USA – NEW YORK Trends and Developments Contributed by: Sam Lieberman, Ben Hutman and Claiborne Hane, Sadis & Goldberg LLP
But the Shanda Games majority refuted Judge Jacobs by citing prior Second Circuit precedent holding that reliance can be shown “in the freeze-out merger con- text ‘when a proxy statement, because of material misrepresentations, causes a shareholder to forfeit his appraisal rights by voting in favor of the proposed... merger” (id) (quoting Wilson v Great American Indus., Inc. , 979 F.2d 924, 931 (2d Cir. 1992)). The majority held that this prior Second Circuit precedent “was not limited to minority shareholders who voted in favor of the merger”, because the class in that prior case included all minority “shareholders at the time of the merger” (id) (quoting Wilson v Great American Indus., Inc. , 94 F.R.D. 570, 571–72 (N.D.N.Y. 1982)). Further, the majority reasoned that “there is no reason for a minority shareholder to vote for or against a freeze-out merger” because the merger’s “success is guaran- teed by the voting power of the majority” buyer (id at 57). Thus, the Shanda Games majority held that the fraud-on-the-market presumption applies regardless of whether minority shareholders voted for the merger or did not vote at all. Moreover, the majority held that applying the fraud- on-the-market presumption in this context did not improperly “expand” federal securities law to “inter- fere[] with state corporate law” regarding unfair merg- ers (id at 58–59). Federal securities class actions chal- lenging a freeze-out merger focus the lack of “full and fair disclosure” in the company’s public proxy state- ments, causing shareholders to lose a legal remedy, whereas appraisal actions focus only on whether the merger used an unfair price (id). Third, Shanda Games also held that the class action plaintiffs adequately pled loss causation by alleging that the defendants’ “proxy statement[s]” caused them “to accept an unfair” merger price for their “shares rather than recoup a greater value through” an “appraisal” action (id at 57) (quoting Wilson , 979 F.2d at 931)). These allegations demonstrated an “economic loss” based on the difference between the “higher value” of the appraisal action price (USD12.84 per share) that the class action plaintiffs could have received absent the misrepresentations and the merg- er price (USD7.10 per share) (id).
Accordingly, Shanda Games is one of the most impor- tant class action developments of 2025, particularly for New York federal courts. Shanda Games establish - es a clear precedent for minority shareholders cashed out at an unfair merger price to bring a viable securi- ties fraud class action, so long as a company’s proxy statements proposing the merger contains material misrepresentations. With so many companies listing their shares on New York’s stock exchanges, many similar class actions can be expected in the next few years to be brought in New York federal courts chal- lenging misrepresentations arising from freeze-out mergers. This will increase the importance of New York federal courts as a forum for mergers and acqui- sitions disputes. Fourth, on 10 November 2025, the United States Supreme Court denied the defendants’ petition for a writ of certiorari to review the Second Circuit’s ruling in Shanda Games . This means that the Second Circuit’s Shanda Games ruling is final and binding precedent governing securities law class actions in the Second Circuit and New York’s federal district courts. Shan- da Games thus will apply to most (if not all) federal securities law class actions involving going-private transactions, because all major US stock exchanges are located in New York. But the Supreme Court has not yet addressed whether the fraud-on-the-market presumption applies to allegations that a minority shareholder “lost an appraisal remedy by virtue of the defendants’ materially misleading proxy statements” (id at 56) (citing Virginia Bankshares, Inc. v Sand - berg , 501 U.S. 1083, 1108 n.14 (1991)); (id at 67 n.5) (Jacobs, J (dissenting)) (same). It is possible that the Supreme Court could rule on this issue at some point in the future. Collective Relief for Investors in Residential Mortgage-Backed Securities (RMBS) and Similar Trusts Under Civil Practice Law and Rules (CPLR) Article 77 An increasingly important form of collective relief under New York law is a special proceeding relating to an express trust under Article 77 of New York’s Civil Practice Law and Rules (“Article 77 Proceed- ing”). An Article 77 Proceeding is a special proceed- ing to address “any matter of interest to trustees, beneficiaries, or adverse claimants concerning” an
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