In re Hi-Crush Partners L.P. Securities Litigation (2013 WL 6233561 (S.D.N.Y.) (December 2013) examines the interplay between Form 8-K triggering events and other disclosure obligations under securities laws. The facts of the case arose out of the filing of a redacted customer contract as an exhibit to a registration statement without the consent of the customer. The customer contract included a confidentiality provision. However, the court noted the consent of the customer was not needed because the confidentiality provision contained a carve out for disclosure where “required by law or regulation.” Here, the SEC had in fact required disclosure through the registration statement review process.
But after the offering was complete, the customer sent Hi-Crush a letter purporting to terminate the agreement, citing the alleged breach of the of the confidentiality provision. Shortly thereafter, Hi-Crush posted an investor presentation to its web site highlighting its relationship with the customer but did not disclose the repudiation letter or hint at the existence of any uncertainty regarding the future of the contractual relationship. On the first trading day after the dispute was made public, Hi-Crush’s shares lost approximately 26% of their value on unusually high trading volume. Shareholder litigation ensued, including under Section 10(b) of the Exchange Act and related Rule 10b-5.
The defendants pointed to Item 1.02 of Form 8-K as the relevant source of their disclosure duty. That part of Form 8-K requires disclosure if a material definitive agreement is terminated. The instructions to the Form however state that disclosure is not required if the registrant believes in good faith that the definitive agreement has not been terminated. Defendants argued no disclosure was required because the termination was invalid.
The court disagreed, noting that the instructions to Form 8-K do not establish there is never a duty to disclose invalid contract terminations under securities laws. According to the court, the SEC decoupled the issue of disclosure under Item 1.02 and the disclosures required Section 10(b). Continuing, the court stated “Compliance with affirmative disclosure obligations does not negate the other basis for a potential duty to disclose under the securities laws—‘to prevent existing disclosures from being misleading.’” Thus publication of the investor presentation triggered a duty to make additional disclosures about the purported termination because “it was highly material to investors because it nevertheless put 18.2% of Hi–Crush’s revenues at risk.”
The case was heard by the court on a motion to dismiss basis. It is important to note that this is not a final decision on the merits.
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