Opposition — Shapiro v. Midwest Rubber Reclaiming Co.

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Supreme Court, U. S,

FILED

NOV 14 1980

No. 80-625

MICHAEL RODAK, JR., CLERK

eee EE___—

IN THE

Supreme Court of the United States

OcTOBER TERM, 1980

ALVIN J. SHAPIRO, ef al.,

Petitioners,

vs.

MIDWEST RUBBER RECLAIMING COMPANY, MIDCON INDUSTRIES,

Inc., £/k/a GOODRICH REALTY AND DEVELOPMENT Group, INC.,

Car H. Totscu, RICHARD M. CoHEN, Morris WEISSMAN,

MICHAEL MILLER AND STANLEY KREITMAN,

Respondents.

BRIEF IN OPPOSITION TO

PETITION FOR CERTIORARI

THomas L. Crort* Jim J. SHOEMAKE*

THOMAS E. DouGLass* MICHAEL A. FISHER

Tuomas A. CroFt 100 North Broadway,

One Mercantile Center, Suite 2000

Suite 2900 St. Louis, Missouri 63102

St. Louis, Missouri 63101 (314) 241-6890

(314) 621-8575 Counsel for Respondent

Counsel for Respondents Midwest Rubber

Midcon Industries, Inc., f/k/a Reclaiming Company

Goodrich Realty and Development

Group, Inc., Carl H. Totsch,

Richard M. Cohen, Morris

Weissman, Michael Miller and

Stanley Kreitman

* Members of the Supreme Court Bar

St. Louis Law Printing Co., Inc., 411 No. Tenth Street 63101 314-231-4477

TABLE OF CONTENTS

THE QUESTION PRESENTED FOR REVIEW WAS

NEITHER DECIDED NOR EXAMINED BY EITHER

COURT BELOW AND WAS EXPRESSLY RE-

JECTED BY THE EIGHTH CIRCUIT AS GROUNDS

FOR ITS DECISION WHICH WAS BASED ENTIRE-

LY ON PETITIONERS’ LACK OF DAMAGES AND

THE LACK OF UNFAIRNESS IN THE GOING-

PRIVATES WEI cc icc ccc csccncccendesscsseves

The Court Of Appeals’ Decision Was Based On

Petitioners’ Lack Of Damages And Lack Of Un-

fairness In The Going-Private Merger ...........

Certiorari Is Plainly Inappropriate ..............

CIE ice kecestaweddnehdsddiugivecccess

TABLE OF AUTHORITIES CITED

Cases:

Adickes v. S. H. Kress & Co., 398 U.S. 144(1970) .....

Harris v. American Investment Co., 523 F.2d 220 (8th

Cir. 1975), cert. denied, 423 U.S. 1054 (1976) ......

Lawn v. United States, 355 U.S. 339 (1958) ...........

Lewis v. McGraw, 619 F.2d 192 (2d Cir.), cert. denied,

49 U.S.L.W. 3332 (Nov. 3, 1980) ...............

Mills v. Electric Auto-Lite Co., 396 U.S. 375 (1970) ....

Nye v. Blyth Eastman Dillon & Co., Inc., 588 F.2d 1189

A ee ee ace ee ae dias 6

Santa Fe Industries, Inc. v. Green, 430 U.S. 462 (1977) .

Page

li

Smallwood v. Pearl Brewing Co., 489 F.2d 579 (Sth

Cir.), cert. denied 419 U.S. 873 (1974) ........... 7

Stull v. Bayard, 561 F.2d 429 (2d Cir. 1977), cert.

So ne 7,8

United States v. Ortiz, 422 U.S. 891 (1975)............ 6

Statutes and Rules:

15 U.S.C. §78 n(e) [Williams Act, Section 14(e)]...... 1,2,6,7,8

SAS EE oh o:a 65 4% ob O44 NaS KRG ES VC Kawase Kees 7

No. 80-625

IN THE

Supreme Court of the United States

OCTOBER TERM, 1980

ALVIN J. SHAPIRO, ef ai.,

Petitioners,

VS.

MIDWEST RUBBER RECLAIMING COMPANY, MIDCON INDUSTRIES,

Inc., {/k/a GOODRICH REALTY AND DEVELOPMENT GROUP, INC.,

CarRL H. TotscH, RICHARD M. COHEN, MorrIS WEISSMAN,

MICHAEL MILLER AND STANLEY KREITMAN,

Respondents.

BRIEF IN OPPOSITION TO

PETITION FOR CERTIORARI

THE QUESTION PRESENTED FOR REVIEW WAS

NEITHER DECIDED NOR EXAMINED BY EITHER

COURT BELOW AND WAS EXPRESSLY REJECTED BY

THE EIGHTH CIRCUIT AS GROUNDS FOR ITS DECI-

SION WHICH WAS BASED ENTIRELY ON PETI-

TIONERS’ LACK OF DAMAGES AND THE LACK OF

UNFAIRNESS IN THE GOING-PRIVATE MERGER

Petitioners frame the issue in this case as follows:

Do non-tendering shareholders who were damaged,

but did not trade or rely on materia! misstatements, omis-

sions and market manipulation by the offeror, have a

cause of action under Section 14(e) of the Williams Act, 15

U.S.C. §78n(e). [emphasis added].

Petition at ii.

=

Petitioners’ formulation of the question presented for this

Court’s discretionary review presumes the fact of damage to

Petitioners in direct conflict with the holding of the Court of

Appeals and seeks this Court’s determination of an issue not

raised by this case: shareholder standing under Section 14(e) of

the Williams Act, 15 U.S.C. §78n(e).'

This standing issue was neither decided nor examined by

either the District Court or the Court of Appeals nor was it

necessary to either court’s decision. Indeed, the Court of Ap-

peals specifically determined that the question of standing was

not before it, finding the resolution of the standing issue un-

necessary in light of the fact that Petitioners simply had suffered

no damages from the acts of which they complained. For these

reasons and those more fully developed below, Respondents

submit that the Petition for Certiorari should be denied.

The Court Of Appeals’ Decision Was Based On Petitioners’

Lack Of Damages And Lack Of Unfairness In The Going-

Private Merger i

In 1973, the Shapiros purchased 800 shares of Midwest stock

for a total of $9,144.10. Petitioners do not allege that this pur-

chase was tainted by any illegality. In 1974 and early 1975, Mid-

‘In their brief, Petitioners make perfectly clear that standing is the

issue which they hope to have this Court decide. For example, see page

30 where Petitioners characterize the issue here as that of *“*non-

tenderer standing’’. Throughout their brief, Petitioners speak in terms

of non-tenderers’ ‘‘cause of action’’ and “right to sue’’, see pp. 16,

17, 18, 20, 24, 25, 27; 28 and 31. As demonstrated infra, the Court of

Appeals simply did not determine that non-tendering and non-relying

shareholders had no standing, no cause of action or could not sue

under Section 14(e). Had it done so, the Court would not have em-

barked upon the lengthy and careful analysis of the ‘‘fairness’’ issue

(Pet. App. A at pp. 23-28) and would not have observed that its deter-

mination concerning Petitioners’ lack of trading or reliance ‘‘does not

end our inquiry, of course.’’ (Pet. App. A at 22). See also footnote 11

of the Court’s opinion (Pet. App. A at 22-23).

=

con gained control of Midwest Rubber by purchasing shares

from various large shareholders of Midwest Rubber at $15.00

per share. In March 1975, Midwest sent an offering circular to

its shareholders, announcing an exchange offer consisting of

a $12.00 face amount subordinated debenture for each share of

stock. The Shapiros did not rely upon the circular and did not

sell their shares. Instead, in March 1978, pursuant to an addi-

tional offer, the Shapiros exchanged or became entitled to ex-

change each of their shares for a $45.00 face amount debenture,

which they concede was worth at least $40.00. As found by the

Eighth Circuit, ‘‘{hjaving invested $9,144.10 in Midwest com-

mon stock in 1973, they now hold debentures with a face value

of $36,000.’ (Pet. App. A at 12)

Though they neither relied nor traded upon the offering cir-

cular, Petitioners assert that the March 1975 circular contained

a number of misrepresentations and that, as a result, they are

entitled to damages despite the four-fold increase in the value of

their investment as of March, 1978.

Throughout this litigation, the Shapiros have measured their

claimed damages by the difference between the $15.00 per share

price privately offered to the former Midwest directors and the

$7.35 per share value Petitioners ascribe to their shares at the

time of the alleged fraud.? In both the District Court and the

Court of Appeals, Petitioners have sought arduously to ignore

the relevance of the fact that, as a result of the 1978 offer, they

received a debenture worth at least $40.00 for each share of their

stock. As a legal basis for disregarding the substantial profit

which Petitioners have realized by virtue of their ownership of

Midwest shares, they urged the Court of Appeals to invoke the

*In their principal brief in the Court of Appeals Petitioners stated:

‘The difference between the price which was privately offered to the

former directors of Midwest ($15.00) and the true value of the

Midwest securities at the time of the fraud ($7.35) is the proper

measure of damages.’’ The Eighth Circuit interpreted the Petitioners

damage theory accordingly (Pet. App. A at 23).

— po

rules of Harris v. American Investment Co., 523 F.2d 220 (8th

Cir. 1975), cert. denied, 423 U.S. 1054 (1976) and Nye v. Blyth

Eastman Dillon & Co., Inc., 588 F.2d 1189 (8th Cir. 1978) and

fix their damages in March of 1975—the time of the alleged

fraud’s commission. Thus, Petitioners argued, the bonanza

realized by them in 1978 did not preclude additional recovery.

The Eighth Circuit agreed with Petitioners that the Harris-

Nye damage formulations do operate to fix damages in a

securities fraud case at the time the fraud is committed or

reasonably discovered, and that after-fraud fluctuations in the

stock’s value do not affect the computation of damages. These

damage formulations apply what is commonly termed the ‘“‘se-

cond investment decision’’ rule, and do not require a securities

fraud plaintiff to mitigate its damages by either selling or retain-

ing stock after discovery of the fraud. See Harris v. American

Investment Co., supra, 523 F.2d at 228.

Crucial to the application of the ‘‘second investment deci-

sion’’ rule, however, is an initial investment decision upon

which liability or damages can be predicated, and the Court of

Appeals so found (Pet. App. A at 21-22). Thus where the wrong

alleged has had no effect on a plaintiff’s initial investment deci-

sion ‘‘either directly (through actual reliance) or indirectly (by

affecting the market upon which the party traded)’’ (Pet. App.

A at 21), the damage rules of Harris and Nye have no logical ap-

plication. Therefore, the Court of Appeals properly determined

the Harris-Nye damage formulations did not provide a basis for

showing damages to the Shapiros or the other members of their

class.

Significantly, this was not the end of the Court of Appeals’

analysis; rather, the Court searched for some other theory under

which the Shapiros might show damages. Before beginning its

inquiry, however, the Court had occasion to note:

We note in passing that there may be some question

whether the Shapiros have standing to advance their claim

a

under 15 U.S.C. 78n(e) (1976). Cf. Hundahl v. Uniied

Benefit Life Ins. Co., 465 F.Supp. 1349, 1369 (N.D. Tex.

1979) (denying standing to plaintiffs who clearly did not rely

on alleged misrepresentations in the tender offer

materials). Nonetheless, the district court did not consider

this issue and it is not before us on appeal. (emphasis

added].

(Pet. App. A at 22-23, n.11).

After this observtion, the Court came to grips with the theory

of damages which Petitioners had espoused consistently prior to

the Eighth Circuit’s ruling against them. That theory, a claim

for the alleged ‘‘control premium’’ paid privately to other

Midwest shareholders, was properly deemed by the Eighth Cir-

cuit to be premised on ‘‘some notion of fairness’ (Pet. App. A

at 23).’ Noting that a takeover such as the one presented in the

instant case raised basic fairness problems in the division of the

purchase price among former shareholders, the Court of Ap-

peals recognized that it may inquire into the fairness of the

terms of such a transaction to determine the appropriate relief

for procedural irregularities such as those alleged by Petitioners

(Pet. App. A at 25)‘.

Thus, the Court turned to an analysis of the entire takeover

procedure and correctly concluded that the Shapiros were harmed,

if at all, only when the, were frozen out in 1978 when the

takeover was consummated. This observation necessarily

followed from the Court’s earlier determination that, in the

absence of trading or reliaiice, the Harris-Nye damages form-

ulations are logically inapposite. The question of fairness was

resolved for the Court of Appeals very simply: First, the

Shapiros had never challenged the terms of the going-private

‘Cf. Santa Fe Industries, Inc. v. Green, 430 U.S. 462 (1977).

‘See Mills v. Electric Auto-Lite Co., 396 U.S. 375 (1970).

~~ oo

merger in 1978, (Pet. App. A at 26-27); and second, the

substantial profit realized by the Shapiros as a result of the

merger rendered an unfairness claim on their behalf suspect. As

the Court noted:

The fact that the Shapiros eventually received a $45

debenture for each share of their Midwest stock suggests

the reasonable inference that they can advance no personal

claims of unfair treatment in the takeover process.

(Pet. App. A at 27, n.16). As a consequence, the Court conclud-

ed that the Shapiros could not show damages resulting from un-

fairness in the takeover procedure. Only after this determina-

tion did the Court of Appeals conclude that the District Court

properly entered summary judgment against the Shapiros.

Certiorari Is Plainly Inappropriate

As demonstrated above, the question Petitioners present to

this Court is simply not an issue in this case. It is, therefore, not

a proper subject for review.

Even if the issue of standing under Section 14(e) of the

Williams Act were somehow involved in this litigation, discre-

tionary review would still be inappropriate in light of the car-

dinal principle that this Court will not consider issues in a

vacuum without the benefit of analysis by the courts below. See,

e.g. Lawn v. United States, 355 U.S. 339, 362-363, n.16 (1958);

see also United States v. Ortiz, 422 U.S. 891, 898 (1975);

Adickes v. S.H. Kress & Co., 398 U.S. 144, 147, n.2 (1970. The

Court of Appeals specifically determined that the standing issue

was not before it on appeal, and, because it had not been raised

at the District Court level, no analysis of this issue by either

court below exists to assist this Court in its deliberations. Nor

can any discussion of the issue be found in the briefs filed by the

on

parties prior to the Eighth Circuit’s ruling on the merits.’ Under

these circumstances, certiorari should not issue.

Finally, even if the question of standing under Section 14(e)

of the Williams Act had been addressed and decided by the

Court of Appeals, the supposed ‘‘conflict among the Circuits’’

described by Petitioners is more illusory than real.

Petitioners contend that the Eighth Circuit’s decision is at

odds with the holdings of the Fifth Circuit in Smallwood v.

Pearl Brewing Co., 489 F.2d 579 (Sth Cir.), cert. denied 419

U.S. 873 (1974) and the Second Circuit in Stull v. Bayard, 561

F.2d 429 (2d Cir. 1977), cert. denied, 434 U.S. 1035 (1978).°

Respondents are loath to address the non-issue of standing

under 14(e) and create the impression that this question is

somehow involved in this case. Suffice it to note that the Fifth

Circuit specifically stated that its holdings in Smallwood did not

require it to consider ‘‘questions of reliance, causation, and the

appropriate measure of damages,’’ 489 F.2d at 608, and that the

‘Petitioners first raised the issue they now present to this Court in

their Petition for Rehearing. That Petition was denied (Pet. App. B)

without a request for briefing from Respondents by the Court of Ap-

peals. See F.R.A.P. 40(a).

*In the brief which Petitioners originally filed with this Court, Peti-

tioners had argued that a conflict existed between Eighth and Second

Circuits on the one hand and the Third and Fifth Circuits on the

other. This argument was the result of Petitioners’ mistaken assump-

tion that Stull v. Bayard, supra, was a Third Circuit case. Thus, Peti-

tioners originally concluded, the recent ruling of the Second Circuit in

Lewis v. McGraw, 619 F.2d 192 (2d Cir.), cert. denied, 49 U.S.L.W.

3332 (November 3, 1980) (holding reliance an essential element of a

cause of action under 14(e)) ‘‘would have come as a surprise to the

panels of the Third and Fifth Circuits.’’ Because Stull is a Second Cir-

cuit case, perhaps it is Petitioners and not the Third and Fifth Circuits

who are surprised. Respondents have been informed that Petitioners

intend to recall their brief for correction.

— po

Second Circuit’s decision in Stull was based entirely on the fact

that plaintiff’s claim was time-barred. The Second Circuit’s

discussion of standing under 14(e) in Stull was mere dictum,

premised on the stated assumption that the plaintiff had a right

to sue. 561 F.2d at 432-33. Moreover, that Circuit’s most recent

pronouncement concerning reliance under 14(e) in Lewis v.

McGraw, 619 F.2d 192 (2d Cir.), cert. denied, 49 U.S.L.W.

3332 (Nov. 3, 1980) is in perfect harmony with Petitioners’

characterization of the Eighth Circuit’s helding in the instant

case. See note 6, supra.

~~ en

CONCLUSION

For the reasons set forth above, Respondents submit that the

Petition for Certiorari should be denied. Though Petitioners

angle masterfully in search of discretionary review, they bait the

hook with red herring.

Respectfully submitted,

THOMAS L. CROFT*

THOMAS E. DOUGLASS*

THOMAS A. CROFT

One Mercantile Center

Suite 2900

St. Louis, MO 63101

(314) 621-8575

Counsel for Respondents Midcon

Industries, Inc., f/k/a Goodrich

Realty and Development Group, Inc.,

Carl H. Totsch, Richard M. Cohen.

Morris Weissman, Michae! Miller and

Stanley Kreitman

JIM J. SHOEMAKE*

MICHAEL A. FISHER

100 North Broadway

Suite 2000

St. Louis, MO 63102

(314) 241-6890

Counsel for Respondent Midwest

Rubber Reclaiming Company

* Members of the Supreme Court Bar