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How To Avoid A Section 11 Liability In A Stock-For-Stock Merger

John Jenkins at DealLawyers.com recently wrote about Section 11 claims being filed in state court by purchasers in stock-for-stock mergers.  Section 11 of the Securities Act of 1933 authorizes a cause of action against specified persons "in case any part of the registration statement, when such part became effective, contained an untrue statement of material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading . . . ".  

It occurred to me that state law could actually be used to avoid Section 11 claims in either state or federal court.  California is one of only a handful of states that offer the opportunity to take advantage of the Section 3(a)(10) exemption from registration under the Securities Act of 1933.  This exemption is most typically used by public issuers who wish to acquire a closely held companies in exchange for securities.  The statutory authority for the procedure in California is Section 25142 of the Corporations Code.  Relying on Section 3(a)(10) by undergoing a fairness hearing eliminates the possibility of Section 11 liability because no registration statement becomes effective under the Securities Act. 

Here are some resources regarding fairness hearings in California:

Elimination of Section 11 exposure, however, does not eliminate liability under other statutes, rules or the common law for false or misleading statements.  In a future post, I'll discuss why it is nevertheless advantageous to issuers to eliminate Section 11 exposure.

© 2010-2022 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume VIII, Number 320
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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
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Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...

949-851-5428
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