USA – NEW YORK Trends and Developments Contributed by: Sam Lieberman, Ben Hutman and Claiborne Hane, Sadis & Goldberg LLP
plaint alleged that the class “suffered financial loss through the failure to exercise their appraisal rights and receive the” USD12.84 per share “appraisal val- ue of their shares” (id). The district court rejected the class action’s loss causation theory, while holding that the complaint had sufficiently “albeit minimally” met the burden of pleading a presumption of reliance (In re Shanda Games Ltd. Sec. Litig. , 2022 WL 992794, at *5 (S.D.N.Y., Mar. 31, 2022), vacated in part, 128 F.4th 26 (2d. Cir. 2025)). But the Second Circuit reversed, and reinstated the claims (128 F.4th at 60). First, the Second Circuit held that the “fraud-on- the-market presumption is available to minority- shareholder[s]” who “sold their shares in a [cash]-out merger” (id at 54). The fraud-on-the-market theory “creates a rebuttable presumption that (1) misrepre- sentations by a[] [company] affect the price of secu- rities traded in the open market, and (2) investors rely on the market price of securities as an accurate measure of their intrinsic value” (id) (quoting Hevesi v Citigroup Inc. , 366 F.3d 70, 77 (2d Cir. 2004)). Because the stock market “‘transmits information to the inves- tor in the processed form of a market price, we can assume... that an investor relies on public misstate- ments whenever he ’buys or sells stock at the price set by the market’”. Erica P. John Fund, Inc. v Hal - liburton Co , 563 U.S. 804, 811 (2011) (quoting Basic Inc. v Levinson , 485 U.S. 224, 244 (1988)). The fraud-on-the-market presumption is critical, and often outcome-determinative in securities class actions, because it is deemed sufficient both to (i) plead reliance and thus defeat a motion to dismiss on that ground, and (ii) meet the elements to certify a class action to proceed under Federal Rule of Civil Procedure 23. Indeed, the Supreme Court has con- cluded that unless the fraud-on-the-market or similar presumption of reliance applies, plaintiffs would be “prevent[ed]... ‘from proceeding with a class action, since individual issues’” of reliance “would ‘over- whelm[] the common ones’” (id at 810 (quoting Basic , 485 U.S. at 242)). Although the presumption of reli- ance is rebuttable, as a practical matter, the applica- bility of fraud-on-the-market presumption can make the difference between a billion-dollar settlement and a complete loss.
Shanda Games reasoned that the fraud-on-the- market presumption of reliance applies to a minority shareholder’s decision whether to (i) accept the cash- out merger price or (ii) “exercise his appraisal rights”, a remedy under Cayman and US state law where a minority shareholder can petition a court to award him the fair value of his shares instead of the merger price (128 F.4th at 55). The court concluded that in decid- ing whether to accept the merger price or to bring an appraisal action, investors presumably “rely on the market price as an accurate measure of his stock’s value when deciding” whether the merger price is fair (id at 54–55). The court noted that it is well-settled that “it is hard to imagine that there is ever a buyer who does not rely on market integrity” (id) (quoting Basic , 485 U.S. at 246–47)). Accordingly, the court applied the presumption, holding that the alleged “material misrepresentations” presumably drove down Shanda Games’ market price, and thus the class action plain- tiffs presumably relied on those misrepresentations in deciding to get cashed out at an unfair merger price instead of pursuing an appraisal action (id at 55). Second, Judge Jacobs dissented from the Shanda Games majority ruling regarding the presumption of reliance (128 F.4th at 69) (Jacobs, J (dissenting)). He argued that the presumption should not apply, because the merger price was privately negotiated – and not an open market price. He further argued that Shanda Games’ market price after the merger was announced corresponded to the privately negotiated merger price – and was no longer an open, efficient market. Next, he argued that the class action did not allege that the plaintiffs voted in favour of the merger – and thus a presumption of reliance should not extend to “a decision that was never made” (ie, no decision to vote in favour of merger) (id at 70). Last, he argued that the majority ruling would expand federal securi- ties law to interfere with state corporate governance law by “recasting individual” state “appraisal actions as [federal] securities fraud claims” with less cost and risk because they can be brought as class actions (id at 69). He noted that under the majority’s ruling, “minority shareholders” in a cash-out merger “who fail to exercise their individual right to appraisal under state law in the first instance will now have a sec- ond-chance claim via a class action under the federal securities law” (id at 70).
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