As mere mortals, we experience time as proceeding in one direction only. We can move forward in time, but never backwards (at least not yet). To illustrate, suppose there are two events, which I creatively call ”Event A” and “Event B”. If Event A occurs before Event B, can Event B ever be said to have caused Event A? Yesterday, the Ninth Circuit Court of Appeals issued an opinion that seemed to permit such an improbable result.

The plaintiff in Hildes v. Arthur Andersen LLP, 2013 U.S. App. LEXIS 17177 (9th Cir., Aug. 9, 2013) had been a director and stockholder of a company that merged with a subsidiary of Peregrine Systems, Inc. In connection with the merger, the plaintiff had signed a voting agreement and an irrevocable proxy to vote in favor of the merger. Thereafter, Peregrine filed a registration statement on Form S-4, which allegedly contained material misstatements and omissions. District Court Judge Roger T. Benitez dismissed the plaintiff’s lawsuit because “any alleged loss was not logically to be attributed to misrepresentations or omissions in the registration statement”. This is sometimes referred to as the “negative causation” defense. Judge Benitez also denied the plaintiff leave to amend his complaint to bring a claim under Section 11 of the Securities Act.

The Ninth Circuit in an opinion by Judge Carlos F. Lucero (sitting by designation) reversed, reasoning:

Although the Voting Agreement and Irrevocable Proxy irrevocably committed Hildes [the plaintiff] to have his shares voted in favor of the merger, it did not irrevocably commit him to exchange his Harbinger shares for Peregrine shares. Any exchange of shares remained contingent on the consummation of the merger. As Hildes plausibly alleges in his proposed second amended complaint, the merger would not have occurred had the Registration Statement been truthful.

Thus, the Court didn’t hold that the plaintiff could plead that the subsequently filed registration statement had caused him to sign the voting agreement and proxy. Rather, the Court held that the plaintiff should be allowed to plead that the registration statement caused his loss because he had purchased the Peregrine shares through the subsequent exchange of shares in the merger.

Last year, I discussed another decision involving Peregrine in Director May Pursue Malicious Prosecution Claims Against Plaintiffs’ Attorneys.