Corporation A was involved in merger discussions with Corporation B. During this
ID: 358788 • Letter: C
Question
Corporation A was involved in merger discussions with Corporation B. During this time, Corporation A made public statements denying that any merger negotiations were taking place or that it knew of any corporate developments that would account for heavy trading activity in its stock. A class of former shareholders who sold Corporation A stock after the public denial of merger activity and the announce- ment of the merger some six weeks later sued Cor- poration A, contending that it made material misrepresentations of fact in denying the merger activity. Corporation A stock increased 25 percent upon the merger announcement. Corporation A stated that at the time of its denial of merger activity it was just involved in preliminary negotiations and its actions were not material until negotiations reached an agreement in principle. Moreover, it asserted that the shareholders made no showing that they relied on the denial statement. Decide.
Explanation / Answer
As per SEC in the case of Carnation company, the SEC clearly held that any misstatement by the company regarding acquisition is a material misinformation which can potentially mislead the shareholders and can lead to action by enforcement authorities.
Keeping this precedent in mind, the denial of acquisition talks by corporation A can be construed as material misstatement and can be held liable for the same as the shareholder's acted on this false statement by selling the stocks after this press release.