October 26, 2022

M&A Disclosure: 2nd Cir. Adopts Bright Line Test for Rule 10b-5 Standing

In Menora Mivtachim Insurance Ltd. v. Frutarom Industries Ltd., (2d. Cir.; 9/22), the Second Circuit held that only target stockholders have standing to assert Rule 10b-5 claims based on the target’s disclosures relating to a merger. This excerpt from Fried Frank’s memo on the decision summarizes the Court’s key holding:

The decision establishes a bright-line test for bringing Rule 10b-5 disclosure claims, limiting standing to plaintiffs who “bought or sold shares” of the company about which the alleged misstatements were made. Because the alleged misstatements in this case had been made by the target company about itself prior to the merger, investors who, after announcement of the planned merger had purchased shares of the acquiror (but not shares of the target company), did not have standing to bring Rule 10b-5 disclosure claims against the target.

The court rejected the plaintiffs’ argument that, based on precedent, it had standing given the “significant” and “direct” relationship between the acquiror and the target (including the acquiror’s incorporation of the misstatements into its press releases and registration statement relating to the merger, as well as the direct impact of the misstatements on the acquiror’s stock price).

The memo discusses the Court’s decision in detail and observes that since claims for a target’s pre-merger statements generally cannot be brought against the buyer, the buyer’s stockholders may be unable to assert federal disclosure claims relating to pre-closing misstatements by the target, even if they impacted the buyer’s stock price.

John Jenkins