DealLawyers.com Blog

In HBK Master Fund v. MaxLinear, (S.D. Cal. 1/25), a California federal district court dismissed securities fraud claims asserted by target stockholders against the proposed buyer arising out of a failed acquisition.  In essence, the plaintiffs’ claimed that MaxLinear and its affiliates made material misrepresentations and omissions about the company’s commitment to its proposed acquisition of Silicon Motion Technology Corporation, while secretly planning to breach the merger agreement and terminate the deal.

The Court concluded that because the plaintiffs’ weren’t stockholders of the purchaser, they lacked standing to assert securities fraud claims based on that company’s statements. This excerpt from a recent A&O Shearman memo summarizes the plaintiffs’ arguments and the Court’s reasoning:

Plaintiffs, investment funds that invested in the Target Company from June 2 to June 26, 2023, alleged that defendants misled investors about the Company’s commitment to merge with the Target Company and the potential benefits of such a merger.  Specifically, plaintiffs alleged that defendants allegedly made material misrepresentations and omissions about the Company’s intent regarding the combination with the Target Company, all while allegedly secretly planning to breach the merger agreement after the merger no longer appeared to be an attractive business proposition.  Plaintiffs further alleged that when the merger was approved by the regulatory authorities, defendants fabricated a breach by the Target Company to avoid liabilities associated with terminating the transaction.

Applying the Ninth Circuit purchaser-seller rule, the Court held that a plaintiff has standing under Section 10(b) of the Exchange Act if the plaintiff purchased or sold the securities about which the alleged misrepresentations were made.  According to the Court, the Ninth Circuit has set a “bright-line rule that the security at issue must be one about which the alleged misrepresentations were made.”  Because the alleged misrepresentations were made about the Company’s security, rather than the Target Company’s security, and because plaintiffs did not hold the Company’s securities during the relevant period, the Court held that plaintiffs did not allege statutory standing to bring their Section 10(b) and 20(a) claims.

The Court’s position that only buyers and sellers of stock in the corporation making an alleged misstatement have standing to pursue securities fraud claims is in keeping with the 9th Circuit’s decision in Max Royal LLC v. Atieva, Inc. (9th. Cir.; 8/24), which we blogged about last year.

– John Jenkins