DealLawyers.com Blog

November 29, 2018

M&A Litigation: Using a Fairness Hearing to Avoid Section 11 Claims

I recently blogged about the growth in state court Section 11 lawsuits surrounding stock-for-stock mergers. Section 11 of the Securities Act applies only to registered offerings. Since that’s the case, this Keith Bishop blog reminds companies about an alternative to registration that some may want to consider – a state court fairness hearing that would permit the shares to be issued under the Section 3(a)(10) exemption. Here’s an excerpt:

Section 11 of the Securities Act of 1933 authorizes a cause of action against specified persons “in case any part of the registration statement, when such part became effective, contained an untrue statement of material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading . . . “.

It occurred to me that state law could actually be used to avoid Section 11 claims in either state or federal court. California is one of only a handful of states that offer the opportunity to take advantage of the Section 3(a)(10) exemption from registration under the Securities Act of 1933. This exemption is most typically used by public issuers who wish to acquire a closely held companies in exchange for securities. The statutory authority for the procedure in California is Section 25142 of the Corporations Code. Relying on Section 3(a)(10) by undergoing a fairness hearing eliminates the possibility of Section 11 liability because no registration statement becomes effective under the Securities Act.

The blog includes links to a number of resources on the 3(a)(10) exemption and the California fairness hearing process. In a subsequent blog, Keith discusses the reasons why companies may want to make the effort to avoid potential Section 11 claims.

John Jenkins