Buzz Article:
Silence is Golden - Second Circuit Affirms No Duty to Disclose Merger Negotiations

by Gregg J. Berman and Jaclyn Lisa Rabin of Fulbright & Jaworski LLP, 7/6/2010

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Introduction

Consistent with long-term practice, the U.S. Court of Appeals for the Second Circuit upheld a district court's dismissal of a civil securities lawsuit, maintaining that there is no duty to disclose merger negotiations and that silence on the issue of merger discussions is not misleading. Thesling and Johnson v. Bioenvision, Inc. No. 09 Civ. 3487, 2010 WL 1337699 (2d Cir. Apr. 7, 2010).

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The action arose from a merger between two pharmaceutical companies, Bioenvision, Inc. and Genzyme Corporation. The plaintiff brought the claims in the Southern District of New York, pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act ("Exchange Act"). The plaintiff alleged that the corporate defendant had made seven specific filings and press releases that were rendered materially misleading due to the defendant's failure to disclose its engagement in merger negotiations with a non-party entity, Genzyme Corporation. The plaintiff contended that the defendant's omissions had the effect of "artificially suppress[ing]" the price of Bioenvision securities during the class period. The plaintiff had sold Bioenvision stock before the merger was officially announced and before the resulting sharp increase in the stock price.

Section 10(b) of the Exchange Act forbids the use of "any manipulative or deceptive" practice "in connection with the purchase or sale of any [registered] security…." Rule 10b-5, which the SEC promulgated pursuant to Section 10 of the Exchange Act, states that it is "unlawful for any person…[t]o make any untrue statement of a material fact or omit to state a material fact necessary to [prevent] the statements made, [from becoming] misleading…in connection with the purchase or sale of any security."

In affirming the district court's dismissal of the plaintiff's claims, the Second Circuit noted that an omission is only actionable where the securities laws "impose a duty to disclose the omitted information" and that no express duty requires the disclosure of "merger negotiations, as opposed to a definitive merger agreement." Unlike prior Second Circuit cases, this case did not involve a situation whereby the defendant corporation had specifically made statements about strategic alliances and failed to prevent those earlier statements from misleading the public. Similarly, this was not a case where the defendant had affirmatively denied merger negotiations, thus giving rise to a duty to speak truthfully and completely. Lastly, the defendant was not falsely assuring the plaintiff that "nothing was going to change in the [company's] near future" while engaging in strategic alternatives. Castellano v. Young & Rubicam, Inc., 257 F.3d 171 (2d Cir. 2001).

If a company elects to remain silent about business objectives that would be specifically affected by a merger, or more generally about merger prospects, it would not be required to publicly announce then-inchoate merger discussions. As noted by the Second Circuit, "a corporation is not required to disclose a fact merely because a reasonable investor would very much like to know that fact."

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Gregg J. Berman, Partner,

EXPERIENCE

Gregg Berman is a partner in Fulbright & Jaworski L.L.P.'s New York office and a Vice Chair of its Securities Practice Group. He has an active corporate and securities practice, representing companies and investment banks in all types of public and private debt and equity offerings, including cross-border transactions.

Gregg also represents public and private companies in merger and acquisition activities, with a particular emphasis on complex international transactions.

Jaclyn L. Rabin, Associate,

EXPERIENCE

Jaclyn Rabin joined the New York location of Fulbright & Jaworski L.L.P. in 2008. As an associate, she works with the firm's Corporate practice group.

EDUCATIONAL BACKGROUND

2008 - LL.M, magna cum laude, Duke University School of Law
2006 - LL.B., Law, University of Cape Town

Fulbright & Jaworski LLP

Fulbright & Jaworski, a full-service international law firm, serves the needs of businesses, governments, non-profit organizations and individual clients around the world. Fulbright is one of the largest law firms in the United States with an estimated 950 lawyers and more than 60 integrated practice areas. There are sixteen Fulbright locations world-wide, with international locations in Beijing, London, Munich, Hong Kong, Dubai and Riyadh.

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Material in this work is for general educational purposes only, and should not be construed as legal advice or legal opinion on any specific facts or circumstances. For legal advice, please consult your personal lawyer or other appropriate professional.

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