M&T Bank Photo: Shutterstock.com

A federal appeals court Wednesday revived a shareholder class action alleging that M&T Bank Corp. misled investors in the run-up to its $1.9 billion merger with Hudson City Bancorp in 2015.

In a 40-page precedential ruling, a three-judge panel of the U.S. Court of Appeals for the Third Circuit found that Hudson investors had cleared an early hurdle in showing M&T Bank did not properly disclose issues surrounding consumer violations and its anti-money laundering compliance in proxy materials submitted two years before federal regulators actually approved the deal.

While it was not yet clear that the alleged missteps had ultimately affected the profit shareholders made on the deal, the panel sent the case back to a Delaware district court judge for further proceedings.

“Although loss causation may ultimately be difficult for the shareholders to establish, we will not say that the shareholders' allegations are facially implausible. Where, as here, resolution is likely to turn on the specifics of the merger negotiations and the inferences that should be drawn therefrom, we think dismissal would be premature,” Judge Thomas Vanaskie wrote.

He was joined in the opinion by Judges Theodore McKee and Eugene Siler Jr.

The ruling reversed Judge Richard Andrews' dismissal of the case last March on the grounds that former Hudson investor David Jaroslawicz failed to allege any misleading statements by M&T regarding the bank's ability to obtain prompt regulatory approval for the merger.

On appeal, Jaroslawicz and his Kaufman, Coren & Ress attorneys argued that M&T was required to disclose its noncompliant business practices, but its filings with the U.S. Securities and Exchange Commission omitted facts that made its proxy statement misleading. Had investors known about M&T's “spotty regulatory record,” he said, they may have been able to secure a more favorable premium or higher dividend in the deal.

The complaint filed in 2015 also targeted Hudson, however M&T has since folded the bank into its subsidiary, Wilmington Trust Corp. M&T acquired the subsidiary in a fire sale following a massive reporting scandal.

M&T argued that its underlying practice of advertising no-fee checking accounts and then switching customers to fee-based services was fixed before the merger was announced, and thus the bank was under no obligation to report any risks to shareholders ahead of the merger.

But Vanaskie said investors had earned a “reasonable” inference that the scope of the problem would have caused a regulatory delay.

“Despite the fact that M&T had ceased the practice, it is plausible that the allegedly high volume of past violations made the upcoming merger vulnerable to regulatory delay,” he said in the ruling. “Accordingly, the District Court erred when it concluded that the second amended complaint failed to plausibly allege that the consumer violations posed a significant risk to the merger at the time the joint proxy issued.”

Vanaskie also rejected M&T's assertions that Jaroslawicz's “loss causation” argument was “entirely speculative,” and remanded the case to the district court to proceed with discovery.

Attorneys for both sides were not immediately available to comment Thursday.

Jaroslawicz was represented by Deborah R. Gross of Kaufman Coren in Philadelphia, and Francis J. Murphy and Jonathan L. Parshall of Murphy & Landon in Wilmington.

M&T Bank was represented by George Conway, Bradley Wilson and Jordan Pietzsch of Wachtell, Lipton, Rosen & Katz in New York, and John Cordrey and Brian Rostocki of Reed Smith in Wilmington.

The case captioned Jaroslawicz v. M&T Bank Corp.