                                                                                                                           Opinions of the United
2002 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


7-11-2002

Tse v. Ventana Med Sys Inc
Precedential or Non-Precedential: Precedential

Docket No. 00-4287




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PRECEDENTIAL

       Filed July 11, 2002

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

Nos. 00-4287 and 01-1066

ALEX TSE; MARGARET WAI LAM LEUNG;
MICHELLE LEUNG; CHING-SHUANG SHIH,
Appellants in No. 00-4287

v.

VENTANA MEDICAL SYSTEMS, INC., a
Delaware Corporation; JACK W. SCHULER;
JOHN PATIENCE; MARQUETTE VENTURE PARTNERS
L.P.; MARQUETTE VENTURE PARTNERS II, L.P.,
an Illinois Limited Partnership; MVP II
AFFILIATES, FUND, L.P. an Illinois Limited Partner ship

Ventana Medical Systems, Inc.; John Patience;
Jack W. Schuler, Appellants in No. 01-1066

On Appeal From the United States District Court
For the District of Delaware
(D.C. Civ. No. 97-cv-00037)
District Judge: Honorable Gregory M. Sleet

Argued: February 4, 2002

Before: BECKER, Chief Judge, McKEE, and
BARRY, Circuit Judges.

(Filed: July 11, 2002)




       NANCY J. SENNETT, ESQUIRE
        (ARGUED)
       Foley & Lardner
       777 East Wisconsin Avenue
       Milwaukee, WI 53202-5367

       PATRICK J. KEARNEY, ESQUIRE
       Foley & Lardner
       3000 K Street, NW, Suite 500
       Washington, D.C. 20007

       JOEL E. FRIEDLANDER, ESQUIRE
       Bouchard, Margules & Friedlander
       222 Delaware Avenue, Suite 1102
       Wilmington, DE 19801

       Counsel for Appellants/Cross-
       Appellees Alex Tse, Margaret Wai
       Lam Leung, Michelle Leung and
       Ching-Shuang Shih
       STEVEN M. SCHATZ, ESQUIRE
        (ARGUED)
       DAVID J. BERGER, ESQUIRE
       ELIZABETH M. SAUNDERS,
        ESQUIRE
       STEVEN GUGGENHEIM, ESQUIRE
       Wilson, Sonsini, Goodrich & Rosati
       650 Page Mill Road
       Palo Alto, CA 94304

       JESSE A. FINKELSTEIN, ESQUIRE
       RAYMOND J. DiCAMILLO, ESQUIRE
       Richards, Layton & Finger
       One Rodney Square
       P.O. Box 551
       Wilmington, DE 19899

       Counsel for Appellees/Cross-
       Appellants Ventana Medical Systems,
       Inc.; John Patience; Jack W. Schuler

                                2


OPINION OF THE COURT

BECKER, Chief Judge:

The plaintiffs, former shareholders of Biotek Solutions,
Inc., ("Biotek"), appeal the District Court’s order granting
summary judgment for the defendants, Ventana Medical
Systems, Inc. ("Ventana"), and Jack Schuler and John
Patience, two of Ventana’s officers, in this securities action
brought pursuant to S 10(b) of the Securities Exchange Act
of 1934, 15 U.S.C. S 78j(b), S.E.C. Rule 10b-5, 17 C.F.R.
S 240.10b-5, and California and North Carolina securities
statutes. The plaintiffs’ claims rest on the defendants’
failure to disclose to Biotek’s shareholders during
negotiations that resulted in the merger of Ventana and
Biotek the terms of a compensation package that Ventana
had approved in principle for the two officer defendants.
The District Court granted summary judgment for the
defendants on the grounds that the plaintiffs had failed to
demonstrate either causation or scienter. The Court
granted summary judgment on the state law claims on the
same grounds.

We will affirm the District Court’s grant of summary
judgment on the Rule 10b-5 claim because we agree that
the plaintiffs have failed to adduce evidence establishing
genuine issues of material fact on causation. The plaintiffs
do not allege actual loss, but rather rely on a"lost
opportunity" theory of causation. We have held that
plaintiffs may rely on a "lost opportunity" theory only where
the fact of loss is not wholly speculative, which we think it
is in this case. We will also affirm the grant of summary
judgment on the state law claim, albeit on a different
ground from that relied upon by the District Court. In our
view, California Corporate Code S 25401, the section under
which the plaintiffs challenge the defendants’ alleged
omission, does not cover "simple nondisclosure," or the
mere nondisclosure of material facts. Rather, S 25401
covers only misstatements of material fact and those
omissions that render misleading the statements that were
made in connection with the sale or purchase of securities,

                                3


and the plaintiffs do not point to any such misstatements.
Specifically, the plaintiffs contend that Ventana’s disclosure
of the stock that it was authorized to issue at the time
when the Biotek shareholders voted to approve the merger
was rendered misleading by the fact that Ventana had
preliminarily approved the sale of shares to Schuler and
Patience, but did not disclose that preliminary approval. We
disagree, and therefore affirm the grant of summary
judgment to the defendants on the California law claim.

I. Facts & Procedural History

A. Factual Background

The plaintiffs, Alex Tse, Margaret Wai Lam Leung,
Michelle Leung, and Ching-Shuang Shih, were investors in
Biotek, a closely held company that was in the business of
developing, manufacturing, and marketing instruments
used to diagnose cancer. Between 1992 and 1995 the
plaintiffs made several investments in Biotek, which they
describe as "promissory notes for their investment, along
with stock in the form of an equity ‘kicker.’ " In total, the
plaintiffs held approximately 9.12% of the notes and
common stock issued by Biotek. Defendant Ventana
Medical Systems, Inc. is a Delaware corporation
headquartered in Tucson, Arizona. It engaged in roughly
the same business as Biotek, and, until 1996 (when the
two merged), was its principal competitor. Defendants Jack
Schuler and John Patience were directors of Ventana
during the period leading up to its merger with Biotek.

The parties present different pictures of the events that
led to their merger. The plaintiffs portray Ventana as a
company that badly needed to merge with Biotek in order
to achieve its goal of going public. To support their
portrayal of Ventana, the plaintiffs point to the statements
that Ventana’s investment banker, Bear Stearns, made to
Ventana’s Board regarding its potential purchase of Biotek
that the "strategic, financial, and synergistic benefits [of the
merger] are compelling" and that the "synergy value" of the
merger with Biotek was between $32 and $50 million. The
plaintiffs also cite statements that Patience made in a

                                4


presentation to the Ventana Board in November 1995 that
Biotek "represents a very attractive strategic acquisition
candidate for Ventana" and that the "acquisition will create
significant value for Ventana’s shareholders, even if a rich
premium is paid." Finally, the plaintiffs point to a
statement from a memorandum written by a Ventana
director that quoted Ventana’s attorney as stating that
"acquiring our major competitor is a truly significant event
which in itself will make the public offering [of Ventana]
possible."

In contrast, the defendants portray Biotek as a company
on the verge of bankruptcy which, but for its 1996 merger
with Ventana, would not have been able to pay its debts.
The defendants assert that "[b]y 1995, Biotek’s debts were
overwhelming," pointing to a March 9, 1995 statement
made by Biotek’s then-president Michael Miller that Biotek
"will be out of cash on or before June 30."

The defendants also point to a previous failed sale
agreement that Biotek entered into with a company named
Shandon. In a message to Biotek’s investors regarding that
sale agreement, Biotek’s chairman Mike Danzi urged the
investors to approve the deal because, in his view,"funding
to allow Biotek to remain independent [wa]s not readily
available on acceptable terms, and . . . without funding or
a sale there [wa]s significant risk of loss of[their]
investment." The Biotek investors approved the terms of the
sale, but Shandon backed out of the deal. Finally, the
defendants offer Danzi’s deposition testimony that in 1995
Biotek "did not have the capacity to repay [its] debts as
they were coming due," and that the company had
"explored many opportunities for an equity or debt
infusion," including "bankruptcy . . . as a way to protect [it]
from the[ ] judgments, lawsuits, and . . . the significant
debts coming due." The plaintiffs do not counter these
descriptions.

Ventana and Biotek began negotiating the terms of a
potential merger in the fall of 1994. According to the
deposition testimony of Patience, who was involved in
negotiating the merger, Biotek proposed merger terms
under which its shareholders would own 50% of the
successor company, and later, in early 1995, revised its

                                5


request downward, proposing that Biotek shareholders
would own 33% of the new company. Ventana rejected both
proposals. However, on December 19, 1995, Biotek and
Ventana agreed upon and signed a letter of intent setting
forth the terms of a merger plan.

The plan provided that a wholly-owned subsidiary of
Ventana called Ventana Acquisitions Corporation would
merge into Biotek, leaving Biotek as the successor
corporation, which would then become a wholly-owned
subsidiary of Ventana. The plan provided that Biotek’s
noteholders would exchange their notes for promissory
notes issued by Ventana, known as "Ventana Exchange
Notes," which would be senior for bankruptcy purposes to
all of Ventana’s preferred and common stock. The plan also
provided that Biotek’s noteholders would have the option to
convert all of their Ventana Exchange Notes into Ventana
common stock at $5.00 per share. Unless holders of the
Ventana Exchange Notes opted not to convert any of their
notes into common stock, 50% of their notes would
automatically be converted at the rate of $5.00 per share.
All of the plaintiffs but one, Shih, opted not to convert any
of their Ventana Exchange Notes. Shih did nothing, and
due to her decision not to opt out of the automatic
conversion provision, 50% of her notes were converted at
the rate of $5.00 per share. All of the plaintiffs’ non-
converted notes have been repaid in full.

On January 16, 1995, three days before the merger
agreements were signed, the Ventana Board approved in
principle a compensation package for Schuler and Patience,
the two Ventana directors who were taking the lead in
negotiating the Biotek merger. On February 23, 1996, the
Ventana Board gave its final approval to the compensation
package, which provided that Ventana would issue to
Schuler and Patience 1.75 million shares of Ventana
Common Stock at $.60 a share. At the January 16 meeting,
the Board recorded its determination that $.60 per share
was the fair market value of Ventana’s stock at that time.
This issuance of stock to Patience and Schuler was,
however, subject to a buyback provision until several
conditions were met. These included that Patience and
Schuler were required to: (1) "[s]pend 50% of their time

                                6


working exclusively for Ventana over a period of years;" (2)
"complete the merger between Biotek and Ventana and
integrate the two companies;" and (3) "[i]nsure that if
Ventana sold its stock in a public offering, that the price of
the stock would be at $4.00 per share or above."

In addition, Schuler was required to serve as Ventana’s
chairman for four years, and Schuler and Patience were
required to invest $1,000,000 in Ventana, for which they
were to receive convertible bonds on the same terms as
other Ventana investors. The compensation agreement
provided that if these conditions were not met, Ventana
could repurchase the shares at the price at which they had
initially sold them to Patience and Schuler. Thus, the
compensation package was structured as an incentive
system, i.e., if Patience and Schuler could increase the
value of the company by the specified amount, the Board
would compensate them by selling them a large number of
Ventana shares at what it estimated to be the current
(comparatively low) value of Ventana stock. In this respect,
the compensation package was not unlike the strategy that
boards of directors commonly employ when granting
corporate officers options to buy company stock in the
future at a discounted price in order to provide them with
an incentive to increase the stock’s value.

As noted above, the disclosures that Ventana made (and
allegedly failed to make) to Biotek regarding the stock
issuances that it had authorized at the time of the proposed
merger with Biotek is of particular relevance to the
plaintiffs’ claim under California Corporate CodeS 25401.
On February 8, 1996, Biotek’s Board of Directors sent a
proxy letter to all Biotek investors (including holders of
both notes and stock), requesting their approval of the
planned merger with Ventana and explaining the terms of
the proposed merger. An information sheet was enclosed
with the letter, which included as one of its exhibits the
Agreement and Plan of Reorganization ("the Agreement").
Section 4.5 of the Agreement set forth the "authorized
capital stock of Ventana as of the date hereof " and stated
that Ventana had 2,110,789 shares of common stock and
70,089 shares of preferred stock "reserved for issuance . . .
under its stock option and stock purchase plans." Section

                                7


4.5 also stated that "[p]rior to the Closing Date [of the
merger with Biotek,] Ventana expects that its authorized
number of shares of Common Stock, Preferred Stock and
Series D Preferred Stock will increase due to the proposed
issuance of warrants to purchase an aggregate of 1,860,500
shares of Series D" Preferred Stock in connection with a
proposed financing transaction.

Section 4.7 of the Agreement provided:

       No representation or warranty made by Ventana in this
       Article IV or in any other Article or Section of this
       Agreement, or in any certificate, schedule, or other
       document furnished or required to be furnished by
       Ventana pursuant hereto, contains or will contain any
       untrue statement of a material fact or omits or will
       omit to state any material fact necessary to make the
       statements or facts contained herein or therein not
       misleading in light of the circumstances under which
       they are made.

Section 6.3(a) of the Agreement provided that:

       The representations and warranties of Ventana and
       Sub [the subsidiary of Ventana that was merging into
       Biotek] set forth in Article IV of this Agreement shall be
       true and correct in all material respects on and as of
       the date of this Agreement and as of the Effective Time
       (except to the extent such representations and
       warranties speak only as of an earlier date, including,
       without limitation, Ventana’s representations as to
       outstanding capitalization), and the covenants and
       agreements of Ventana and Sub set forth herein shall
       have been complied with in all material respects and
       Bio[t]ek shall have received a certificate signed by an
       authorized officer of Ventana and Sub dated the
       Effective Time to such effect.

None of the information concerning the Schuler and
Patience compensation package that had been approved in
principle on January 16 (but not yet formally approved
until February 23) was disclosed to Biotek investors in
this information packet. However, Ventana disclosed the
information regarding the compensation package to its own
shareholders in a proxy statement issued on February 2,

                                8


1996 in anticipation of its upcoming annual shareholders
meeting.

The Merger Agreement required that 90% of the
outstanding Biotek stock had to vote in favor of the merger
in order for it to be approved. Although the plaintiffs state
that they were reluctant to accept the terms of the merger
because they received no cash for their Biotek stock and
promissory notes, all of them voted for the merger. The
merger plan was formally approved on February 23, 1996,
and became effective on February 26, 1996.

B. Procedural History

When the plaintiffs learned about the Patience and
Schuler compensation package, they sued Ventana,
Schuler, and Patience in the District Court for the District
of Delaware, alleging violations of S 10(b) of the Securities
Exchange Act of 1934, 15 U.S.C. S 78j(b), S.E.C. Rule 10b-
5, 17 C.F.R. S 240.10b-5, and California and North Carolina
securities statutes.1 The complaint alleges that Ventana
had fraudulently withheld information regarding the
Patience and Schuler compensation packages, and that
Ventana had failed to disclose the $.60 fair market value
estimate for Ventana shares at which Patience and Schuler
would be allowed to purchase Ventana shares after the
Biotek merger. The complaint further alleges that Ventana’s
failure to disclose this information induced the plaintiffs to
accept the merger at terms much less favorable to Biotek’s
investors than they could have negotiated had the terms of
the compensation package been disclosed.

The defendants moved to dismiss pursuant to Federal
Rule of Civil Procedure 12(b)(6), arguing that their duty to
disclose information did not extend to the plaintiffs. The
District Court rejected this argument and denied the
motion, concluding that:

       Defendants argue that where the acquirer was neither
       an insider nor a fiduciary of the target, the acquirer
_________________________________________________________________

1. The plaintiffs do not appeal the District Court’s grant of summary
judgment on the claims based on North Carolina law. Those claims are
therefore not before us.

                                9


       owes no duty to disclose to the shareholders of the
       target. Although such . . . [an] assertion may be true,
       it is not relevant under the circumstances of the case
       at bar. In the instant action, the acquiring corporation
       traded in its own securities. By the terms of the
       Agreement, defendants were asking to become equity
       shareholders in the acquiring corporation, Ventana.
       Accordingly, as "insiders," defendants assumed an
       affirmative duty to disclose material information.

The case was subsequently reassigned to a different judge.
Following discovery, the defendants moved for summary
judgment. Relying on the law-of-the-case doctrine, the
second District Judge (1) followed the first judge’s
conclusion that the defendants owed a fiduciary duty to the
plaintiffs, and (2) concluded that the alleged omission was
material. Nevertheless, the Court granted summary
judgment on the two alternative grounds that no
reasonable jury could find either that: (1) the plaintiffs had
established loss causation; or that (2) the plaintiffs had
established scienter. For the same reasons, the District
Court concluded that the defendants were also entitled to
summary judgment on their state law claims.

The plaintiffs appeal, contending that the existence of
genuine issues of material fact rendered it error for the
District Court to grant summary judgment on either of the
alternative grounds on which it relied with regard to its
claims based on S 10(b), Rule 10b-5, and California law.
The defendants cross-appeal. They argue that the first
District Judge committed legal error when denying the
motion to dismiss by holding that the defendants had a
duty to disclose information to the plaintiffs regarding the
compensation package. And they submit that the second
District Judge erred by holding that he was bound by this
interpretation under the law-of-the-case doctrine. Although
the scope of the duty presents an important legal question,
we need not resolve it in order to decide this appeal.

The District Court had jurisdiction pursuant to 28 U.S.C.
S 1331 and 15 U.S.C. S 78aa. It exercised pendent
jurisdiction over the plaintiffs’ related state law claims
pursuant to 28 U.S.C. S 1367(a) (which were also supported
by diversity jurisdiction, 28 U.S.C. S 1332). This court has

                                10


appellate jurisdiction to review the final order of the District
Court pursuant to 28 U.S.C. S 1291. We exercise plenary
review over the District Court’s grant of summary
judgment, applying the same standards that the District
Court should have applied in the first instance. Chisolm v.
McManimon, 275 F.3d 315, 321 (3d Cir. 2001). Summary
judgment is proper if there is no genuine issue of material
fact and if, viewing the facts in the light most favorable to
the non-moving party, the moving party is entitled to
judgment as a matter of law. See Fed. R. Civ. P. 56(c);
Celotex Corp. v. Catrett, 477 U.S. 317 (1986). The judge’s
function at the summary judgment stage is not to weigh the
evidence and determine the truth of the matter, but to
determine whether there is a genuine issue for trial. See
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986).
II. The S 10(b)/Rule 10b-5 Claim

Section 10(b) of the Securities Act of 1934 makes it
unlawful to "use or employ, in connection with the
purchase or sale of any security, . . . any manipulative or
deceptive device or contrivance in contravention of such
rules and regulations as the Commission may prescribe."
15 U.S.C. S 78j(b). Rule 10b-5, which the Securities and
Exchange Commission promulgated pursuant to S 10(b),
makes it unlawful to "make any untrue statement of a
material fact or to omit to state a material fact necessary in
order to make the statements made, in light of the
circumstances under which they were made, not misleading
. . . in connection with the purchase or sale of any
security." 17 C.F.R. S 240.10b-5. We have held that in order
to prevail on a claim for securities fraud underS 10(b) and
Rule 10b-5, "a plaintiff must show that the defendant (1)
made a misstatement or an omission of a material fact (2)
with scienter (3) in connection with the purchase or sale of
a security (4) upon which the plaintiff reasonably relied and
(5) that the plaintiff ’s reliance was the proximate cause of
his or her injury." In re Ikon Office Solutions, Inc. Secs.
Litig., 277 F.3d 658, 666 (3d Cir. 2002).

The District Court concluded that the defendants were
entitled to summary judgment because there is no triable
issue of fact on the causation or scienter requirements. If it

                                11


was correct with respect to either ground, the defendants
are entitled to summary judgment on the S 10(b) and Rule
10b-5 claims. We turn first to the causation issue.

A. Causation

The causation element of our test for securities fraud
under S 10(b) and Rule 10b-5 turns on a legal link between
the defendants’ misstatement or omission and the plaintiffs’
injury. Typically, this requires the plaintiff to show that he
or she experienced an actual loss. The plaintiffs in this case
did not experience any actual loss from their initial
investments in Biotek. The three plaintiffs who declined to
convert their Ventana Exchange Notes to Ventana common
stock were repaid in full, with the interest they had
negotiated. Shih, the plaintiff who converted half of her
Ventana Exchange Notes into stock, had, as of the time the
briefs were filed for this appeal, experienced a significant
increase in the value of her shares above the rate at which
she exercised her option to convert her notes into common
stock.

We have, however, recognized, at least in the context of
claims brought pursuant to S 14(a) of the Securities Act of
1934 and Rule 14a-9 promulgated thereunder (which apply
to statements made in proxy materials, see infra note 2),
that plaintiffs may proceed on a theory of "lost opportunity"
without demonstrating any actual loss. See Gould v.
American-Hawaiian S.S. Co., 535 F.2d 761, 781 (3d Cir.
1976). The District Judge who heard the motion to dismiss
assumed that this "lost opportunity" theory extends to Rule
10b-5 claims, and held that the plaintiffs had pleaded facts
sufficient to support the causation element of their claim
based on the lost opportunity to negotiate a merger with
Ventana on more favorable terms. She observed that Gould
allowed the plaintiffs to proceed on the theory that"by the
circulation of defective proxy materials ‘plaintiffs were lulled
to inaction and thereby suffered the loss of an opportunity
to secure a merger agreement which would be more
favorable to them.’ " (quoting Gould, 535 F.2d at 782.). She
then held that because the Ventana/Biotek merger
agreement "required a 90% affirmative vote of the
outstanding Biotek Notes in order to consummate the

                                12


merger," and because "[p]laintiffs owned approximately
9.12% of all the outstanding Biotek Notes," and thus the
"plaintiffs were in a relatively strong bargaining position,"
she could not "conclude, based upon the pleadings, that
had plaintiffs not been ‘lulled into inaction’ by defendants’
alleged omissions/misrepresentations, they would not have
successfully prevailed upon Ventana to pay a higher price
for Biotek."

As explained above, the case was reassigned to a different
judge following the denial of the motion to dismiss. That
judge accepted the first judge’s conclusion that Gould
provides that plaintiffs may, under some circumstances,
establish causation for a 10b-5 claim through a"lost
opportunity" theory, but nevertheless concluded that the
defendants were entitled to summary judgment on the
causation issue. In its opinion granting summary judgment,
the District Court noted that "[u]nder Gould . . . , a plaintiff
who cannot prove out of pocket damages may prove‘loss of
a possible profit or benefit, [defined as] an addition to the
value of one’s investment, unless the loss is wholly
speculative.’ " (citing Gould, 535 F.2d at 781). The Court
observed that "the plaintiffs want the court to hypothesize
as to whether" they could have negotiated a more favorable
conversion rate from Ventana "and to hypothesize as to
what that rate would be." It concluded that this need for
speculation by the Court renders the plaintiffs’"claim for
lost profits . . . wholly speculative." From this, the Court
reasoned that the plaintiffs’ claim of lost opportunity to
negotiate better merger terms was "wholly speculative," and
that they therefore could not rely on Gould’s "lost
opportunity" theory. Because the plaintiffs did not
experience any out-of-pocket losses (the other route for
showing the loss needed to establish causation), the Court
held that they had no avenue for demonstrating loss
causation, and that therefore the defendants were entitled
to summary judgment.

Gould was a class action lawsuit brought by shareholders
of McLean Industries against that company’s directors
alleging, inter alia, that the directors had violated S 14(a) of
the 1934 Act and Rule 14a-9 promulgated thereunder"in
connection with the solicitation of proxies by McLean

                                13


Industries for shareholders’ approval of its merger into
Reynolds" Tobacco Company.2Gould, 535 F.2d at 765. The
Gould plaintiffs’ claims were based on the directors’ failure
to disclose in their proxy solicitation (which was requesting
approval of the terms of the merger) that certain
shareholders of McLean would be receiving a more
favorable exchange rate than other McLean shareholders.
The plaintiffs in Gould stipulated that they did not
experience any out-of-pocket loss in the merger transaction
but they claimed that had they known about the more
favorable terms of exchange that some of their fellow
shareholders were getting, they would have negotiated to
receive an equal share of the surplus value that these
shareholders were receiving. Id. at 781.

Gould held that while the damages provision of the 1934
Act provides that "no person permitted to maintain a suit
for damages under the provisions of this title shall recover
. . . a total amount in excess of his actual damages," the
"dichotomy [that this provision draws upon] is between
actual and punitive damages and recovery is not limited to
out of pocket loss, a diminution in the value of one’s
investment, but may include loss of a possible profit or
benefit, an addition to the value of one’s investment, unless
the loss is wholly speculative." Id. (emphasis added). Gould
further held that "by the circulation to [the plaintiffs] of the
defective proxy materials [they] were lulled to inaction and
thereby suffered the loss of an opportunity to attempt to
secure a merger agreement which would be more favorable
to them." Id. at 782. Thus, the court agreed that the fact of
the loss was not wholly speculative (i.e., it was fairly certain
that the plaintiffs suffered a monetary loss of some
amount). While the court focused on the difficulty of
_________________________________________________________________

2. Parallel to S 10(b) and Rule 10b-5,S 14(a) and Rule 14a-9 prohibit   the
issuance of a proxy statement "containing any statement which, at the
time and in the light of the circumstances under which it is made, is
false or misleading with respect to any material fact, or which omits   to
state any material fact necessary in order to make the statements
therein not false or misleading or necessary to correct any statement   in
any earlier communication with respect to the solicitation of a proxy   for
the same meeting or subject matter which has become false or
misleading." 17 C.F.R. S 240.14a-9(a).

                                14


determining the amount of the loss, it nevertheless held
that where the fact of the loss is almost certain,"the risk
of uncertainty as to amount of damages is cast on the
wrongdoer and it is the duty of the fact finder to determine
the amount of the damages as best he can from all the
evidence in the case." Id.
In sum, Gould holds that: (1) "lost opportunity" damages
are available "unless the loss is wholly speculative"; and (2)
if the fact of loss is not "wholly speculative," "the risk of
uncertainty as to amount of damages is cast on the
wrongdoer and it is the duty of the fact finder to determine
the amount of the damages as best he can from all the
evidence in the case." 535 F.2d at 781-82. Thus,"lost
opportunity" damages are not available where the fact of
the loss, i.e., whether there was any lost opportunity at all,
is wholly speculative. But where the fact of lost opportunity
is well established, it is up to the fact finder to determine
the amount of the loss to the best of its ability. The
defendants argue, however, that Gould’s"lost opportunity"
approach is inapplicable to the present case because"Gould
is a Section 14(a) case that does not even discuss the
causation requirement in the context of Rule 10b-5," and
its "lost opportunity" theory does not extend to Rule 10b-5
claims.3 We will assume without deciding that Gould’s "lost
opportunity" theory applies to Rule 10b-5 claims. Even
assuming that it does, however, we do not think that the
plaintiffs may proceed under that theory in this case
because the fact of their loss is "wholly speculative." Gould,
535 F.2d at 781.
_________________________________________________________________

3. Although we have not applied Gould’s"lost opportunity" causation
theory to a Rule 10b-5 case, district courts from within this Circuit have
done so. See Dofflemeyer v. W.F. Hall Printing Co., 558 F. Supp. 372, 380
n.6 (D. Del. 1983); see also Rudinger v. Ins. Data Proc., Inc., 778 F.
Supp. 1334, 1340 n.9 (E.D. Pa. 1991). Furthermore, the Supreme Court
has imported standards from S 14(a) jurisprudence into its S 10(b)
jurisprudence in other contexts, such as the test for materiality. See
Basic Inc. v. Levinson, 485 U.S. 224, 232 (1988) (adopting in the context
of S 10(b) the materiality test set forth in TSC Industries, Inc. v.
Northway, Inc., 426 U.S. 438 (1976), a S 14(a) case); but see Herskowitz
v. Nutri/System, 857 F.2d 179, 189-90 (3d Cir. 1988) (noting that the
mental state required for a S 14(a) violation is only "negligence," and is
thus less stringent than the scienter requirement in a S 10(b) case).

                                15


The plaintiffs’ main contention is that, if they had known
the details of the compensation package that the Ventana
Board had approved in principle, including its judgment
that the $.60 per share figure was the stock’s "fair value,"
they would have held out for a better exchange rate
between Biotek stock and Ventana stock in the merger
deal. As the defendants properly note, there are at least
four events upon which the plaintiffs’ alleged lost
opportunity would hinge. First, the plaintiffs would have
had to vote against the proposed merger, and recruit at
least some other shareholders to oppose it with them (they
held 9.12% of the shares and would need 10% to prevent
the merger). Second, Biotek would have had to negotiate a
more favorable exchange rate at which its shareholders
could exchange Ventana Exchange Notes for Ventana
common stock. Third, the plaintiffs would have to have
chosen to exchange their notes for common stock. Fourth,
the plaintiffs would have to have chosen to have sold
Ventana common stock following the IPO at a profit (i.e., in
order to do better than the return that they got on their
promissory notes). We will assume that the plaintiffs would
have completed the third and fourth steps of the chain
(exercising their conversion option and selling their stock at
a profit). Nevertheless, we think that the Gould "wholly
speculative" standard is not met by the first and second
steps taken together (rejecting Ventana’s merger offer and
negotiating a better deal).

Regarding the first step in this chain, the plaintiffs argue
that because they held almost 10% of the shares, the
amount required to block the merger, they could have
obtained the necessary additional votes and would have
voted against the merger and negotiated more favorable
terms for Biotek had they known about the
Patience/Schuler compensation package. To support this
contention, they present affidavits and testimony stating
that they themselves would have voted against the merger
if the information had been disclosed. They also present
affidavits from three out of the five Biotek directors who
voted in favor of the merger representing that they would
have voted against the merger had the information been
disclosed. We will assume that the plaintiffs could have
amassed sufficient votes to block the merger, but we think

                                16


it is highly speculative that they would have done so had
the Ventana Board disclosed the information regarding its
estimate of the value of Ventana stock and the terms of the
Patience and Schuler compensation packages.

The defendants point to evidence of significant financial
difficulties that Biotek was facing at the time when the
shareholders voted on the merger offer. Indeed, they adduce
evidence that seems to demonstrate that "by October 1995,
Biotek had no real alternative but bankruptcy." They cite a
letter from Biotek’s Chairman, Mike Danzi, to Biotek’s
shareholders urging them to accept a deal similar to the
Ventana deal in August 1995, in which he wrote that
"funding to allow Biotek to remain independent is not
readily available on acceptable terms, and . . . without
funding or sale there is a significant risk of loss of your
investment." The defendants also point to the testimony of
Danzi in which he stated that in October 1995, Biotek was
forced to have an outside investor cover its payroll
expenses. The defendants argue that these record
references show that the only two options were for the
Biotek shareholders to accept the merger, in which case
they were likely to have their notes repaid in full, or for
Biotek to declare bankruptcy, in which case the plaintiffs
would almost certainly have received a less than full return
on their promissory notes.

The plaintiffs dispute that Biotek would have been
required to declare bankruptcy, relying principally upon an
affidavit from Angella Sabella, a former Biotek investor, that
states that she would have loaned up to $2.8 million to
Biotek in order to prevent it from going bankrupt. Such
post hoc declarations are inevitably suspect. Moreover,
Sabella would have extended the loan only on a "super
priority" basis, meaning that her loan would line up before
the plaintiffs’ notes in the case of bankruptcy, an
arrangement that would have been extremely difficult to
obtain. In sum, while the plaintiffs have presented
substantial evidence that they could have rejected the
Ventana merger on the terms on which it ultimately took
place, we believe that it is highly speculative that they
would have done so, even if they had known the terms of
the compensation package, given Biotek’s shaky financial

                                17


situation and the risk of loss of their investment in the case
of bankruptcy.

Regarding the second event, even if we were certain that
the plaintiffs would have voted against the merger if the
compensation information had been disclosed, the record
renders it unlikely that they could have negotiated a better
deal. Indeed, there is evidence in the record that prior to
the final merger proposal, Biotek had attempted to
negotiate a better exchange rate between Biotek and
Ventana shares, but had been refused. In the fall of 1994,
Biotek proposed a merger where its shareholders would
hold 50% of the shares in the merged company, but
Ventana rejected the offer. And in early 1995, Biotek
proposed a merger arrangement where its shareholders
would hold 33% of the merged company but Ventana
declined.

The plaintiffs point to information obtained through
discovery about the importance of the Biotek merger to
Ventana, including how crucial the merger was for Ventana
to shore up its market position and to prepare for an IPO.
The plaintiffs rely on the following information. First, Biotek
relies on a presentation that Patience made to the Ventana
Board in November 1995 regarding the potential Biotek
merger, in which he recommended that Ventana acquire
Biotek because:

       1. [Biotek] represents a very attractive strategic
       acquisition candidate for Ventana; and

       2. The acquisition will create significant value for
       Ventana’s shareholders, even if a rich premium is paid.

To determine how rich of a premium that Ventana might
have paid, the plaintiffs invoke a November 30, 1995
recommendation that Ventana management made to the
Board "that it approve discussions for the acquisition of
Biotek on terms not to exceed $27.2 million" in stock and
assumed liabilities.

The plaintiffs also cite presentations delivered to Ventana
by Bear Sterns in February 1995 that concluded that:
       1. The acquisition of Biotek by Ventana was "of
       critical strategic importance as Ventana embarks on its
       strategy of automating IHC testing in laboratories";

                                18


       2. The "synergy value" of the Merger was between $32
       million to $50 million; and

       3. The "strategic, financial and synergistic benefits of "
       the Merger "are compelling."

This information, the plaintiffs submit, shows not only that
Biotek could have negotiated a more favorable merger deal
from Ventana, but also establishes the bounds of how
much more Ventana would have been willing to pay (for the
purposes of damage calculations).

We disagree. The plaintiffs would have the court
reconstruct the negotiations as if Biotek had perfect
information about Ventana’s underlying financial situation
and how much Ventana valued Biotek and Ventana had no
information regarding Biotek’s finances or how much it
valued the Ventana merger. This is a highly unrealistic way
to recreate a potential merger negotiation. Even if the
plaintiffs had all of the information regarding the
compensation package that they allege they should have
been given, they still would not have known any of the
information about the rate at which Ventana valued Biotek
that they now cite as evidence for the proposition that they
would have secured more favorable merger terms. This
evidence is especially unconvincing in light of the evidence
that Biotek attempted to secure a more favorable share
exchange rate and failed to do so.

The highly speculative chain of events that the plaintiffs
ask us to infer from the evidence they have presented -- in
particular, that Biotek would have rejected the Ventana
offer and could have negotiated a more favorable merger
deal -- appears to be what Gould was referring to when it
stated that we should not apply the "lost opportunity"
theory of causation in a situation where the loss is"wholly
speculative." Gould, 535 F.2d at 781. We think that unlike
Gould, where the fact of some uncertain amount of loss was
clearly established because some shareholders received a
more favorable share exchange rate than other similarly
place shareholders, the very fact of loss in this case is
"wholly speculative."4
_________________________________________________________________

4. The fact of loss was also much more certain in Rudinger v. Ins. Data
Proc., Inc., 778 F. Supp. 1334 (E.D. Pa. 1991), in which the court allowed

                                19


The plaintiffs also make the alternative argument that
damages could be calculated based on a disgorgement
theory, that is, damages could be calculated by requiring
Patience and Schuler to disgorge the profits they have
received from their compensation package. We fail to see
how this argument makes any less speculative the fact of
loss. We will therefore affirm the District Court’s grant of
summary judgment on the plaintiffs’ claims based on
S 10(b) and Rule 10b-5 on the ground that no reasonable
jury could find that the plaintiffs have established causation.5
As there is no triable issue of fact with respect to the
causation element of the plaintiffs’ 10b-5 claim, we need
not reach the issue of scienter. Our ruling moots the
defendants’ cross-appeal, which addresses only theS 10(b)
and Rule 10b-5 claims.

III. The California Corporate Code S 25401 Claim

The plaintiffs also brought claims based on S 25401 of
the California Corporations Code, which provides that:

       It is unlawful for any person to offer or sell a security
       in this state or buy or offer to buy a security in this
       state by means of any written or oral communication
       which includes an untrue statement of a material fact
       or omits to state a material fact necessary in order to
       make the statements made, in the light of the
_________________________________________________________________

the plaintiff to rely on the "lost opportunity" theory of causation, than it
is in the present case. Rudinger involved a claim by an employee who
chose to work for a company because he was enticed by the promise of
stock options based on a fraudulently over-valued stock. In doing so, the
employee gave up a definite offer from another employer that also
included stock options (that were not fraudulently represented). The
district court held that the fact of loss was not"wholly speculative"
because, presented with accurate information, the employee would have
chosen the other job. Further, the district court noted that the "lost
opportunity" damages could be quantified because the alternative job
offer presented "certain, fixed, and demonstrable profits thwarted by a
defendant’s alleged fraud." Rudinger, 778 F. Supp. at 1341.

5. The plaintiffs did not experience any out-of-pocket loss, and the fact
of their potential loss is too speculative to support the "lost opportunity"
theory of causation.

                                20


       circumstances under which they were made, not
       misleading.

Cal. Corp. Code S 25401. Specifically, the plaintiffs claim
that Ventana’s disclosures regarding the stock issuances
that it had approved at the time when the Biotek
shareholders voted to approve the merger were rendered
misleading by the fact that Ventana had preliminarily
approved the sale of shares to Schuler and Patience, but
did not disclose that preliminary approval. In other words,
the plaintiffs contend that the planned sale of stock to
Patience and Schuler was "a material fact necessary in
order to make the statements made, in the light of the
circumstances under which they were made, not
misleading." Cal. Corp. Code S 25401.

The District Court granted summary judgment for the
defendants on the California law claim because it found
that "it involves the same elements as the plaintiffs’ 10b-5
claim." While we think that the District Court was incorrect
in its conclusion that S 25401 involves the same elements
as a Rule 10b-5 claim, we are satisfied that it was correct
that the defendants are entitled to summary judgment on
the California claim, albeit for somewhat different reasons
than those relied on by the Court. See Narin v. Lower
Merion Sch. Dist., 206 F.3d 323, 333 n.8 (3d Cir. 2000) ("An
appellate court may affirm a decision on a ground other
than that relied on by the district court.").

The District Court did not provide a separate discussion
of the claims based on California law, but granted summary
judgment for the defendants with respect to all claims
because it concluded that S 25401 "involves the same
elements as the plaintiffs’ 10b-5 securities fraud claim."
Therefore, we assume that the District Court relied on the
same grounds, i.e. failure to adduce facts sufficient to
establish both causation and scienter, to dismiss the
California claims as it did to dismiss the Rule 10b-5 claims.
To the extent that it relied on causation and scienter to
grant summary judgment to the defendants on the
California claim, the Court erred. Section 25401, which is
modeled on S 12(2) of the Securities Act of 1933, has less
stringent requirements than S 10(b) and Rule 10b-5
regarding both scienter and causation. Section 25401 does

                                21


not require civil plaintiffs to demonstrate the exacting
scienter standard required for 10b-5 claims. Nor does it
require plaintiffs in the civil context to establish causation.
See Bowden v. Robinson, 136 Cal. Rptr. 871, 878 (Cal Ct.
App. 1977) (noting that in a claim brought underS 25401
"(1) proof of reliance is not required, (2) although the fact
misrepresented must be ‘material,’ no proof of causation is
required, and (3) plaintiff need not plead defendant’s
negligence"). But cf. People v. Simon, 886 P.2d 1271, 1290-
01 (Cal. 1995) (imposing a "knowledge" mens rea
requirement for criminal prosecutions brought under
California Corporate Code S 25401).

Nevertheless, the defendants are entitled to summary
judgment on the S 25401 claim because that statute does
not cover the activity alleged by the plaintiffs in this case.
As noted above, S 25401 attaches liability to the buyer or
seller of a security when he or she makes "an untrue
statement of a material fact or omits to state a material fact
necessary in order to make the statements made, in the
light of the circumstances under which they were made, not
misleading." Cal. Corp. Code S 25401. The California Court
of Appeals has held that the statute does not cover cases of
"simple nondisclosure." Lynch v. Cook, 196 Cal. Rptr. 544,
554 (Cal. Ct. App. 1983) (quoting Bowden v. Robinson, 136
Cal. Rptr. 871 (Cal. Ct. App. 1977)); see also 1 Harold
Marsh, Jr. & Robert H. Volk, Practice Under the California
Securities Laws S 14.03[2][a] (2001) (stating that S 25401
does not cover cases of "simple" or "total" nondisclosure).
We interpret this to mean that S 25401 does not impose a
duty on buyers or sellers to disclose information unless
that information is material and "necessary in order to
make [other] statements made, in light of the
circumstances under which they were made, not
misleading." Cal. Corp. Code S 25401.

The plaintiffs contend that the representations that
Ventana made about its capital structure, including its
outstanding stock, were misleading when not accompanied
by the disclosure of information regarding the Patience and
Schuler compensation package.6 Thus, the question is
_________________________________________________________________

6. The plaintiffs failed to raise in their opening brief, but argue in their
reply brief, that because they included in their amended complaint

                                22


whether the plaintiffs had to disclose the share issuance
aspect of the compensation package in order to make the
statement that they made at the time of the merger about
their outstanding capital stock not misleading. The
plaintiffs point to statements from the Reorganization
Agreement (which contained the terms negotiated between
Ventana and Biotek), and from the Information Statement,
which was an additional document distributed to Biotek
investors prior to their approval of the merger that basically
summarized the Reorganization Agreement.

The Reorganization Agreement provided a detailed
account of Ventana’s capitalization structure. It stated:

       Section 4.5 Capitalization The authorized capital stock
       of Ventana as of the date hereof consists of 30,000,000
       shares of Common Stock and 18,450,000 shares of
       Preferred Stock, 750,000 share of which have been
       designated Series A Preferred Stock, 8,300,000 shares
       of which have been designated Series C Preferred Stock
       and 9,400,000 shares of which have been designated
       Series D Preferred Stock. As of the date hereof,
       2,742,968 shares of Common Stock, 750,000 shares of
       Series A Preferred Stock, 3,083,039 shares of Series C
       Preferred Stock and 9,036,410 shares of Series D
       Preferred Stock are outstanding, and no other shares
       of capital stock are outstanding. Ventana has
       outstanding warrants to purchase an aggregate of
       228,914 shares of Preferred Stock and has 2,110,789
       shares of Common Stock and 70,089 shares of
       Preferred Stock reserved for issuance (including both
       shares subject to outstanding options or rights and
       shares reserved for future grant) under its stock option
_________________________________________________________________

claims under California Corporate Code S 25402, which proscribes
insider trading, and because, according to the plaintiffs, S 25402 does
cover "simple nondisclosure," that the defendants are not entitled to
summary judgment even if the plaintiffs’ claim is only one of "simple
nondisclosure." Our jurisprudence makes clear that "an issue is waived
unless a party raises it in its opening brief." Reform Party of Allegheny
County v. Allegheny County Dep’t of Elections, 174 F.3d 305, 316, n.11
(3d Cir. 1999) (citation omitted). The plaintiffs failed to raise a claim
based on S 25402 in their opening belief and therefore may not rely on
it now.

                                23


       or stock purchase plans. Shares of Common Stock
       issuable upon conversion of Ventana Payment Notes
       will, when issued upon any such conversion, be duly
       and validly issued, fully paid and nonassessable. Prior
       to the Closing Date, Ventana expects that its authorized
       number of shares of Common Stock, Preferred Stock and
       Series D Preferred Stock will increase due to the
       proposed issuance of warrants to purchase an
       aggregate of 1,860,500 shares of Series D Preferred
       Stock in connection with a proposed financing
       transaction. Ventana will on the Closing Date deliver an
       updated capitalization schedule as of that date.

The plaintiffs focus on the penultimate sentence in this
section, which we have emphasized. They argue that
because the Reorganization Agreement disclosed the
issuance of 1,860,500 shares connected to the financing of
the merger that Ventana expected to issue prior to the
closing date, but did not refer to the planned sale of 1.5 to
1.75 million shares of Ventana common stock to Patience
and Schuler, that the omission of any reference to the
compensation package makes the statement quoted above
misleading. The defendants counter that the Reorganization
Agreement only made representations about the stock that
Ventana expected to issue "prior to the Closing Date." They
contend that "[i]t is undisputed that the Compensation
Package shares were not issued or outstanding until April
19, 1996, at the earliest," and that "[i]t is equally
undisputed that the historical information in the
Reorganization Agreement was correct."

In our view, whether the statement quoted above is
misleading in the absence of information regarding the
compensation package depends largely on the timing of
events, specifically, when the Ventana Board of Directors
had given final approval to the compensation package
relative to the closing date of the Ventana/Biotek merger.
The relevant events are as follows. In November 1995, the
Ventana Board began to negotiate a compensation package
with Schuler and Patience. Thereafter, several relevant
events happened at the January 16, 1996 meeting of the
Ventana Board of Directors. First, the Ventana Board voted
to authorize Ventana "to issue and sell an aggregate of

                                24


1,500,000 shares of the Corporation’s Common Stock to
Jack Schuler and Crabtree Partners at $.60 per share"
subject to certain conditions.7 The Board also voted to
authorize the officers to increase the number of shares to
be sold to Patience and Schuler to 1.75 million if needed.
The Board also approved on January 16, 1996 the
valuation of the company’s common stock at $.60. The
Ventana Board of Directors did not consider its January 16
vote to grant final approval for the compensation package,
however, because, as noted below, it submitted the issue to
the Ventana shareholders for approval in a proxy vote.

The Ventana Board also approved two resolutions
regarding the Biotek merger in its January 16 meeting.
First, the Ventana Board signed a letter of intent to merge
with Biotek. Second, the Ventana Board approved the
issuance of the shares discussed in the sentence
highlighted from Section 4.5 of the Reorganization
Agreement, quoted above, to help finance the planned
merger with Biotek. The Ventana Board issued the
Reorganization Agreement and Information statement on
January 19, 1996.

On February 2, 1996, the Ventana Board disclosed the
terms of the Patience/Schuler compensation plan in a
proxy statement issued to its shareholders, and the
shareholders approved the plan. Danzi, the Biotek
Chairman, wrote to Biotek investors on February 8, 1996,
calling for a special meeting to vote on whether to approve
the merger with Ventana. He enclosed in this letter copies
of the Reorganization Agreement and Information
Statement. The Ventana Board of Directors voted to
approve the "final compensation plan for Mr. Schuler, Mr.
Patience, and Crabtree Partners which included a right to
purchase 1,750,000 shares of the Company’s restricted
Common Stock, subject to certain buyback provisions by
the Company, at $.60 per share," on February 23, 1996.
On the same day, more than 90% of Biotek investors,
including all of the plaintiffs, voted to approve the merger
with Ventana. As noted above, the merger transaction
_________________________________________________________________

7. Crabtree Partners is a venture capital firm that was initially a
defendant in this case, but is no longer involved.

                                25


closed on February 26, 1996. Patience and Schuler bought
the shares issued as part of the compensation package on
April 19, 1996.

The plaintiffs emphasize the proximity of the Board’s
January 16 authorization of the compensation agreement
and the representations made to Biotek (and through
Biotek to its investors) in the Reorganization Agreement.
They contend that because Ventana was clearly
contemplating expanding its capital stock by issuing 1.75
million shares to Patience and Schuler, it was obligated to
include that information in the Reorganization Agreement,
and that its failure to do so renders the statements made
in the agreement about the currently outstanding capital
stock misleading. The defendants counter, emphasizing
that none of their statements in the Reorganization
Agreement were false, and that the statements were only
intended to apply to capital stock issuances that took place
before the closing date for the merger. They point out that
the final approval of the issuance of stock to Patience and
Schuler took place after the Reorganization Agreement was
distributed, and that Ventana did not issue the shares to
Patience and Schuler until April 1996, almost two months
after the closing date of the Ventana/Biotek merger.

The question whether Ventana "omit[ted] to state a
material fact necessary in order to make the statements
made, in the light of the circumstances under which they
were made, not misleading" turns largely on how broadly
we read the term "misleading." Cal. Corp. CodeS 25401.
Although the California courts have provided no guidance
on the breadth of the term "misleading" inS 25401, they
have cautioned that S 25401 should not be read to create a
general duty of disclosure of all material information, i.e. it
does not cover "simple nondisclosure." Lynch v. Cook, 196
Cal. Rptr. 544, 554 (Cal. Ct. App. 1983) (quoting Bowden v.
Robinson, 136 Cal. Rptr. 871 (Cal. Ct. App. 1977)); see also
1 Harold Marsh, Jr. & Robert H. Volk, Practice Under the
California Securities Laws S 14.03[2][a] (2001) (stating that
S 25401 does not cover cases of "simple" or "total"
nondisclosure). That caution counsels us not to adopt a
broad reading of the term "misleading" in this case.

                                26


Taking the facts in the light most favorable to the
plaintiffs, do they have an actionable claim underS 25401?
That question hinges on whether the statement from the
Reorganization Agreement that, "Prior to the Closing Date,
Ventana expects that its authorized number of shares of
Common Stock, Preferred Stock and Series D Preferred
Stock will increase due to the proposed issuance of
warrants to purchase an aggregate of 1,860,500 shares of
Series D Preferred Stock in connection with a proposed
financing transaction," was misleading because it was not
accompanied by information regarding the prospective
issuance of shares to Patience and Schuler. We think that
the omission did not render the statement misleading for a
number of reasons.

First, the issuance of stock disclosed in the
Reorganization Agreement (i.e., that relating to the
financing of the merger) is sufficiently distinct from the
issuance of stock pursuant to the compensation package
that the omission of information regarding the second does
not make the disclosure of information regarding the first
misleading. The issuance of stock pursuant to the financing
plan appears to have had final approval before the Ventana
Board made its statement in the Reorganization Agreement,
while the Patience/Schuler compensation package did not
receive final approval until after the distribution of the
Reorganization Agreement. The compensation agreement
went to the shareholders for approval through a proxy
statement and was subject to another vote by the Board of
Directors before its approval was deemed final.

Second, the Board contemplated issuing the stock for the
financing plan before the closing date of the merger, but
there is no indication that it contemplated issuing the stock
for the Patience/Schuler compensation plan until after the
merger’s closing date. Indeed, the issuance was conditioned
on the merger’s success, and Ventana did not issue the
stock to Patience and Schuler until April 19, 1996, about
two months after the merger’s closing date. As the
defendants point out, the Reorganization Agreement only
made statements with respect to Ventana’s capitalization as
of the date on which the Reorganization Agreement was
issued and issuances of stock that it expected to happen
prior to the closing date for the merger.

                                27


Finally, it is undisputed that the Ventana Board had the
authority to issue additional common stock at any time it
wanted to do so after the merger. We fear that if we
concluded that the present case falls under S 25401, we
would come close to creating a general duty to disclose all
information that relates to any topic mentioned in a merger
agreement.

Therefore, although we think that the District Court
likely erred by granting summary judgment to the
defendant on the claims based on California Corporate
Code S 25401 based on scienter and causation grounds, we
will affirm based on the alternative ground that the claims
allege only "simple nondisclosure," which is not actionable
under S 25401.

The judgment of the District Court will be affirmed.

A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit

                                28
