Yesterday, the Ninth Circuit Court of Appeals issued an opinion that will likely be cited most often for its conclusions regarding scienter, loss causation and Rule 10b-5. WPP Luxembourg Gamma v. Spot Runner, 9th Cir. Case No. 10-55401 (Aug. 23, 2011). Today, however, I’m going to focus the Court’s application of California contract law.

The plaintiff generally alleged that the the executives of a privately held company, Spot Runner, Inc., solicited the purchase of shares by the plaintiff at the same time that those executives were selling personally owned shares and when the company was incurring substantial losses. Under Rule 10b-5(b), a defendant can be liable for an omission of material information if she has a duty to disclose. The plaintiff argued that the defendants had a duty to disclose based on a Right of First Refusal/Co-Sale Agreement. In response, the defendants contended that the notice had been waived pursuant to a provision in the agreement that allowed waivers by ”the holders of sixty percent (60%) of the Shares held by the investors voting together”. According to the defendants, two other investors who owned the requisite 60% had waived the plaintiff’s right to receive notice. The plaintiff, however, contended that the “voting together” language in the agreement required that all investors participate in the vote. In other words, there had to be be an opportunity for a vote by all shareholders.