A Sign of Macquerie’s Impact- The E-House (China) Holdings Limited Decision

On June 10, 2024, the Second Circuit Court of Appeals affirmed the Southern District of New York’s decision granting Defendants, E-House (China) Holdings Limited (“E-House”) —a China based real estate services company— and other individual Defendants’ Motion to Dismiss Plaintiffs’ Amended Complaint.  This case centered around allegations that Defendants issued false and misleading proxy materials concerning a “going private” merger transaction in violation of Sections 10(b), 13(e), 20A, and 20(a) of the Securities Exchange Act of 1934.

Importantly, Plaintiffs alleged, in part, that in connection with the going private merger, E-House’s management prepared “undisclosed higher projections” to solicit investors and have them invest in the post-merger E-House business while at the same time “soliciting public market investors with lower projections to get them to sell their shares on the cheap” so they could “pay public investors less than what their shares were worth, while using the real value of the Company to solicit interest in the post-Merger business”. The Amended Complaint referred to these projections as “Parallel Projections” and claimed that it was misleading to not disclose the higher of the Parallel Projections to investors.  

In briefing, Plaintiffs argued that “Defendants had an independent duty to disclose the Parallel Projections” but the Court disagreed and stated that “although this Court once held that a duty to disclose, including duties that derive from statutes or regulations that obligate a party to speak,” could “serve as the basis for a securities fraud claim under Section 10(b)[,]”[1] the Supreme Court has since clarified that “[e]ven a duty to disclose . . . does not automatically render silence misleading under Rule 10b–5(b).” under the recently decided Supreme Court decision Macquarie Infrastructure Corp. v. Moab Partners, L. P., 601 U.S. 257, 265 (2024). Consequentially, the court found Plaintiffs’ arguments unavailing because ‘pure omissions’ are no longer ‘actionable under Rule 10b-5’” Id. at 264. The remainder of Defendants’ challenged statements were also not found to be materially misleading under separate grounds.

The decision in E-House is just one example of courts’ new founded addendum to the well-worn principle that “silence absent a duty to disclose is not misleading.”  It is now clear that violations of SEC regulations requiring disclosure, in and of themselves, do not create such a duty.  This decision will create new hurdles in circuits such as the Second Circuit, which had previously held that a duty arises when there is “ ‘a statute or regulation requiring disclosure,’ ... such as Ite[m] 303.” Id. at 262.  Securities plaintiffs will need to plead more than a failure to follow SEC disclosure requirements in order to show a duty to disclose in a post-Macquerie world.  See City of Warren Gen. Employees' Ret. Sys. v. Teleperformance SE, No. 23-24580-CIV, 2024 WL 2320209, at *7 (S.D. Fla. May 22, 2024) (dismissing Plaintiffs’ Complaint and citing to Macquerie to support that “[d]isclosure is required ... only when necessary to make statements made, in the light of the circumstances under which they were made, not misleading.”).
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