SW Legal Educational Publishing

Merger Mania Statements Fuel Investments
But Are Not Actionable As Fraudulent
Description Court of Appeals upholds finding that forward-looking, vaguely optimistic statements regarding mergers are not actionable under securities law fraud statutes when defendant provided risk disclosures and other statements in SEC filings warning about stock price fluctuations.
Topic Securities Law
Key Words Fraud, Forward Looking Statements
C A S E   S U M M A R Y
Facts Novell announced it would merge with WordPerfect. To complete the merger, Novell issued stock that it exchanged for WordPerfect stock. A registration statement was filed with the SEC in connection with the stock issue. Soon after the merger, Novell's stock fell 7%. Grossman sued in a class action suit alleging false and misleading statements and omissions from Novell that inflated the price of the stock before its fall. The cited statements included statements by company executives that the merger was "perhaps the smoothest of mergers in recent history," that the merger was moving "faster than we thought it would," that WordPerfect was "gaining market share ... from less than 20% in 1992 to more than 40% today [1994]," and that the merger created "a compelling set of opportunities." Trial court dismissed the suit. Grossman failed to allege a materially misleading statement or omission based on the statements cited. Grossman appealed.
Decision Affirmed. "Forward-looking representations are ... immaterial when the defendant has provided the investing public with sufficiently specific risk disclosures or other cautionary statements concerning the subject matter of the statements at issue to nullify any potentially misleading effect." The SEC filings contained warnings that Novell's earnings and stock price could fluctuate after the merger. "Vague, optimistic statements are not actionable because reasonable investors do not rely on them in making investment decisions."
Citation Grossman v. Novell, Inc., ---F.3d--- (1997 WL 450085; 10th Cir.)
or
120 F.3d 1112 (10th Cir., 1997)

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