Hildes v. Arthur Andersen LLP

A district court errs in denying a request for leave to amend a complaint to add claims under Section 11 of the Securities Act of 1933 when the amended complaint sufficiently alleges that material misstatements in a registration statement required for merger could have caused the plaintiff’s losses, regardless of whether the plaintiff signed a voting agreement prior to the filing of the registration statement.

In April 2000, two companies, Harbinger Corporation (“Harbinger”) and Peregrine Systems, Inc. (“Peregrine”), entered into an Agreement and Plan of Merger and Reorganization (“the Agreement”) where Harbinger would become a subsidiary of Peregrine. As part of the Agreement, several of Harbinger’s board members, including David Hildes, signed voting agreements that gave Peregrine an irrevocable proxy to vote the board members’ shares in favor of the merger. The voting agreement did not restrict the board members’ right to sell their Harbinger shares prior to the merger. Hildes brought suit against Arthur Andersen LLP, an outside director of Peregrine, and the auditor of its financial statements that were filed with the SEC Registration Statement. Hildes alleged that the financials contained omissions and misstatements of company value that led to an overinflated stock price. Hildes requested leave to amend his complaint to add claims under Section 11 of the Securities Act of 1933. The district court denied his request. On appeal was a single issue of whether the district court erred in denying Hildes’ request to amend his complaint. In denying the request, the district court concluded that because the voting agreement was signed before the Registration Statement was filed, the omissions and misstatements could not have caused any of Hildes’ alleged losses in stock value. The Ninth Circuit rejected the district court’s reasoning, holding that the amended complaint sufficiently alleged the Section 11 claims of material misstatements, regardless of whether or not the Registration Statement was filed prior to Hildes signing the voting agreements. The panel concluded that the alleged misstatements could have caused Hildes’ losses because the voting agreement only irrevocably committed Hildes’ shares to be voted in favor of the merger, but did not irrevocably commit Hildes to exchange his Harbinger shares for Peregrine. REVERSED and REMANDED