April 19, 2014

Tenth Circuit: Investor Forced to Sell Shares as the Result of a Merger Does Not Have Standing to Sue as a Purchaser of Securities under 1933 Act

The Tenth Circuit Court of Appeals issued its opinion in Katz v. Gerardi on Thursday, August 25, 2011.

The Tenth Circuit affirmed the district court’s decision. Petitioners were minority shareholders in a real estate investment trust owned by a public company. The company entered into a merger agreement in which two investors acquired all of their outstanding public shares. As part of the merger, Petitoiners were squeezed out of the investment trust and had the option of receiving either cash or stock in the newly formed entity in exchange for their shares. Petitioner separately sued and claimed the offering documents associated with the merger contained false and misleading statements or omissions. The district court dismissed their complaint when Petitioners tried to join them together, finding that one of the petitioners was improperly splitting claims that should have been alleged in its earlier action. The court also found the other petitioner lacked standing to bring his securities law claims since he was not a purchaser when he opted to sell his shares.

The Court agreed with the district court’s analysis of the issues. As a result of the joinder, one of the petitioners had filed two cases in the same district court, involving the same subject matter, seeking the same claims for relief against the same defendants; the district court did not abuse its discretion by dismissing that petitioner from the case for claim splitting.

The district court also properly dismissed the other petitioner’s 1933 Act securities claims. The court concluded that he was not a purchaser of securities and therefore lacked standing to bring those claims. Petitioner contested this conclusion, “arguing he, in fact, was a purchaser under the securities laws for a single reason: the merger caused a fundamental change of his A-1 units that so altered the nature of his investment as to transform them into “new” A-1 Units. In his view, the A-1 Units lost their valuable liquidity, dividend, and tax indemnification features upon the announcement of the merger. The merger effectively forced him to purchase the “new” A-1 Units, which lacked the advantageous characteristics of the “old” units, for purposes of the 1933 Act.” The Court rejected this argument and determined that the merger did not force him to purchase new securities, but only to sell his A-1 Units for cash or new units. Since 1933 Act claims only give standing to purchasers of securities, his claims were properly dismissed.

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