September 1, 2004

The Whole Truth… School’s

The Whole Truth…

School’s back and so am I with a recent case that will grab your attention (it certainly grabbed mine).

Check out Vega v. Jones Day (2004 WL 1719279 (Cal. App. 2 Dist)). A copy of the opinion has been posted in the “Mergers & Acquisitions” Practice Area.

The facts: Plaintiff was a shareholder of target in an acquisition in which P received shares of buyer’s stock. P claimed that Jones Day, buyer’s counsel, defrauded P by actively concealing the terms of one of those infamous “toxic preferred stock” financings that was done between signing and closing of the acquisition agreement. Instead of providing a previously prepared supplemental disclosure schedule that “clearly described and properly disclosed” the toxic provisions, buyer’s counsel delivered a “sanitized” version that did not include the toxic provisions. JD also made statements to the effect that this financing was “no big deal,” “nothing unusual,”and “standard.” Two weeks before the closing, JD filed the Certificate of Designations with the Delaware Secretary of State.

P sued JD for fraud and negligent misrepresentation. JD’s defense was that, as opposing counsel, it had no duty to disclose to target, P (a target shareholder), or target’s counsel.

The Court didn’t buy JD’s defense and held that, once JD “specifically undertook to disclose the transaction, and having done so, [JD] is not at liberty to conceal a material term. Even where no duty to disclose would otherwise exist, ‘where one does speak he must speak the whole truth to the end that he does not conceal any facts which materially qualify those stated…”

Can you say “Ouch!”?

How many times have you delivered disclosure schedules that contained a one-line reference to a set of closing docs that evidence an otherwise complex transaction? In light of Vega, can you sleep at night knowing that you’ve “properly disclosed.” What happened to caveat emptor and opposing counsel’s obligation to its client to figure out what’s in that stack of documents? Is the Vega court is saying that the Ragu Approach (“it’s in there!”) just isn’t enough and that you must not only put the “material facts” under someone’s nose but you must also wave a your arms and yell “HEY BUDDY, LOOK HERE!”?

The opinion has many more pearls of wisdom that will make you do a double take (e.g., the fact that the Certificate of Designation was publicly available wasn’t good enough). Take a look at it.

On the other hand, maybe I’m just over-reacting because the Court’s just reminding us of what our mommies always told us: “Now sweetie, it’s not nice to tell stories…”