On a matter of first impression, the U.S. Court of Appeals for the Eleventh Circuit held that sophisticated investors involved in an arms-length merger transaction may not recover under Section 11 of the Securities Act of 1933 where they made a legally binding investment commitment months before an allegedly defective registration statement was issued. The plaintiffs, shareholders of the merger target corporation, signed stockholder agreements in which they irrevocably agreed to vote their shares in favor of the merger.

Two months later the acquirer issued its registration statement for the merger, which was followed by the requisite shareholder approval of the merger. Just months thereafter, the acquirer announced revenue shortfalls, which caused a sharp stock price decline. Plaintiffs sued, alleging the registration statement misrepresented the acquiring company’s financial condition.

While recognizing that Section 11 claims brought within one year of issuance of a registration statement ordinarily include a presumption of reliance on the statement, the Court ruled that applying such a presumption here was “illogical” and unwarranted, finding that there was no basis to presume that the plaintiffs relied upon alleged misrepresentations in the registration statement since it did not exist at the time they irrevocably committed to invest. Rather, based upon an extension of the “so-called ‘commitment theory’” courts use to determine the commencement of the statute of limitations in Rule 10b-5 claims, the Court ruled that the plaintiffs had made a “binding commitment decision” and “effectively ‘purchased’ their [stock]” months before the registration statement was filed. Accordingly, the Court dismissed the Section 11 claim. (APA Excelsior III L.P. v. Premiere Technologies, Inc., 2007 WL 286258 (11th Cir. Feb. 2, 2007))