Medafor v. CryoLife: Section 12(g) of the Exchange Act does not Provide a Private Right of Action

In Medafor, Inc. v. CryoLife, Inc., the United States District Court for the District of Minnesota ruled that Section 12(g) of the Securities Exchange Act of 1934 (“Section 12(g)”) does not provide a private right of action.  2012 WL 1072340 (D. Minn., Mar. 30, 2012). 

CryoLife markets and distributes medical products, including Medafor's product, a substance that facilitates blood clotting. CryoLife also owned approximately 10% of the outstanding common shares of Medafor.

In 2010, Medafor had about 550 shareholders and was approaching $10 million in assets.  Section 12(g) requires any corporation with 500 or more shareholders of record and more than $10 million in assets to register with the Securities and Exchange Commission (“SEC”).  To reduce its number of shareholders, thereby avoiding Section 12(g) registration and its administrative burdens, Medafor initiated a reverse stock split in which shareholders owning less than 5,000 shares were given cash value for their shares.

After Medafor executed the reverse stock split, CryoLife sent a letter to Medafor threatening to sue and report Medafor to the SEC, unless Medafor complied with the registration requirements of Section 12(g).  In response, Medafor filed suit under the Declaratory Judgment Act seeking a judicial declaration that it was not required to register under Section 12(g).  CryoLife then moved to dismiss, arguing that Medafor lacked standing to bring the suit because was no case or controversy. 

To have standing under the Declaratory Judgment Act, a plaintiff must show the existence of a case or controversy by demonstrating a “substantial likelihood that he will suffer injury in the future.”  Thus, for the threat of a lawsuit to establish standing, the suit must be substantially likely to occur.  To determine the likelihood that Cryolife could bring suit against Medafor under Section 12(g), the district court examined the threshold question of whether Section 12(g) provided a private right of action that would allow a shareholder to sue a corporation for failing to register.  The language of Section 12(g) does not explicitly provide such a right, but Medafor argued that the right was implied. 

To determine whether Section 12(g) provided an implied private right of action to shareholders, the district court considered the language of Section 12(g), its legislative history, and the Supreme Court’s analysis of Section 17(a) in Touche Ross.  After finding that neither Section 12(g) nor its legislative history showed any congressional intent to create a private right of action, the district court focused on the Touche Ross decision. In Touche Ross, the Supreme Court held that Section 17(a) of the Exchange Act did not provide a private right of action because Congress had not clearly manifested its intent to include that right.  As the district court explained, the test under Touche Ross “focuses on whether Congress intended to include a private right of action, rather than on whether Congress intended to preclude that right.”  The district court applied the Touche Ross test to Section 12(g) and ruled that the section does not provide a private right of action because Congress had not intended to include that right.

The district court ruled that because Section 12(g) does not provide a private right of action for CryoLife to sue Medafor, there was no case or controversy.  Therefore, the court granted CryoLife’s motion to dismiss because Medafor lacked standing to pursue a declaratory judgment.

The primary materials for this case may be found on the DU Corporate Governance website.

Michael Burleigh