United States: Bricklayers And Masons Local Union No. 5 Ohio Pension Fund V. Transocean: Federal Appeals Court Rules That Three-Year Statute Of Repose Applies To Section 14(A) Of The Exchange Act

On 29 April 2016, in Bricklayers and Masons Local Union No. 5 Ohio Pension Fund v. Transocean Ltd., the federal appeals court based in New York held that, even though the Sarbanes Oxley Act of 2002 ("SOX") extended the statute of repose for certain types of securities claims from three years to five years, it did not change the three-year statute of repose for claims brought under Section 14(a) of the Exchange Act (which prohibits misrepresentations in corporate proxy statements). A statute of repose establishes a period after which claims related to a certain event can no longer be brought, even in circumstances (such as a defendant's fraudulent concealment of evidence) that might extend the period established by a statute of limitations.

The plaintiffs' Section 14(a) claim arose from the merger of GlobalSantaFe Corp. ("GSF"), an offshore oil and gas drilling contractor, and Transocean Inc. ("Transocean"). Transocean owned the Deepwater Horizon, an offshore oil rig in the Gulf of Mexico that exploded on 20 April 2010, causing the worst oil spill in US history. The joint proxy statement in support of the merger, released on 2 October 2007, included statements about Transocean's compliance with training and safety programs and equipment maintenance requirements. GSF shareholders alleged that the proxy statement contained material misrepresentations and omissions concerning Transocean's safety protocols. When the original plaintiff was dismissed for lack of standing, the only remaining lead plaintiff was a party that did not seek to be appointed lead plaintiff until 3 December 2010, over three years after the proxy statement at issue was released.

In a case from 1990, this court applied the three-year statute of repose applicable to Sections 9(f) and 18(a) of the Exchange Act (which cover other types of securities fraud) to Section 14(a). But even though the court concluded that SOX's five-year statute of repose applies to Sections 9(f) and 18(a) because both statutes meet SOX's requirement of claims dealing with "fraud, deceit, manipulation, or contrivance," it held that this repose period does not apply to Section 14(a). The court reached this conclusion based on the principle of statutory interpretation that "assume[s] that Congress is aware of existing law when it passes legislation." When Congress chose to make SOX's five-year statute of repose apply only to claims of "fraud, deceit, manipulation, or contrivance," it therefore must have intended to leave intact the three-year statute of repose under Section 14(a), which can give rise to liability for mere negligence. Lastly, the court held that because statutes of repose are meant to impose a firm cutoff on when claims can be brought, the statute of repose under Section 14(a) begins to run at the time of the defendant's alleged violation—in this case, when the merger proxy statement was issued—rather than the more "fluid" standard of when the plaintiff could have discovered (or did discover) the claim.

The court here decided an open question concerning Section 14(a) claims. This decision should bring added clarity to this area of the law.

For additional information about this case, please see our client note:

http://www.shearman.com/en/newsinsights/publications/2016/05/second-circuit-holds-sarbanes-oxley-s-five-year

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