Tenth Circuit Holds that "Forced Sellers" Resulting From a Squeeze Out Merger Lack Standing to Assert Claims Under Sections 11 and 12(a)(2) the Securities Act of 1933


In Katz v. Gerardi, No. 10-1407, 2011 WL 3726279 (10th Cir. Aug. 25, 2011), the United States Court of Appeals for the Tenth Circuit affirmed the dismissal of claims alleging violations of Section 11 and Section 12(a)(2) of the Securities Act of 1933 (the “1933 Act”), 15 U.S.C. §§ 77k, 77l(a)(2), against a real estate investment trust (“REIT”). The claims were brought by a former minority unit holder of a REIT who, as part of a “squeeze-out merger” of the REIT with another entity, exchanged his units for cash. The Court held that the merger did not force the plaintiff to purchase new securities, but only to sell his old securities. Because Sections 11 and 12(a)(2) of the 1933 Act provide a private right of action only for purchasers, not sellers, of securities, the Tenth Circuit held that plaintiff lacked standing to assert a claim. The decision confirms that shareholders involved in forced sales resulting from a merger may not bring claims under the Section 11 and 12(a)(2) of the 1933 Act.

This action centers around Jack P. Katz (“Katz”), a minority unitholder in a REIT controlled by the majority unitholder, Archstone Smith Trust, a public company. Katz held his interest in the Archstone REIT in the form of “A-1 Units.” The A-1 Units had certain advantages — liquidity rights, dividend rights and tax indemnification — that allegedly made them particularly valuable to Katz. Archstone entered into a merger agreement in which two investors acquired all of Archstone’s outstanding public shares. As part of the merger, Katz was squeezed out of the REIT and had the option of receiving either cash or stock in the newly formed entity in exchange for his shares. Katz opted for cash. Claiming the offering documents associated with the merger contained false and misleading statements or omissions, Katz sued alleging violations of Sections 11 and 12(a)(2) of the 1933 Act. Section 11 of the Securities Act imposes liability on issuers and other signatories of a registration statement that “contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.” Similarly, Section 12(a)(2) imposes liability under similar circumstances with respect to prospectuses. The United States District Court for the District of Colorado dismissed Katz’s 1933 Act claims, holding that he was not a purchaser of securities when he opted to sell his shares and therefore lacked standing under the statute. Katz appealed.

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