“I Was Absolutely, Positively Going To Sell My Shares”

Today’s edition of The Daily Journal (subscription required) has a column by Thomas Klein, a Wilson Sonsini partner, entitled “Shareholders Who Keep Stock Have State Remedy.” The column discusses the recent decision by a divided California Supreme Court in Small v. Fritz Cos. Inc., (Cal. April 7, 2003), in which the court ruled that a stockholder who held his stock, rather than purchased or sold his stock, in reliance on misrepresentations may bring suit for common-law fraud or negligent misrepresentation under California law. To adequately plead these claims, however, the stockholder must (a) plead with particularity; and (b) demonstrate actual reliance on the alleged misrepresentations (the “fraud-on-the-market” theory cannot be used). Note that the actual reliance requirement would appear to make it all but impossible for a plaintiff to bring a class action on behalf of holders.

Quote of note (from the opinion): “In a holder’s action a plaintiff must allege specific reliance on the defendants’ representations: for example, that if the plaintiff had read a truthful account of the corporation’s financial status the plaintiff would have sold the stock, how many shares the plaintiff would have sold, and when the sale would have taken place. The plaintiff must allege actions, as distinguished from unspoken and unrecorded thoughts and decisions, that would indicate that the plaintiff actually relied on the misrepresentations.”

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