(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

"Merger of Equals" Fraud Suit Survives Challenge

Investors adequately alleged that corporate officers' representations that a merger would be a "merger of equals" were false and misleading. According to the U.S. District Court for the District of Delaware, the claims that senior officials of a German automobile company concealed their actual intention to operate a U.S. company as its division rather than a coequal partner after the merger in order to induce shareholder approval of the combination stated a claim for relief.

The court compared the investors claims that the German company misrepresented its true intentions to a case recently decided by the U.S. Supreme Court. In Wharf (Holdings) Ltd. v. United Int'l Holdings, Inc. (2001 CCH Dec. ¶91,425 ), the Supreme Court allowed an action to proceed based on claims that a company granted an option to purchase securities with a secret intent not to honor the option. In describing the merger between the two automobile companies, the district court stated that the fact "that plaintiffs did not bring the failure to honor these promises as a breach of contract claim is not fatal to their claims, because as defendants recognize in their own discussion of Wharf, the making of a promise with no intent to fulfill that promise, coupled with a later refusal actually to fulfill the promise, constitutes a misstatement."

The court also rejected challenges to the action on limitations grounds. Finding that the investors brought their securities fraud action within the required time period, the court concluded that magazine articles raising question about a merger and the departure of several officers of one of the merger partners did not place investors on inquiry notice of the possible fraud.

In a related action, the court held that investors were permitted to conduct limited discovery to investigate whether personal jurisdiction existed over the chairman of the German automobile group's supervisory board. The court noted that the federal securities laws provide for national service of process and extend personal jurisdiction to the limits of due process. Shareholder allegations that the supervisory board chairman was involved in the preparation and dissemination of false and misleading documents raised a prima facie showing of personal jurisdiction justifying additional discovery.

¨ In re DamilerChrysler AG Securities Litigation (DC Del) is reported at ¶91,776 and ¶91,777 .