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LegalEase Sample – Memorandum on Private Placement DELAWARE

Memorandum on Private Placement DELAWARE

To: Large Law Firm, New York, NY

From: LegalEase Solutions, LLC

Date: 1/16/2006

Re: Private Placement Memorandum/Fraud Allegations/Reasonable Reliance

Introduction

You have asked us to research, identify and summarize the key cases on the issue of what might be held to constitute reasonable reliance on representations made in a private placement memorandum offering interests in a fund. These issues require discussion of:

Relevant Cases

DELAWARE

1. AES Corp.V. The Dow Chemical Company; Dynegy Power Corporation., 325 F.3d 174 (3rd Cir. 2003)

Plaintiff purchaser sued defendants, a parent company and a subsidiary, alleging securities law violations in connection with a transaction in which the purchaser bought the stock of the subsidiary’s subsidiary. After the subsidiary settled, the United States District Court for the District of Delaware granted summary judgment in favor of the parent company. The purchaser appealed.

The purchaser alleged that defendants violated the Securities Exchange Act of 1934 by conspiring to sell the purchased company at an artificially inflated price by making misrepresentations material to an evaluation of the purchased company. The district court determined that non-reliance clauses in the transaction documents rendered the purchaser’s reliance on the alleged misrepresentations unreasonable as a matter of law. The appellate court disagreed and determined that enforcement of the non-reliance clauses to bar the purchaser’s fraud claims as a matter of law would be inconsistent with § 29(a) (15 U.S.C.S. § 78cc(a)) of the Securities Exchange Act of 1934, which forecloses anticipatory waivers of compliance with the duties imposed by Rule 10b-5, 17 C.F.R. § 240.10b-5. The appellate court rejected the parent company’s argument that it would be impossible for a buyer to show reasonable reliance in any case where there is a non-reliance clause. Rather, the existence of the non-reliance clauses should have been treated as one of the circumstances to be taken into account in determining whether the purchaser’s reliance was reasonable. The appellate court reversed the judgment of the district court.

2. Harry Lewis v. The Dow Chemical Company, 1992 U.S. Dist. LEXIS 15792 (D. Del. 1992)

Plaintiff investor instituted the class action against defendant corporation that asserted that the company engaged in fraudulent practices to reduce the redemption value of securities issued as part of a merger of a subsidiary with another company in violation of Section 10(b) of the Securities Exchange Act of 1934 and its implementing regulation, Rule 10b-5. 17 C.F.R. § 240.10b-5 (1991). The company filed a motion to dismiss.

The securities that were involved were contingent value rights, which had been issued to shareholders of an acquired company as part of the acquisition and were redeemable on call by the company. The company asserted that the investor did not have standing to sue under Rule 10b-5 since he was not a purchaser or seller of securities because the contingent value rights were issued and redeemed and that he failed to show reliance, an element of causation, since the contingent value rights were issued and redeemed without representations that could be considered inducements to a purchase or sale. The court granted the motion to dismiss because it determined that the investor lack standing to bring the action. The court found that the investor had failed to assert that there was reliance on a fraudulent representation, which was a necessary element of a Rule 10b-5 cause of action. The court further found that the invocation of the forced sale doctrine did not relieve the investor of the requirement of establishing reliance for the cause of action.

The court granted the company’s motion to dismiss the investor’s securities fraud claims.

3. Raymond K. Peil v. Marvin M. Speiser, 806 F.2d 1154 (3rd Cir. 1986)

Plaintiffs appealed a jury verdict and an order for a directed verdict from the United States District Court for the Eastern District of Pennsylvania for defendants in a class action suit based on alleged violations of the federal Securities Acts and the common law. Plaintiffs in a class action suit claimed that misrepresentations by defendants violated 17 C.F.R. § 240.10b-5, § 11 of the Securities Act of 1933, 15 U.S.C.S. § 77k, and the common law. The court affirmed the judgment below, finding that the directed verdict as to the common law and § 11 claims were proper as plaintiffs did not directly rely on the misrepresentations of defendants. The court found that the directed verdict as to the claim based on 17 C.F.R. § 240.10b-5(b) was an error by the court below, because the claim in, addition to the § 240.10b-5(a) and (c) claims, could be supported by the “fraud on the market” theory. However, as the harmless error did not exclude any of the evidence presented by plaintiffs, the jury instructions and verdict precluded a new trial. The order for a directed verdict and jury verdicts was affirmed because the order was appropriate for the common law claims, and while the order was in error for the securities law claim, the effect of the jury verdict, given the jury instructions presented, precluded the need for a new trial and was harmless error.

To prevail in a common law action for deceit, a plaintiff had to establish six elements: 1) a false representation of 2) a material 3) fact; 4) defendant’s knowledge of its falsity and his intention that plaintiff rely on it; 5) the plaintiff’s reasonable reliance thereon; and 6) his resultant loss. There is little dispute that plaintiffs in 17 C.F.R. § 240.10b-5 claims must generally satisfy all of these requirements as well. Id at 1161.

4. In re Ramada Inns Sec. Litigation, 550 F. Supp. 1127 (D. Del. 1982)

Shareholders claimed that a corporation and directors fraudulently inflated the price of common stock. The alleged fraud caused an artificial inflation of the corporation’s stock during the period when the shareholders were purchasing stock. The court denied the motion to dismiss and held that the shareholders could be able to introduce sufficient evidence of a causal connection between the management’s misleading information and the stock price. They also could show that they relied on the pricing of stock in the market to permit an inference that management’s misconduct was responsible for their unfortunate investment decision. The shareholders’ attorneys, even if relying solely on information from the Wall Street Journal to support the shareholders’ claims, satisfied their obligation under Fed. R. Civ. P. 11. The claims were not dismissed for failure to state a claim.

5. Jacobs v. Hanson, 464 F. Supp. 777 (D. Del. 1979)

Plaintiffs alleged that majority stockholders and officers unlawfully transferred assets to other defendants for lucrative consulting agreements. Defendants allegedly made misrepresentations to minority shareholders to induce them to vote for the sale of assets and to permit liquidation of the corporation. The court denied a motion to dismiss, which was treated as a summary judgment motion, holding that: (1) the evidence supported a causal connection between the alleged misrepresentation and the transactions giving rise to the loss of assets and was sufficient to preclude summary judgment; (2) the alleged fraud and misrepresentations were made in connection with the forced sale of securities, which, thus, stated a claim under § 10(b) of the Act and under S.E.C. Rule 10b-5; (3) the filing of the certificate of dissolution in Delaware was an integral and essential part of the scheme so as to establish venue under § 27 of the Act, 15 U.S.C.S. § 78aa; and (4) transfer was denied where the degree of inconvenience was not substantial so as to overcome the presumption in favor of plaintiffs’ choice of venue. The court denied defendants’ motion to dismiss the action alleging securities violations. The court also denied defendants’ alternative motion to transfer the action.