Antifraud Liability Arising out of Exhibits to Securities Law Filings

April 2009

Public companies routinely file exhibits to securities filings which include copies of acquisition agreements. The acquisition agreements contain negotiated representations and warranties of the seller directed to the buyer in the transaction. Customarily, the seller will provide to the buyer a disclosure schedule or disclosure letter that qualifies many of the representations and warranties. As a matter of practice, a seller generally does not include the disclosure schedule in the exhibits to the securities filings. In this scenario, most public companies would consider the representations and warranties part of a private acquisition agreement and that such representations and warranties could not be relied upon by investors bringing a securities fraud action against a public company seller. A recent case from the United States Court of Appeals for the Ninth Circuit rejects this hypothesis.

In Glazer Capital Management, LP v. Magistri, 549 F.3d 736 (9th Cir. 2008), investors brought a class action lawsuit alleging securities fraud claims against InVision Technologies, Inc., based on alleged public misstatements made by InVision in a merger agreement entered into with General Electric. Specifically, InVision made representations in the merger agreement that it was in material compliance with all laws and that, to its knowledge, it was not in violation of the Foreign Corrupt Practices Act ("FCPA"). InVision filed the merger agreement as an exhibit to its annual report on Form 10-K with the SEC. InVision did not file its disclosure schedule as an exhibit to its 10-K.

Subsequently, InVision disclosed that, after an internal investigation, it had learned of possible violations of the FCPA by the company. As a result, the company's share price dropped significantly. Investors then filed a class action lawsuit against the company.

InVision argued to the court that because the representations and warranties were made in connection with a private merger agreement directed solely to GE, the statements in question could not reasonably support a securities law claim by investors. The company further noted that the merger agreement specifically referenced disclosure schedules which qualified the representations and warranties in the merger agreement (which were not filed as an exhibit). The merger agreement also specifically stated that GE was the only intended beneficiary of the representations.

The court rejected InVision's arguments. The court reasoned that InVision's investor base would have strong interest in the details of the proposed transaction. The court held that, as a matter of law, the mere fact that the statements were made in the context of a private merger agreement directed solely to a private merger partner and included reference to a non-public disclosure schedule was insufficient to prevent a reasonable investor from relying on the statements. As such, the court concluded that an investor may rely on representations and warranties made by a public company to a private third party in a merger agreement when the acquisition agreement is filed with the SEC as an exhibit to a company's public securities filings.

The court's holding is consistent with the reasoning of the SEC's Section 21(a) Report of Investigation in connection with the settlement of an enforcement action against the Titan Corporation. See Exchange Act Release No. 51283 (March 1, 2005) (the "Titan Report"). In the Titan Report, the SEC advised that representations and warranties included in agreements filed as exhibits to public company filings may be subject to antifraud liability. Such statements constitute disclosures to investors.

In light of the Glazer decision and the Titan Report, public companies need to give greater consideration to the disclosure of material acquisition agreements as exhibits to public filings. In that regard, public companies should carefully consider whether to file disclosure schedules or reports as exhibits to public filings (subject to confidentiality concerns). In addition, public companies may want to consider whether to include general disclaimers both in the acquisition agreements and in the public filings made with the SEC. Such disclaimers could address:

(1) that the representations and warranties in the acquisition agreement address the contractual allocation of risk between the parties and not to establish facts;

(2) that the representations and warranties are qualified by a confidential disclosure schedule that may contain some nonpublic information that is not material under applicable securities laws;

(3) that the acquisition agreement may have different standards of materiality from the securities laws;

(4) that certain facts may have changed since the date of the acquisition agreement; and

(5) that only parties to the acquisition agreement or other intended beneficiaries referenced therein may enforce the agreement.

For more information on antifraud liability regarding the exhibits to public company filings, please contact Attorney Joe Marrow.

Article tools

Contact author | Print | Bookmark | Send to friend

Return to top of page

Return to Business Resources index