In this week’s Alabama Law Weekly Update, we report on one case from the Alabama Supreme Court regarding the jurisdiction of Alabama courts and one case from the U.S. Court of Appeals for the Eleventh Circuit regarding a corporation’s duty under the Securities Exchange Act to correct prior misstatements.
Alabama et al. v. Boys And Girls Clubs of South Alabama, Inc., _____So. 2d. _______ (Ala. 2014) (Alabama Code Section 6-5-440 compels the dismissal of an action when another action involving the same cause and the same parties was previously filed in another court).
In 1996, B.R. Wilson, Jr. (“Wilson”), one of the incorporators of The Boys and Girls Clubs of South Alabama, Inc. (“BGCSA”), executed a deed transferring to BGCSA approximately 17 acres of real estate. Contemporaneously with the execution of the deed, Wilson gave a letter to BGCSA stating that BGCSA was “‘free to ultimately dispose of this property,’” but that it was Wilson’s “‘desire and understanding that [BGCSA] will use the proceeds from any such disposition for [BGCSA's] facilities and/or activities in the Fairhope–Point Clear area.’”
Wilson died and two actions were filed. First, on May 16, 2013, BGCSA filed a declaratory action in the Mobile Circuit Court (the “Mobile Action”) seeking entitlement to the funds attributable to Wilson’s gift (the “Wilson Funds”). Second, on June 13, 2013, the Eastern Shore Clubs filed an action in the Baldwin Circuit Court seeking declaratory and injunctive relief against BGCSA, alleging that BGCSA “ha[d] used,” or, perhaps, was “anticipat[ing] using,” the Wilson Funds for its own operations, rather than for the benefit of the Eastern Shore Clubs. The Baldwin Circuit Court entered a judgment in which it determined Wilson’s intent was that the Wilson Funds should be used for the “exclusive benefit of the Fairhope and Daphne Clubs,” and ordered the disbursal of the remainder of the Wilson Funds. BGCSA sought a writ of mandamus from the Alabama Supreme Court ordering the Baldwin Circuit Court to vacate its order.
The Supreme Court concluded that Alabama Code Section 6-5-440 compelled dismissal of the Baldwin Circuit Court case because another action involving the same cause and the same parties (i.e. the Mobile Action) was filed first. Therefore, the Court granted the petition for a writ of mandamus and directed the Baldwin Circuit Court to vacate its most recent order in the case.
Finnerty v. Stiefel Laboratories, Inc., _____ F.3d. _______ (11th Cir. 2014) (Corporation has duty under Securities Exchange Act to disclose facts that were necessary to make its prior statements not misleading).
Finnerty received certain “put” options in connection with his employment with Stiefel Laboratories (“SLI”). The put options allowed Finnerty to require SLI to buy back his stock at the fair market value of the stock during a certain window of time. During the relevant window of time, SLI issued a press release that stated: “SLI … will continue to be privately held,” and also sent an email to its employees assuring them that “SLI will continue to be a privately held company.” Shortly after the notices were issued, Finnerty executed a form irrevocably electing to “put” his stock to SLI at the stock’s then-effective fair market value. Unknown to Finnerty, the owners of SLI had been exploring the possibility of going public at the time he cashed out. The transaction was ultimately completed, and the value of the shares Finnerty previously owned increased.
Finnerty brought suit against SLI, alleging violations of the Employee Retirement Income Security Act (“ERISA”) and Section 10(b) of the Securities Exchange Act of 1934. The securities fraud count was tried on the theory that SLI had a duty to disclose to Finnerty information related to going public but failed to do so. The district court denied SLI’s motion for judgment as a matter of law and the jury awarded Finnerty compensatory damages. SLI appealed.
On appeal, the Eleventh Circuit stated that to succeed on a Section 10(b) securities fraud claim, “a plaintiff must establish (1) a false statement or omission of material fact (2) made with scienter (3) upon which the plaintiff justifiably relied (4) that proximately caused the plaintiff’s injury.” The court determined that the jury did not error by determining that SLI’s statement that it “will continue to be privately held” gave rise to a duty to update Finnerty when SLI considered itself to be a serious acquisition target. Accordingly, the judgment of the district court was affirmed.