Background
Torchlight Energy Resources, a publicly traded oil and gas company, merged with Metamaterial Technologies Inc. in June 2021 to form Meta Materials Inc. The parties structured the deal so that Torchlight’s stockholders received non-voting Preferred Stock entitling them to proceeds from any eventual sale or distribution of Torchlight’s oil and gas assets. Because Meta Materials ultimately decided not to sell those assets, it spun them off into a new company, Next Bridge Hydrocarbons, in December 2022. When Next Bridge was created, Meta Materials distributed Next Bridge common stock to the Preferred Stockholders—and, critically, canceled all outstanding Preferred Stock in the same transaction.
Next Bridge filed a Registration Statement with the SEC valuing the oil and gas assets at approximately $47.3 million as of September 30, 2022. Several months later, Next Bridge’s 2022 fiscal report listed those same assets at $79.7 million. But in the following year’s report, Next Bridge restated its 2022 figures to show that the oil and gas assets had been worth nothing all along. Todd Targgart and other Next Bridge shareholders sued under Sections 11, 12, and 15 of the Securities Act, alleging the Registration Statement was materially inaccurate. The district court dismissed all claims, holding that Plaintiffs lacked statutory standing because they had not “purchased” their Next Bridge shares—they merely received them as a distribution.
The Court’s Holding
The Fifth Circuit reversed, holding that the shareholders did acquire their Next Bridge stock “for value” as required by Section 11 of the Securities Act. The critical fact the district court overlooked was that Plaintiffs were entirely dispossessed of their Meta Materials Preferred Stock at the moment they received their Next Bridge shares. Although the Registration Statement stated that shareholders were “not asking [Preferred Stockholders] to make any payment,” it also made clear that all Preferred Stock would be canceled immediately after the spinoff. Plaintiffs were warned that if they sold their Preferred Stock before the spinoff, they would forfeit their right to receive Next Bridge shares. This was a conditioned exchange, not an unconditional gift.
The court reasoned that this stock-for-stock exchange—Preferred Stock for Next Bridge common stock—satisfies the statutory definition of “purchase for value” under the Securities Act. It relied on Fifth Circuit precedent holding that parties who relinquished one security and received another in return had acquired the new security for value. The defendants argued the transaction was merely technical because both securities related to the same oil and gas assets, invoking the “fundamental-change doctrine” to distinguish the transaction from a true purchase. The court rejected this argument, finding that the fundamental-change doctrine applies only to Exchange Act claims under Section 10(b), not to Securities Act claims. Because Plaintiffs exchanged one security for another, Sections 11, 12, and 15 claims all survive dismissal on statutory standing grounds.
Key Takeaways
- In spinoff transactions, shareholders who receive new company stock in exchange for their interests in the distributing company acquire those shares “for value” under Securities Act Section 11, even though no cash changes hands.
- The “fundamental-change doctrine,” which may apply in Exchange Act cases, does not limit the definition of “purchase” under the Securities Act.
- A shareholder’s loss of one security in exchange for another constitutes statutory consideration, giving the shareholder standing to pursue securities fraud claims.
- At the motion-to-dismiss stage, plaintiffs need only allege plausibly that a defendant acted as a “statutory seller” or controlled the issuer—the court will not dismiss on theories not addressed by the district court.
Why It Matters
This decision significantly narrows the circumstances under which defendants can dismiss securities fraud claims in spinoff contexts. Before Targgart, companies attempting to shield themselves from Section 11 liability could argue that spinoff shareholders received their shares “for free” and thus lacked standing to sue. The Fifth Circuit’s holding forecloses that defense whenever shareholders surrender any interest—even a tethered, related interest in the parent company—to receive the spinoff security. This is important because spinoff transactions frequently involve valuation discrepancies that surface only after the spin is complete.
The decision also clarifies that courts should not import doctrines developed in the fraud-based Exchange Act context into strict-liability Securities Act claims. Section 11 imposes liability on issuers without requiring proof of scienter or reliance, and the court’s refusal to apply equitable doctrines that might limit that liability serves the statute’s remedial purpose. For securities litigators, Targgart establishes that spinoff shareholders have a viable path to survive dismissal and proceed to discovery and trial on their Section 11, 12, and 15 claims.