Daniel Stone Publishes Article in NYLJ on Untangling Warrant Agreements: What Companies and Investors Need to Know

Olshan litigation counsel Daniel Stone authored an article in New York Law Journal (subscription required) entitled “Untangling Warrant Agreements: What Companies and Investors Need to Know.” In the article, Dan highlights a critical but often overlooked risk in securities warrant agreements: forum selection. He explains the importance of thinking through these issues by highlighting an important circuit split regarding the "unregistered dealer" defense. “The significance of forum selection has been recently underscored by a challenging affirmative defense frequently raised by issuers seeking to avoid their contractual obligations,” Dan explains. “When sued to enforce these warrant agreements, these issuers assert that the plaintiffs operate as ‘unregistered dealers’ and that the warrants are therefore subject to rescission pursuant to Section 29(b) of the Securities Exchange Act of 1934.” As Dan explains, the Second Circuit, in Xeriant Inc. v. Auctus Fund, LLC, ruled that contracts cannot be rescinded under Section 29(b) unless they specifically require a party to act as an unregistered dealer, meaning warrants that merely provide for share purchases are not rescindable in New York courts. By contrast, the First and Fifth Circuits permit rescission even for facially legal contracts if their performance involved Exchange Act violations, exposing litigants to extensive and costly discovery.  Dan’s analysis highlights the need for counsel to think carefully about every aspect of their warrants, including the forum selection clause.