed that defendants should have disclosed the existence of the AMT, it is simply not the case that the omission of this information made statements that were disclosed materially misleading.”
The court capped things off by dismissing the case with prejudice (thereby denying plaintiffs any chance to amend their complaint), but finding all parties had met their Rule 11(b) obligations regarding bringing claims in good faith.
You can read the decision at 371 F. Supp. 2d 548.
Nugget: “The federal securities laws simply do not require the excruciatingly lengthy and complicated disclosure that would result if every indicia of the modern regulatory state needed to be compiled, catalogued, and explained to potential investors.”