On November 26, 2008, in Glazer Capital Management, LP v. Magistri (2008WL 5003306 (C.A.9 (Cal.))), the US Court of Appeals for the Ninth Circuit stated that representations and warranties in a merger agreement are not immune from a securities fraud claim under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. However, because of the context and limited nature of the misrepresentations in this case, the court found that the mere fact that an officer of the company had knowledge of a misstatement was insufficient to satisfy the scienter requirements, thus limiting a company's potential liability for "collective scienter" based on representations and warranties made in a merger agreement.

On March 15, 2004, InVision Technologies, Inc. (InVision), a publicly traded company engaged in the manufacture and sale of explosives detection systems, entered into a merger agreement with General Electric Company (GE). The merger agreement, signed by InVision's CEO and COO, was filed with the Securities and Exchange Commission (SEC) as an exhibit to InVision's form 10-K. On July 30, 2004, InVision issued a press release stating that it had voluntarily reported to the SEC and the Department of Justice (DOJ) that InVision employees may have violated the Foreign Corrupt Practices Act of 1997 (FCPA) in connection with certain foreign sales transactions. Following that announcement, the price of InVision's stock dropped by more than US$6 per share. A few days later, InVision shareholders filed a class action complaint in the Northern District of California alleging that InVision, its CEO and its CFO violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. Specifically, the plaintiff identified three statements in the representations and warranties section of the merger agreement that were inaccurate due to the FCPA violations. In the complaint, the plaintiff did not cite any specific instances to show that the CEO had knowledge of the FCPA violations at the time when he signed the merger agreement and thus made the representations in question. Instead, the plaintiff attempted to show that the CEO qualified as having scienter of those violations based on certain circumstantial factors.

Affirming the district court's dismissal of the case, the Ninth Circuit rejected InVision's argument that the mere context of the three alleged misstatements rendered them legally incapable of supporting a securities fraud claim because the court did not accept InVision's argument that since the merger agreement included a "no third party beneficiary" clause, and since the representations were qualified by statements in an unavailable disclosure schedule, no one could reasonably rely on such misstatements. But the court concluded that the context was clearly relevant to the issue of scienter.

The court analyzed whether the complaint met the requirements for scienter under the Private Securities Litigation Reform Act of 1995 (PSLRA). First the court determined that, in this case, because of the limited nature and context of the alleged misstatements, the plaintiff was required to successfully plead scienter with respect to the CEO individually for the company to be found to have scienter. The court refused to apply the theory of collective scienter, which would have held the company liable for the misstatements in the merger agreement as long as someone in the company had scienter.

The court found that because the plaintiff failed to show that the CEO was personally aware of the FCPA violations or that he was actively involved in the details of those violations, the circumstantial factors cited by the plaintiff were insufficient to show scienter on the part of the CEO. The factors rejected by the court were: 1) the relatively small size and nature of the company's business; 2) the fact that the CEO signed a Sarbanes-Oxley certification; 3) the discovery of the FCPA violations by GE early in the due diligence process; 4) the personal financial incentives for the CEO to consummate the merger; and 5) the conclusions about the FCPA violations contained in InVision's settlement documents with the SEC and DOJ.

In Glazer, although the court ruled that a statement in a merger agreement is not immune from a securities fraud claim, the court also concluded that except for the extreme situation in which knowledge of the misrepresentation is pervasive within the company, a plaintiff bringing such a case must show that the officers who signed that merger agreement were individually aware that a statement in that merger agreement was not true.