Brief Fact Summary. Plaintiff, Great Lakes Chemical Corporation, brought claims under the Securities Exchange Act against Defendants, Monsanto Company and Sweet Technologies, Inc., for misrepresentations allegedly made when Defendants sold an LLC to Plaintiff.
Synopsis of Rule of Law. Securities laws are meant to regulate investments rather than commercial ventures, and therefore a security can be a traditional stock or alternatively an investment contract that consists of an investment of money in a common enterprise with profits to come solely from the efforts of others.
Facts. Defendants jointly owned and controlled 100% of an LLC, NSC Technologies Company. NSC was created to develop pharmaceutical products from a chemical, L-phenylalinine, made by Monsanto. The Members of NSC, Monsanto and Sweet, did not have day-to-day control of NSC, but they controlled it by appointing the managers that did control it. Defendants solicited offers for a buyer of NSC, and an investment bank contacted Plaintiff. Defendants had initial estimates of the sales of NSC that they later reduced after NSC began having difficulties with lower sales and patent infringers. Defendants explained away the recently poor performance to Plaintiff as just a shifting of the numbers and they offered to indemnify Plaintiff if their numbers were off by more than $6.5 million.. Defentants also reduce the price of NSC by $5 million. After the purchase, Plaintiffs did not even reach half of the estimate given by Defendants and brought claims under the Securities Exchange Act for the
misrepresentations. Defendants moved to dismiss the claims since the NSC interests are not “securities” as defined by the Act.
Issue. The overall issue is whether the purchase of NSC by Plaintiff was a purchase of a security under the Securities Exchange Act.
The first issue is whether the interests sold to Plaintiff were stock as defined by the Act.
The second issue is whether the purchase was an “investment contract” that would be considered a security under the Act.
Held. The court held that it was not a security as understood by the Act.
The court held that the interest purchased by Plaintiff was not a stock as understood to be covered by the Act. Although the shares that Plaintiff purchased share the qualities of a traditional stock in that they have “the right to receive dividends contingent upon an apportionment of profits; (2) negotiability; (3) the ability to be pledged or hypothecated; (4) voting rights in proportion to the number of shares owned; and (5) the ability to appreciate in value”, the stock is not what was intended to be regulated by the Act. The Act is intended to protect investments, but this transaction is commercial in nature.
The court held that the interests purchased by Plaintiff were not an investment contract because there was no common enterprise (Plaintiff was the only one who would own NSC) and the profits would not come from the efforts of others (Plaintiff will exert control over NSC through appointing the managers).
Discussion. The court is not ruling that Plaintiff does not have a claim, but they are limiting the scope of the Securities Exchange Act to include only investments rather than commercial transactions. There are likely alternative causes of action to hold Defendants accountable for any damaging misrepresentations.