Hildes Ex Rel. David & Kathleen Hildes 1999 Charitable Remainder Unitrust v. Arthur Andersen LLP
734 F.3d 854
9th Cir.
2013
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Background

  • Peregrine Systems and Harbinger agreed to a stock-for-stock merger; Harbinger shares would convert to 0.75 shares of Peregrine upon closing.
  • Harbinger directors (including plaintiff Hildes) executed Voting Agreements and Irrevocable Proxies to vote in favor of the merger; proxies terminated on merger closing or on contractually specified termination events.
  • Peregrine filed an S-4 Registration Statement (including audited financials) that Hildes alleges contained material misstatements/omissions (massive revenue overstatement and understated losses).
  • Shareholders approved the merger after the Registration Statement was filed; Hildes’ Harbinger shares were exchanged for Peregrine stock at closing.
  • Hildes sued under Section 11 of the Securities Act to add claims against former Peregrine outside directors who signed the Registration Statement; the district court denied leave to amend as futile, concluding a pre-registration irrevocable commitment barred causation.
  • The Ninth Circuit reversed, holding Hildes adequately alleged that the Registration Statement’s misrepresentations caused the exchange and thus a Section 11 claim was not futile.

Issues

Issue Plaintiff's Argument Defendant's Argument Held
Whether negative-causation (loss causation) bars a post-registration-acquisition Section 11 claim Hildes: He acquired Peregrine stock pursuant to the Registration Statement and alleges the Registration Statement’s misstatements caused the merger/ exchange and his losses Directors: Hildes irrevocably committed to the merger/exchange before the Registration Statement, so misstatements could not have caused his loss Held: Reversed district court — Hildes plausibly alleged misrepresentations caused the merger/exchange; negative-causation not established as a matter of law
Whether signing a Voting Agreement/Irrevocable Proxy prior to filing equates to an irrevocable commitment to acquire securities under Section 11 Hildes: The proxy bound only voting, not unconditional exchange; exchange was contingent on conditions and the Registration Statement Directors: The pre-filing agreements effectively committed shareholders to the exchange, defeating traceability/causation Held: Proxy did not irrevocably commit Hildes to exchange; transaction remained conditional and traceable to the Registration Statement
Whether Section 11 requires plaintiff reliance where acquisition occurred within 12 months of registration Hildes: Reliance not required for acquisitions within 12 months; Section 11 imposes broad liability Directors: Argued reliance/causation effectively impossible due to pre-registration commitments Held: Confirmed Section 11 generally lacks a reliance element for <12-month acquisitions; causation defense is affirmative and defendants bear heavy burden
Sufficiency of proposed amendment to plead a viable Section 11 claim Hildes: Allegations trace acquisition to the defective Registration Statement and explain how misstatements led to the merger/exchange Directors: Amendment futile because negative causation defeats the claim as a matter of law Held: Amendment not futile; plausible theories (board termination for breach, shareholder rejection, rescission, sale, injunction) avoid negative-causation as matter of law

Key Cases Cited

  • Sanford v. MemberWorks, Inc., 625 F.3d 550 (9th Cir. 2010) (standard of review for denial of leave to amend)
  • Carvalho v. Equifax Info. Servs., LLC, 629 F.3d 876 (9th Cir. 2010) (leave to amend proper unless amendment cannot save complaint)
  • Herman & Maclean v. Huddleston, 459 U.S. 375 (U.S. 1983) (Section 11 imposes minimal burden; material misstatement establishes prima facie case)
  • Silverstrand Invs. v. AMAG Pharms., Inc., 707 F.3d 95 (1st Cir. 2013) (Section 11 lacks reliance and scienter requirements for <12-month acquisitions)
  • Hutchison v. Deutsche Bank Sec. Inc., 647 F.3d 479 (2d Cir. 2011) (no reliance or scienter element required under Section 11)
  • In re Constar Int’l Inc. Sec. Litig., 585 F.3d 774 (3d Cir. 2009) (Section 11 does not demand individualized reliance proof)
  • In re Worlds of Wonder Sec. Litig., 35 F.3d 1407 (9th Cir. 1994) (recognizing negative-causation/loss-causation defense; defendant bears heavy burden)
  • Provenz v. Miller, 102 F.3d 1478 (9th Cir. 1996) (defendant must prove depreciation due to factors other than misstatement)
  • APA Excelsior III L.P. v. Premiere Techs., Inc., 476 F.3d 1261 (11th Cir. 2007) (pre-registration binding commitments can defeat Section 11 claims; distinguished on facts)
  • SEC v. National Student Marketing Corp., 457 F. Supp. 682 (D.D.C. 1978) (merger agreement conditions meant no binding irrevocable commitment; registration misstatements could be causally related)
  • Rubke v. Capitol Bancorp Ltd., 551 F.3d 1156 (9th Cir. 2009) (PSLRA heightened pleading standards generally do not apply to Section 11 claims)
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