Menora Mivtachim Ins. Ltd. v. Frutarom Indus. Ltd.
54f4th82
2d Cir.2022Background:
- IFF (a U.S. company) acquired Frutarom (an Israeli target) in a transaction announced May 7, 2018 and closed October 2018.
- Plaintiffs are a putative class of investors who bought IFF securities between May 7, 2018 and August 12, 2019.
- Plaintiffs allege Frutarom ran a long‑running bribery scheme (Russia/Ukraine and customers) and made material misstatements about anti‑bribery compliance and sources of growth, many of which were incorporated into IFF’s proxy/registration materials.
- On August 5–6, 2019 IFF disclosed improper payments by Frutarom; IFF’s stock plunged ~16% the next day.
- Plaintiffs sued Frutarom and certain officers under Section 10(b)/Rule 10b‑5 (and related claims); the district court dismissed and held plaintiffs lack statutory standing to sue Frutarom.
- The Second Circuit affirmed: under the Blue Chip Stamps purchaser‑seller rule, Section 10(b) private plaintiffs must have bought or sold securities of the issuer about which the misstatement was made; IFF purchasers did not buy Frutarom stock and therefore lack standing to sue Frutarom under Section 10(b).
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether IFF shareholders have Section 10(b) standing to sue Frutarom for Frutarom’s alleged misstatements about itself | Plaintiffs: Frutarom’s misstatements were directly linked to IFF’s disclosures and IFF stock price (merger integration), so they should have standing | Frutarom: Purchaser‑seller rule limits standing to purchasers/sellers of the issuer about which a misstatement was made; plaintiffs bought IFF, not Frutarom | Held: No standing—plaintiffs bought IFF, not Frutarom, so cannot sue Frutarom under Section 10(b) |
| Whether a “direct‑relationship” or functional test (linking target’s statements to acquirer’s stock) overcomes purchaser‑seller rule | Plaintiffs: adopt a functional/direct‑relationship test given merger context and intercompany disclosures | Frutarom: Reject functional test; Blue Chip Stamps requires a limiting, formal rule to avoid case‑by‑case erosion | Held: Rejected plaintiff’s functional/direct test; applied purchaser‑seller rule strictly |
| Whether the merger context creates an exception to purchaser‑seller rule | Plaintiffs: merger creates sufficiently close relationship to permit suit | Frutarom: Merger does not change the statutory standing rule | Held: Merger does not confer Section 10(b) standing on purchasers of the acquirer’s stock to sue the target for the target’s pre‑merger misstatements |
Key Cases Cited
- Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975) (adopted purchaser‑seller rule limiting Rule 10b‑5 private plaintiffs to actual purchasers or sellers of the issuer’s securities)
- Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir. 1952) (origin of purchaser‑seller limitation)
- Ontario Pub. Serv. Emps. Union Pension Tr. Fund v. Nortel Networks Corp., 369 F.3d 27 (2d Cir. 2004) (held purchasers lacked standing to sue a different company whose statements harmed them; left open merger‑exception question)
- In re NYSE Specialists Sec. Litig., 503 F.3d 89 (2d Cir. 2007) (clarified Nortel’s reasoning that the connection was too remote in those circumstances)
- Janus Capital Grp., Inc. v. First Derivative Traders, 564 U.S. 135 (2011) (cautionary principle: narrowly construe judicially created private rights under Rule 10b‑5)
- Stoneridge Inv. Partners, LLC v. Scientific‑Atlanta, Inc., 552 U.S. 148 (2008) (warned against expansion of implied Section 10(b) private causes of action)