Reardon v. LightPath Technologies

LightPath Technologies (LightPath) (defendant) had a certain optical-glass technology and needed a substantial amount of funding to produce a commercial product. In 1995, LightPath decided to raise funds through an initial public offering (IPO). Before the IPO, LightPath first had to recapitalize. LightPath sought approval from its existing shareholders of a two-part plan: (1) a 1-to-5.5 reverse stock split, which would reduce the number of outstanding shares of Class A common stock (A shares) from 5.5 million to 1 million, and (2) LightPath’s distribution of a nontaxable stock dividend, or E shares, to pre-IPO shareholders. The reverse stock split would not change an investor’s share of ownership or total investment. Further, all holders of A shares would receive four E shares, which would not convert to A shares or be tradeable until and unless LightPath reached certain financial milestones. As to the contemplated IPO, proxy materials distributed to shareholders provided that “units,” consisting of one A share and two warrants, would be offered at $5 per unit. The materials also estimated that the post-IPO market valuation for the units was $33–$34.2 million, based on an IPO price of $5 per unit. Shareholders approved the recapitalization plan, and the IPO went forward. LightPath offered over 1.6 million units for $5 each and raised significant funds. LightPath did not, however, achieve the milestones set forth in the proxy materials for E shares to convert to A shares. A group of LightPath shareholders (the shareholders) (plaintiffs) sued LightPath and others (defendants), claiming fraud and securities fraud, among other claims. The trial court granted summary judgment to LightPath, based in part on the shareholders’ failure to establish that they had suffered damages. The shareholders appealed. On appeal, the shareholders argued that LightPath had represented that the post-IPO value of the E shares would be $5 per share, which, if true, would be a basis for damages.