The Ninth Circuit recently sent corporate lawyers and litigators a reminder that representations or statements that appear solely in an agreement filed as an exhibit to an issuer’s SEC filings may in and of themselves provide a basis for suit under Section 10(b) and Rule 10(b-5).

In Glazer Capital Management, LP v. Magistri,1 the Ninth Circuit held that statements found in a merger agreement’s “representations and warranties” section may support a securities fraud action against a corporation that filed the merger agreement as an exhibit to its securities filings. The court rejected arguments by the issuer that the merger agreement was a private agreement, that the representations were subject to a non-public disclosure schedule, and that the agreement itself expressly limited rights and remedies to its parties. This holding is consistent with the position that the Securities and Exchange Commission took in a 2005 Section 21(a) Report concerning its investigation of Titan Corp.,2 in which the Commission warned that representations contained in contracts filed with the Commission as material agreements could form the basis for liability under Sections 10(b) and 14(a) of the Securities Exchange Act of 1934.

On a second, alternative point, the court nonetheless upheld the dismissal of the case and rejected the plaintiffs’ “collective scienter” argument. It found that the plaintiffs in that case would need to plead scienter with respect to those individuals who actually made the false statements in the merger agreement. However, the court left open the theoretical possibility that a collective scienter argument could succeed in a case where the alleged misrepresentations were so dramatically false that they raised a strong inference that corporate officials knew about their falsehood.

Representations in a Merger Agreement May Support a Securities Fraud Action

In Glazer, the defendant corporation, InVision Technologies, Inc., a company which manufactured explosives detection systems, entered into a merger agreement in March 2004 with General Electric. That same day, InVision filed a Form 10-K, to which it attached the merger agreement as an exhibit. The “representations and warranties” section of the merger agreement stated that InVision was “in compliance in all material respects with all laws” and that “Neither the Company . . . nor to the Knowledge of the Company, any director, officer, agent, employee or other Person acting on behalf of the Company” had violated the anti-bribery provisions of the Foreign Corrupt Practices Act.

Four months later, on July 30, 2004, InVision issued a press release stating that an internal investigation had revealed possible violations of the FCPA in connection with certain foreign sales transactions. The press release further stated that InVision had voluntarily reported these activities to the SEC and the Department of Justice but warned that subsequent investigations could potentially delay or terminate the merger. There was an immediate drop in InVision’s share price. InVision shareholders then filed a class action complaint, in which they argued that the “representations and warranties” section of the merger agreement contained misrepresentations, actionable by purchasing public shareholders. In December 2004, InVision announced that it had entered into a nonprosecution agreement with the Department of Justice and had submitted an offer of settlement to the SEC, which the SEC staff had agreed to recommend. GE, in fact, consummated the merger that same day.

InVision argued that because the statements appeared in the “representations and warranties” section of a private merger agreement directed solely to GE, the statements could not reasonably have been interpreted as factual communications to investors. InVision further argued that the merger agreement conferred rights only on the parties to the agreement and that because the representations were expressly subject to a private disclosure schedule, no reasonable investor would have relied on them. The court rejected these arguments, reasoning that because InVision’s proposed merger with GE was a significant event for the company, InVision could have expected intense investor interest in the details of the merger. The court held that InVision’s choice to communicate the details of the merger in the form of an attachment to its Form 10-K, which contained the representations, would not per se bar liability.

The Ninth Circuit’s decision follows guidance the SEC issued during its 2005 investigation of Titan Corp. Titan’s merger agreement with Lockheed Martin, which Titan publicly disclosed in its proxy statement, also contained an FCPA-related representation. In a Section 21(a) Report of Investigation, the SEC advised that materially false representations in an agreement filed as an exhibit may be actionable by the SEC. Although Titan’s shareholders were not beneficiaries of the merger agreement’s FCPA representation, the SEC advised that Titan’s inclusion of the representation in a disclosure document filed with the SEC constituted a disclosure to investors.

Collective Scienter Argument Rejected But Not Foreclosed Entirely

On the scienter point, the Glazer plaintiffs attempted to plead scienter in part by relying on a theory of collective scienter, which would allow plaintiffs to allege scienter or fraudulent intent on the part of a corporation as a whole without demonstrating that any individual corporate executive had the requisite intent. The plaintiffs argued that the misrepresentations themselves raised a strong inference of collective scienter and obviated the need to plead that the CEO who signed the merger agreement knew that the agreement contained misrepresentations.

The court rejected the theory that if any InVision employee had knowledge of any violation of law, scienter could be imputed to the company as a whole.The court held that given the limited nature and unique context of the alleged misrepresentations, the plaintiffs would need to plead scienter with respect to those individuals who actually made the false statements in the merger agreement. The court further held that it could not infer scienter on the CEO’s part from the following: (1) the small size and limited nature of InVision’s business; (2) the CEO’s signing a Sarbanes-Oxley certification stating that he had put certain controls and procedures in place to discover violations; (3) GE’s discovery of the FCPA violations relatively early in the due diligence process; (4) the CEO’s personal financial incentives to consummate the merger; and (5) the conclusions contained in the DOJ and SEC settlement documents.

The Ninth Circuit did leave open the possibility that, in some circumstances, it might be possible for plaintiffs who are unable to plead scienter on the part of an individual to plead scienter under a collective theory. For example, the court reserved judgment on whether it might infer collective scienter in a hypothetical scenario such as one the Seventh Circuit described in Makor Issues & Rights, Ltd. v. Tellabs Inc.:

Suppose General Motors announced that it had sold one million SUVs in 2006, and the actual number was zero. There would be a strong inference of corporate scienter, since so dramatic an announcement would have been approved by corporate officials sufficiently knowledgeable about the company to know that the announcement was false.3

In such a case, where the misrepresentations were so dramatically false that they raise a strong inference that corporate officials knew about their falsehood, courts might sustain a claim of collective scienter. The Ninth Circuit’s holding follows a similar decision by the Second Circuit earlier this year, which also declined to adopt a per se rule against collective scienter.4 However, at least two other circuits have rejected entirely the theory of collective scienter,5 and it remains to be seen how the rest will weigh in.


The Ninth Circuit’s holding in Glazer that statements in a publicly filed merger agreement’s “representations and warranties” section may support a securities fraud action is a warning to draftsmen and may well provide an additional argument to corporate lawyers seeking to nuance particular statements or to qualify representations with knowledge of specified corporate officers. Indeed, in certain circumstances, particularly in the merger context, there may actually be a mutual interest between a seller seeking to qualify a specific representation, and a buyer, who if the transaction closes, may inherit liability for any misstatement in the agreement.

The Ninth Circuit, like the Second Circuit earlier this year, did not categorically reject the theory of collective scienter. Other circuits have disagreed with this position, and Glazer itself suggests that cases in which plaintiffs could avoid dismissal on such a theory will be uncommon. Nonetheless, the specter of liability on a theory of collective scienter remains in two circuits where securities law suits are frequently brought. Due diligence in corporate acquisitions may be something that now sellers, and not just buyers, will need to consider where transaction documents with their representations and warranties will be publicly available.