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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.

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...