Monday, November 19, 2012
Claim for Securities Fraud Dismissed for Lack of Materiality
Preliminary Acquisition Discussions Not “Material”;
Claim for Securities Fraud Dismissed
In a recent decision, the 6th Circuit Court Appeals dismissed, on the grounds of lack of materiality, claims for securities fraud in connection with a shareholder’s sale of shares back to the corporation and to its President/CEO. Filing v. Phipps, 2012 WL 5200375 (6th Cir. Oct. 23, 2012).
Filing, an employee of White Rubber Company, acquired a significant number of shares of the corporation’s stock. He was offered the opportunity to sell shares back to the corporation, an offer which he accepted. Ultimately, the corporation, as well as Phipps, purchased fewer than the total number of offered shares at a price determined by a third-party valuation. While the discussions with respect to that purchase were taking place, a third-party, Norcross, expressed an interest in acquiring White Rubber, ultimately entering into a confidentiality agreement with respect to those discussions. The 6th Circuit noted, however, that Norcross had executed similar confidentiality agreement, with “dozens” of other possible acquisition targets. Those discussions ultimately broke down when White Rubber refused to provide certain requested due diligence. Shortly after that breakdown, the closing took place on the sale by Filing of stock to White Rubber and to Phipps. Several months later, another set of ultimately aborted discussions regarding the acquisition by Norcross of White Rubber were initiated. Then, a year later, after Norcross was recapitalized by its own acquisition, it acquired White Rubber for $22 million. Although not express in the opinion, Filing sold his shares based on a company valuation of approximately $4.65 million. Filing then brought suit against, ultimately, Phipps, the corporation and certain other directors alleging violations of § 10(b) of the ‘34 Act and Rule 10b-5 thereunder. The trial court granted summary judgment in favor of the defendants, and appeal to the 6th Circuit followed.
Filing asserted that the failure to disclosed the discussions between White Rubber and Norcross violated §10(b) and Rule 10b-5, the latter of which precludes “the making of ‘any untrue statement of material fact’ or the omission of any material fact ‘necessary to make the statements made … not misleading.’” 2012 WL 5200375, *2. A fact is material if “a reasonable shareholder would (1) consider the fact important in making an investment and (2) view the fact as having significantly altered the total mix of information available.” Id., citing Basic Inc v. Levinson, 486 U.S. 224, 231-32 (1998). There having been no disclosure of the potential acquisition, the question turned entirely on whether those discussions had been material.
Ultimately, in light of the preliminary, on and off nature of the negotiations between White Rubber and Norcross, the 6th Circuit affirmed the determination that those discussions had not been material. The Court noted as well that it was not until Norcross was itself acquired that a transaction with White Rubber took place. Ergo, Filing’s claims for securities fraud were unavailing.