Versyss Inc. v. Coopers & LybrandVersyss Inc. v. Coopers & Lybrand
- Reporters:
- ,
- Before:
- Boudin, Torruella, Cyr
[Hon. Robert E. Keeton, U.S. District Judge]
Before Torruella, Cyr and Boudin, Circuit Judges.
Patrick J. Sharkey with whom Henry A. Sullivan, John F. Sylvia and Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. were on brief for appellant.
Steven W. Phillips with whom Christian M. Hoffman, Peter M. Casey and Foley, Hoag & Eliot were on brief for appellees.
I.
On May 17, 1985, Continental Telecom, Inc. (“Contel“) entered into a merger agreement with Northern Data Systems, Inc. (“NDS“). The agreement provided that NDS would be merged into a newly created subsidiary of Contel and, in exchange, NDS stockholders would receive Contel stock. Both Contel and its merger subsidiary were Delaware corporations; NDS was a Massachusetts corporation. At the time of the merger agreement, NDS stock was publicly traded. Previously, a registration statement under the Securities Act of 1933 had been filed with the Securities and Exchange Commission in connection with an August 1984 public offering of NDS stock. See
Subsequent to the merger, Contel concluded that the NDS registration statement had contained materially misleading financial information, including information certified by the accounting firm of Coopers & Lybrand. Although the registration statement had been issued before the merger,
In the district court, Coopers & Lybrand moved for summary judgment on the ground that Contel did not qualify as a section 11 plaintiff because it had not “acquired [NDS] securit[ies].” Patently, Contel “acquired” something in exchange for the many Contel shares it issued in the merger, so the focus of the dispute is upon the term “security.” Pointing to the transfer of the NDS certificates, Versyss claimed that NDS securities were acquired by Contel through the merger. The district court, adopting Cooper & Lybrand‘s view of the matter, held that the NDS stock certificates were an empty shell not qualifying as a “security” and that the essence of what Contel received was the assets and liabilities of the former NDS. The district court then granted summary judgment for Coopers & Lybrand on the section 11 claim, dismissing pendant state claims without prejudice. This appeal followed.
II.
Statutory construction begins with statutory language. The language in this case is straightforward: section 11 of the Securities Act of 1933, so far as pertinent here, creates a federal cause of action in favor of a purchaser “acquiring a security” after a false or misleading registration statement for that security has gone into effect unless the
The term “security” is defined in both the Securities Act of 1933 and Securities Exchange Act of 1934, provisions which despite differences in language are construed alike. Landreth Timber Co. v. Landreth, 471 U.S. 681, 686 n.1 (1985). Nothing in the language of the definitions precisely resolves the present issue except so far as the variety and breadth of the definitions encourage a broad construction.1 But terms, even broadly construed, have outer limits, and those limits are strained badly by describing what Contel acquired through the merger as a “security.”
On the date of the merger, and before any NDS stock certificates were to be transferred to Contel‘s exchange
It follows that, when the merger became effective, NDS stock underwent a considerable transformation. At that point, the NDS stock certificates ceased to represent an investment interest in the separate assets of NDS (since it no longer existed), ceased to reflect voting rights in the management of NDS (since NDS ceased to have a management), and ceased to comprise a claim to dividends declared from NDS earnings (since no such dividends could be issued). In sum, for the NDS stock the essential characteristics of securities ceased to pertain. “[A]t the moment a stock for stock merger
If this view is taken, then--when the former NDS stockholders turned in their NDS certificates after the merger--what Contel received was not “securities.” At worst, the certificates were wall-paper; at best, they represented evidence that the parties who surrendered the certificates were prior owners of NDS stock, entitled by virtue of the merger agreement to be paid the Contel stock promised as consideration. Nor does Contel‘s position improve if one views the situation at the time after the merger agreement was signed but before the merger was consummated. It may be that for some purposes a contract to acquire securities can be treated as an acquisition. Cf.
There is a second piece of evidence, culled from the statutory language, that hinders Versyss’ claim. Section 11 provides a damage formula for the cause of action it creates. Simplifying somewhat, Section 11(e) provides that the
This language assumes a buyer of securities who pays a price for and receives securities. Then, finding that the securities are worth less than the price paid, the buyer brings suit either for the loss of value or, if the buyer sells before suit or before judgment, for the loss suffered on account of the reduced sale price received by the buyer on resale. In sum, the continuation of the acquired securities in the hands of the plaintiff-buyer is a premise of the damage calculation. Yet in this case the NDS securities ceased to exist at the time of merger because the corporation ceased to exist. It would be fantasy to speak of the non-
III.
Words normally have some elastic in their makeup. Courts in other cases have stretched language further than Versyss asks us to do in this case. If legislative history or purpose encouraged that result, the question here might be
The background of the 1933 Act is familiar history. During the stock market boom that preceded the Great Depression, a wave of speculation drove up the largely unregulated market in securities. When the market collapsed in 1929, “[f]ully half . . . of the securities floated during this period . . . proved to be worthless. These cold figures spell[ed] tragedy in the lives of thousands of individuals who invested their life savings, accumulated after years of effort, in these worthless securities.” H.R. Rep. No 85, 73rd Cong., 1st Sess. 2 (1933). The most notorious example was Samuel Insull‘s sale of several million shares of utility stock to the public. The stock, sold to family members and friends of Insull at $12 or less, opened at $30 in the market and climbed to $149 a share, before it collapsed--to the detriment of a million stock and bondholders. Joel Seligman, The Transformation of Wall Street 21-23 (1982).
One of the “foremost” causes of such losses was, in the view of Congress, “the failure to furnish essential information to prospective investors when they were invited to buy securities.” I Louis Loss & Joel Seligman, Securities Regulation 25 (3d ed. 1989). The broad purpose of the 1933 Act was to require full disclosure to investors, and section
Needless to say, there is little resemblance between this scene of ill-informed small investors buying investment securities on original issue or later through the market and the triangular “forward merger” by which Contel acquired NDS, doubtless after careful study of information that went far beyond the registration statement issued some years before incident to a public NDS offering. This mismatch ought not deprive Contel of a section 11 remedy in any case where section 11‘s “acquiring such security” language fits the transaction (for example, a tender offer acquisition by Contel of the NDS shares). The mismatch does, however, create doubt that stretching the language to fit Contel‘s circumstances can be justified as serving Congress’ purpose.
As the Supreme Court has reminded us, the federal securities laws were not designed to provide “a broad federal remedy for all fraud,” Marine Bank v. Weaver, 455 U.S. 551,
This is apparently a case of first impression, and virtually none of the precedents provides much assistance. Versyss’ best case is SEC v. National Securities, 393 U.S. 453, 466 (1969), which it offers for the proposition that the transfer of stock in a merger is a purchase or sale of securities under
The lack of precedent for applying section 11 to our facts may mean only that the acquiring company in a merger transaction rarely relies upon statements in an earlier registration statement of the acquired corporation. On the other hand, it may be that such reliance has occurred from time to time but, when the registration statement proved false and the reliance misplaced, no one thought that section 11 applied. Even so, applying section 11 to merger acquisitions might not unfairly upset settled expectations; under section 11, accountants are held to demanding standards when they certify registration statements and are liable to
Many statutes, notably statutes of limitation, set limits that create arbitrary stopping-points for liability. Here, it has been assumed that Contel might well have a claim under section 11 if it had acquired the NDS stock in a tender offer and later merged it out of existence. It is even more clear that it would have no claim whatever if the Contel-NDS transaction had been framed as a pure acquisition of NDS assets. Faced with a merger transaction that fits neatly into neither category, any construction of the statute will leave discontinuities and a sense of lingering unease. For us, there is greater conformity to language and less unease in concluding that a security in a non-existent corporation is not a “security” within the meaning of section 11.
I arrive at my conclusion by reading the plain language of 11 and deferring to the ordinary and common meaning of its words. See Aaron v. SEC, 446 U.S. 680, 685 (1980) (construing
The issue in this case, as I see it, is whether Versyss ever gained possession, control or power of disposal over NDS stock. In this regard, section 2.2 of the Agreement and Plan of Reorganization, setting forth the terms of the merger, plainly states that “each share of NDS Stock . . . by virtue of the Merger and without any action on the part of the holder thereof,
Moreover, 11, like all securities statutes, must be construed “flexibly to effectuate its remedial purpose.” SEC v. Capital Gains Research Bureau, 375 U.S. 180, 195 (1963); see also Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 151 (1972). In this regard, the Supreme Court has found that Congress passed 11 to “assure compliance with the disclosure provisions of the Act by imposing a stringent standard of liability on the parties who play a direct role in a registered offering.” Herman & MacLean v. Huddleston, 459 U.S. 375, 381-82 (1983) (citations omitted). Thus, Congress imposed essentially fiduciary standards upon those who sign registration statements, including ethical and competence standards meant to ensure sound and honest business practices. H.R. Rep. No. 152, 73d Cong., 1st Sess. 23 (1933). Accountants such as Coopers & Lybrand have a
Interpreting “acquire” to include mergers consummated by stock exchange, such as the one which occurred here, furthers these goals. In passing 11 Congress wished to control unsound and fraudulent business practices. Whether an acquisition occurs pursuant to a simple sale or a complex merger, the threat of such practices exists, and 11 should protect all innocent purchasers against them.
The holding of the majority, on the contrary, precludes the application of 11 to any merger like the one presented here, and thus allows parties to structure their transactions in the form of such a merger to circumvent the application of 11. Such an end-run around 11 hardly effectuates its broad remedial purpose. As such, I dissent.