DealLawyers.com Blog

On Friday, in Guerra v. Snap (Del. Ch.; 5/26), the Delaware Court of Chancery addressed a motion to dismiss fraudulent inducement claims related to SNAP’s 2021 acquisition of Popwallet brought by the former CEO and co-founder acting as representative of Popwallet’s former stockholders. The statements underlying the fraudulent inducement claims were premised on public statements and SEC filings made by SNAP. 

For his equitable fraud claim, Guerra alleges “Snap publicly made numerous material misrepresentations and omissions meant to induce Popwallet and its former stockholders to enter into the Merger Agreement with a purchase price that Snap would pay in inflated stock.” Guerra also alleges “Popwallet, its board of directors, and Elias Guerra as the Securityholder Representative justifiably relied on Snap’s public statements and SEC filings in negotiating and agreeing to the Merger Agreement’s terms because Snap had an independent duty to provide accurate information to stockholders and the SEC.” [. . .] Guerra’s common-law fraud claim makes essentially the same allegations as the equitable fraud claim.

SNAP pointed to SLUSA, or the Securities Litigation Uniform Standards Act of 1998, which preempts certain state-law-based securities fraud class actions involving “covered securities” under the Private Securities Litigation Reform Act of 1995, with limited exceptions. Before SLUSA’s enactment, plaintiffs had used state-law-based class actions to avoid the heightened pleading requirements and other procedural impediments imposed on federal securities class actions by the PSLRA. Under SLUSA, federal claims are generally the only ones permitted to be made for class actions involving securities traded on a national securities exchange, and federal court is the only forum in which those claims may be brought.

SLUSA preemption requires that:

– The action is a “covered class action;”

– The claims asserted in the state court complaint are state-law claims;

– The action involves a “covered security”;

– The complaint alleges “either (a) a misrepresentation or omission of a material fact or (b) the use of any manipulative or deceptive device or contrivance;” and

– The misrepresentations or omissions were made in connection with the sale or purchase of “covered securities.”

The Chancery Court found that:

Each element of SLUSA preemption is present: this action is a covered class action based on state law that involves a covered security and alleges misrepresentations or omissions of a material fact in connection with the purchase or sale of a covered security. Under SLUSA, this action is preempted and must be dismissed.

In so doing, the court pointed out that the action was a covered class action since Popwallet’s former stockholders, not the former CEO or Popwallet, are “persons” with common questions of fact and law, and the former CEO was acting on their behalf. It rejected the plaintiff’s argument that the action did not involve a “covered security” because Popwallet stockholders received restricted shares of SNAP that weren’t immediately transferable. Finally, it said, “a misrepresentation is ‘in connection with the purchase or sale of a covered security’ if it is ‘material to the decision by one or more individuals (other than the fraudster) to purchase or sell a covered security.’ [. . .] This includes stock acquired through a merger.”

– Meredith Ervine