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.
No comments:
Post a Comment