Sher Tremonte Wins on Issue of First Impression in the Third Circuit, Board Observers Cleared of Liability under Section 11(a)(3) of the 1933 Act


On July 23, 2019, attorneys Michael Tremonte and Justin Gunnell secured a major victory in the U. S. Court of Appeals for the Third Circuit, which reversed a lower court ruling and directed the entry of summary judgment in favor of Sher Tremonte’s client in an important decision interpreting the scope of liability under Section 11(a)(3) of the Securities Act of 1933.

Section 11(a)(3) of the 33 Act imposes near strict liability for false or misleading statements on “every person who, with his consent, is named in the registration statement as being or about to become a director, person performing similar functions, or partner.”  15 U.S. Code § 77k(a)(3) (emphasis added).  The shareholders of British Virgin Islands-based Tibet Pharmaceuticals, Inc. sued the company’s officers and directors for alleged material misrepresentations and omissions contained in Tibet’s IPO registration statement, and had sought to impose 11(a)(3) liability on Sher Tremonte’s client, Hayden Zou, who was listed as a “board observer” in the prospectus.

Sher Tremonte successfully moved for an interlocutory appeal of the lower court’s decision allowing the case to proceed to trial against Mr. Zou (read the decision granting interlocutory review here), who faced potential joint and several liability for damages totaling $16.4 million — the full amount raised in Tibet’s IPO.  On appeal, the Third Circuit adopted Sher Tremonte’s lead arguments and held, as a matter of first impression, that a non-voting board observer cannot be subjected to liability under  Section 11(a)(3), and that determinations of liability under this provision must be decided as a matter of law (read the full opinion here).

News reports about this case can be found here: