The U.S. Court of Appeals for the Fourth Circuit, in an “unpublished” decision (which is not binding precedent under the Court’s rules), affirmed the dismissal of state law securities and fraud claims brought by Sherwood Brands, Inc. against a candy cane manufacturer’s (Asher) Chairman and his sister, who was Asher’s majority shareholder, over a failed merger and acquisition deal. The dispute arose when, following execution of the Merger Agreement, Sherwood discovered adverse information about Asher’s financial condition.
Sherwood alleged that representations and warranties made by Asher in the Merger Agreement were false and that the Chairman and his sister violated Maryland’s securities laws which impose liability on (i) any person selling securities by means of an untrue statement or omission of material fact, and (ii) persons who control sellers who are directly liable under Maryland law.
The Court affirmed the lower court ruling that no liability existed as to either defendant. With respect to the majority shareholder, the Fourth Circuit agreed that there was no evidence that the Chairman’s sister personally made any representations to Sherwood. With respect to the claims against Asher’s Chairman, the Court first found that he did not own, and, thus, did not sell, any securities pursuant to the Merger Agreement. The Court ruled that, as a result, the Chairman could not be directly liable as a seller. The Court then considered whether the Chairman was liable as a control person based upon Sherwood’s allegations that he controlled the company and was actively involved in the negotiations leading to the merger. The Court held that these allegations did not suffice as a matter of law because, under the terms of the Merger Agreement, Asher’s shareholders – rather than the company – were the sellers. (Sherwood Brands, Incorporated v. Leonard Levine, No. 06-1509 (Oct. 30, 2007 4th Cir.))