Menora Mivtachim Ins. Ltd. v. Frutarom Indus. Ltd.
54 F.4th 82 (2022)
Rule of Law:
Under the purchaser-seller rule, standing to bring a private cause of action under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 is limited to actual purchasers or sellers of securities issued by the company about which a material misstatement was made, even in the context of a merger.
Facts:
- International Flavors & Fragrances Inc. (IFF), a U.S.-based company, acquired Frutarom Industries Ltd. (Frutarom), an Israeli firm, both operating in the flavoring and fragrance industries.
- Plaintiffs are investors who acquired IFF securities between May 7, 2018, and August 12, 2019.
- From 2002 to 2018, Frutarom's executives allegedly engaged in a bribery scheme, making improper payments to clients and officials in Russia and Ukraine to secure business and facilitate product imports.
- On May 7, 2018, Frutarom and IFF announced an anticipated merger.
- Leading up to the merger, Frutarom allegedly made materially misleading statements, some incorporated into IFF's Form S-4 Registration Statement, falsely asserting compliance with anti-bribery laws and attributing financial growth to legitimate factors while omitting the bribery scheme.
- IFF's acquisition of Frutarom closed in October 2018, making Frutarom a wholly-owned subsidiary of IFF.
- On August 5, 2019, IFF acknowledged that Frutarom had made improper payments to representatives of customers in Russia and Ukraine.
- The day after IFF's acknowledgment, its share price dropped nearly 16%.
Procedural Posture:
- Plaintiffs, a putative class of investors, sued Frutarom and its officers (among others) in the United States District Court for the Southern District of New York.
- Plaintiffs alleged violations of Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5, and a claim under Israeli Securities Law.
- The district court granted the defendants' motion to dismiss for failure to state a claim, finding that the complaint failed to allege misconduct with requisite particularity, that the statements were not actionable or material, and that plaintiffs lacked statutory standing under Section 10(b) against the Frutarom defendants.
- Plaintiffs appealed the district court's dismissal to the United States Court of Appeals for the Second Circuit, pursuing their appeal against only Frutarom and four of its officers.
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Issue:
Does a purchaser of securities in an acquiring company have statutory standing under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 to sue a target company for its alleged material misstatements about itself made prior to a merger between the two companies?
Opinions:
Majority - Park, Circuit Judge
No, purchasers of an acquiring company's stock do not have statutory standing under Section 10(b) and Rule 10b-5 to sue a target company for alleged misstatements the target company made about itself prior to the merger. The court affirmed the district court's dismissal, holding that the purchaser-seller rule, established in Blue Chip Stamps v. Manor Drug Stores (adopting Birnbaum v. Newport Steel Corp.), limits standing to actual purchasers or sellers of securities of the issuer about which a misstatement was made. Since Plaintiffs bought shares of IFF, not Frutarom, they lack standing to sue Frutarom based on Frutarom's misstatements. The court emphasized the need to construe judicially created private rights of action narrowly and rejected the Plaintiffs' 'direct relationship' test, warning that such an approach would lead to 'endless case-by-case erosion' of the clear purchaser-seller rule, contrary to the Supreme Court's concerns about vexatious litigation and the need for a formal, not functional, inquiry into standing.
Concurring - Pérez, Circuit Judge
Yes, I agree with the majority that plaintiff IFF investors lack statutory standing to sue Frutarom and its former executives based on the alleged misstatements Frutarom made about itself. However, Judge Pérez argued that the court could have resolved the question by applying the reasoning from Ontario Public Service Employees Union Pension Trust Fund v. Nortel Networks Corp. ('Nortel'), without creating 'new law.' Under Nortel's 'direct relationship' test, the connection between Frutarom’s alleged misstatements and IFF’s stock price was too remote to sustain an action. The concurrence questioned the majority's broad language on narrowing judicially created implied private rights of action generally, asserting that the task of courts is to define the scope of these rights in light of statutory text and precedent, acknowledging that such judicial decisions involve policymaking.
Analysis:
This case reinforces the strict application of the 'purchaser-seller rule' in the Second Circuit, preventing investors from suing a target company for pre-merger misstatements when they only purchased stock in the acquiring company. It signals a continued narrow interpretation of statutory standing under Section 10(b) and Rule 10b-5, particularly in complex corporate transactions like mergers. The decision emphasizes a formalistic approach to standing over a functional 'direct relationship' test, limiting the class of potential plaintiffs and potentially channeling certain claims to state law or SEC enforcement actions rather than federal securities fraud litigation.
