Thank you for sharing!

Your article was successfully shared with the contacts you provided.
A divided 3rd U.S. Circuit Court of Appeals has determined that under the Securities Exchange Act of 1934, securities purchasers who agree not to rely on sellers’ representations may still prevail in suits against sellers for alleged misrepresentations or omissions. In AES Corp. v. The Dow Chemical Co., Judges Walter K. Stapleton and Theodore A. McKee held that signing non-reliance clauses could go to whether a party reasonably relied on a seller’s representations, but would not in every case provide immunity from fraud liability for defendants. Judge J. Clifford Wallace, a 9th U.S. Circuit Court of Appeals judge sitting by designation, disagreed with the majority decision though he concurred with the end result. In his concurring and dissenting opinion, Wallace said that � 29(a) of the act voids stipulations constituting waivers of its provisions. And � 10(b) of the act, Stapleton wrote for the majority, prohibits manipulative or deceptive practices in connection with the sale or purchase of any security. Thus non-reliance agreements have no force under the act and may not be offered as evidence of unreasonable reliance, Wallace concluded. The 3rd Circuit was faced with non-reliance agreements in securities sales when AES, a corporation that operates power facilities, purchased all of the international assets of Destec Energy Inc., a Dow subsidiary, and all the outstanding stock of that company’s subsidiary, Destec Engineering Inc. The majority opinion states that AES claimed that instead of walking away from the deal with a predicted profit of $31 million from the design and construction of a foreign power plant, it ended up with a loss of $70 million. “According to AES,” Stapleton wrote, “shortly after purchasing [Destec Engineering] and [Destec Energy's] other international assets, it realized that the [power plant] would cost far more to complete than its due diligence investigation had indicated and would open for operation much later than Dow and Destec [Energy] had represented it would.” AES subsequently filed suit in U.S. District Court in Delaware, alleging that Dow and Destec Energy had violated � � 10(b) and 20(a) of the act. Destec Energy and AES settled, leaving Dow the remaining defendant, the majority opinion states. There was no discovery before Dow moved for summary judgment, Stapleton said. In so doing, Dow relied solely on contracts relating to the transactions in which AES acquired the Destec Engineering stock. AES responded by requesting discovery in specific areas. But the district court granted Dow’s summary judgment motion, the majority opinion states, holding that non-reliance clauses in the transaction documents rendered AES’ reliance on alleged misrepresentations unreasonable as a matter of law. According to the majority opinion, Morgan Stanley performed a valuation of Destec Energy to facilitate a public sale of the company. The investment firm then issued a “Confidential Offering Memorandum” on behalf of Destec Energy. Stapleton said that to receive the offering memorandum, AES signed a confidentiality agreement providing in part that AES acknowledged that neither Destec Energy nor Morgan Stanley made “any express or implied representation or warranty as to the accuracy or completeness of the information.” The document further provided that AES agreed that the companies would not have any liability related to the information provided or for any errors or omissions. “We [AES] further agree,” the clause provided, “that we are not entitled to rely on the accuracy or completeness of the information and that we will be entitled to rely solely on any representations and warranties as may be made to us in any definitive agreement with respect to the transaction, subject to such limitations and restrictions as may be contained therein.” While Dow was not a party to the agreement, Stapleton said, AES alleged that the company was a controlling person within the meaning of the Securities Exchange Act, and the appeals court said it assumed the confidentiality commitment was made for the benefit of, and was enforceable by, Dow. The offering memorandum, Stapleton noted, contained projections and estimates about the future performance of Destec Energy’s businesses, including Destec Engineering and the power plant project. The memorandum also contained a non-reliance provision similar to the one in the confidentiality agreement. On appeal, AES contended that Dow “knew specific facts about the [power plant] that contradicted the representations it had made prior to and during due diligence,” the majority opinion states. “Its complaint alleges 14 affirmative misrepresentations and eight material omissions upon which it relied.” Stapleton and McKee began with the language of the act. Rule 10b-5, the opinion states, was promulgated to implement � 10(b). And according to the 3rd Circuit’s 2000 decision in Semerenko v. Cendant Corp., the AES opinion states, a 10b-5 plaintiff must show the following: � That the defendant made a misstatement or an omission of a material fact; � With scienter; � In connection with the purchase or the sale of a security; � Upon which the plaintiff reasonably relied; and � That the plaintiff’s reliance was the proximate cause of his or her injury. “The reasonable reliance element of a Rule 10b-5 claim requires a showing of a causal nexus between the misrepresentation and the plaintiff’s injury, as well as a demonstration that the plaintiff exercised the diligence that a reasonable person under all of the circumstances would have exercised to protect his own interests,” Stapleton wrote. Because reliance is an essential element of a 10b-5 claim, the opinion states, it follows that if a party commits itself never to claim that it relied on representations of the other party to its contract, it purports to anticipatorily waive any claims based on fraudulent misrepresentations of that other party. “The same is true if the commitment is more limited,” Stapleton wrote, “e.g., a promise not to claim reliance on any representation not set forth in the agreement. The scope of the anticipatory waiver is more limited, but it is nevertheless an anticipatory waiver of potential future claims under Rule 10b-5.” The judge emphasized that � 29(a) of the act forecloses anticipatory waivers of compliance with the duties imposed by Rule 10b-5. “We believe the conclusion inescapable that enforcement of the non-reliance clauses to bar AES’s fraud claims as a matter of law would be inconsistent with Section 29(a),” the opinion states. But the majority cautioned that a plaintiff’s agreement not to rely on a defendant’s representations — alone or in conjunction with other evidence of non-reliance — may establish an absence of reliance. And if an absence of reliance is shown and not rebutted, that may provide a basis for summary judgment in favor of a defendant, Stapleton wrote. In AES, the opinion states, the non-reliance clauses constituted some evidence of an absence of reliance, but the district court did not find that the evidence was unrebutted. Dow changed tacks and argued that the non-reliance clauses established as a matter of law that any reliance by AES was unreasonable, the opinion indicates. The majority disagreed. “We find the same tension between Section 29(a) and this argument … as we have found between Section 29(a) and the argument that the non-reliance clauses foreclose an assertion by AES that it relied,” Stapleton said. On remand, the majority instructed, the district court would have to determine whether, viewing all of the relevant circumstances and applying a reasonable reliance standard, a reasonable trier of fact could only conclude that AES failed to exercise ordinary care in protecting its own interest. The appeals court said it would be premature to do so at the appellate level. “While AES may have an uphill battle here and summary judgment for the defendants may be appropriate at some point, we decline to give controlling significance to the existence of a non-reliance clause in a vacuum,” Stapleton wrote. “We fully appreciate that the avoidance of costly discovery is one of the objectives of negotiating such clauses. Nevertheless, to hold that a buyer is barred from relief under Rule 10b-5 solely by virtue of his contractual commitment not to rely would be fundamentally inconsistent with Section 29(a).”

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]

Reprints & Licensing
Mentioned in a Law.com story?

License our industry-leading legal content to extend your thought leadership and build your brand.


ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.