Opposition Brief — Dow Chemical Co. v. AES Corp.

IN THE

Supreme Court of the United States

THE DOW CHEMICAL COMPANY,

Petitioner,

v.

THE AES CORPORATION,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

BRIEF IN OPPOSITION

JAMES W.B. BENKARD

Counsel of Record

FRANCES E. BIVENS

Kei J. STENSTROM

Davis POLK & WARDWELL

450 Lexington Avenue

New York, New York 10017

(212) 450-4000

Attorneys for Respondent

The AES Corporation

183118 g

COUNSEL PRESS

(800) 274-3321 + (800) 359-6859

No. 03-272 | SEP 1 & 2603

i

COUNTER-STATEMENT OF

QUESTION PRESENTED

1. Whether the statutory prohibition in Section 29(a) of

the Securities Exchange Act of 1934 against waivers of

compliance with the federal securities laws renders “void”

as 4 matter of law non-reliance and merger clauses in a

contract for the sale of securities.

ee |

il

STATEMENT PURSUANT TO

SUPREME COURT RULE 29.6

Respondent The AES Corporation is a publicly held

company. Respondent has no parent corporation and no

publicly held company owns 10% or more of its stock.

Ul

TABLE OF CONTENTS

Page

Counter-Statement of Question Presented ........ 1

Statement Pursuant to Supreme Court Rule 29.6 .. il

Ne. ill

ee tee IV

Counter-Statement of the Case ..............--: 2

A. The Fraud by Dow and Destec ........... 2

B. Proceedings Below ...........---+-e+55 8

REASONS FOR DENYING THE PETITION .... 12

I. The Third Circuit’s Decision Does Not Create

Multiple Conflicts with Other Circuits .... 13

Il. The Third Circuit’s Decision Does Not

Conflict with This Court’s Opinion in

Ln 18

Il]. The Third Circuit’s Decision Will Not

Result in the Negative Consequences for

Negotiated Securities Transactions Predicted

by Petitioner ..........--- eee eeeeeees 20

sole) Gee ee 21

lv

TABLE OFAUTHORITIES

Page

Cases

FS Photo Inc. v. Picturevision Inc., 61 F. Supp. 2d

ee Ce Ps he renee ee eeanes 14

Harsco Corp. v. Segui, 91 F.3d 337 (2d Cir. 1996) .

SERN ENROEN STEER aan eee 15, 16, 17

Jackvony v. RIHT Financial Corp., 873 F.2d 411

CF ee i ete ae aoe ee ee eas 13

Jadoff v. Gleason, 140 F.R.D. 330 (M.D.N.C. 1991)

OT eee ETC eT eee ere ee 14

Katz v. First of Michigan, No. K87-264 CA4, 1989

U.S. Dist. LEXIS 19141 (W.D. Mich. Mar. 13,

SPE ee seh eee REREae ese eed ee tes 14

MBI Acquisition Partners, L.P. v. The Chronicle

Publishing Co., No. 01-C-177-C, 2001 U.S. Dist.

LEXIS 15387 (W.D. Wis. Sept. 6, 2001) ....... 14,17

One-O-One Enterprises, Inc. v. Caruso, 848 F.2d

See Cea ek. CE v6 Ue ek ieee ee 13,14

Rissman y. Rissman, 213 F.3d 381 (7th Cir. 2000) ... 13

Rissman y. Rissman, No. 98 C 3656, 1999 U.S. Dist.

LEXIS 10611 (N.D. Ill. June 30, 1999), aff’d, 213

ef Fk ify, Te ee een 14

Vv

Cited Authorities

Page

Rogen v. Tlikon, 361 F.2d 260 (1st Cir. 1966) ..... 14, 15

i Shearson/American Express, Inc. v. McMahon, 482

| 13D. ZOO CHRO) 66 hss eeve een eeene 13, 18, 19, 20

Wilko v. Swan, 346 U.S. 427 (1953) ............. 19>

Statutes and Rules ~

13 UB; @ FONE 4 eke es sdecessie eee 8

1S U.S.C. § Taw AIRR SD 6c can ce vincesneenees 9

oe A oe re are Perm ek lee si passim

Oe Us © Oe ese eee elena eee 8

SOUL Oe oes sh 2 one eee 8

26 Vi AE 8s es See eee 9

Securities and Exchange Commission

ee er re rT re rrr ere 2,14

Tex. Rev. Civ. Stat. Ann. Art. 581

Bt Ss ee rrr ua 2

Tex. Rev. Civ. Stat. Ann. Art. 581

FPP ere eee ee er ee Pee rr 2

Tex. Bus. & Com. Code Ann. § 27.01 ........... 2

oe

l

No. 03-272

IN THE

Supreme Court of the United States

THE DOW CHEMICAL COMPANY,

Petitioner,

Vv.

THE AES CORPORATION,

Respondent.

On PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES CouRT OF APPEALS FOR THE THIRD CIRCUIT

———— ——

a en ——

BRIEF IN OPPOSITION

| meen ten tne ne an on = ne em eee ~ meneame

a NN» re

Before the Court is a petition for a writ of certiorari to

review the judgment of the United States Court of Appeals

for the Third Circuit, filed by The Dow Chemical Company

(“Dow”). Respondent The AES Corporation (“AES”) has

filed a conditional cross-petition for a writ of certiorari to

review the judgment. The petition by Dow should be denied.

Contrary to petitioner’s arguments, the decision below does

not create a conflict among multiple circuits that requires

2

resolution by this Court, nor does it conflict with any prior

decision of this Court. Rather, the court below correctly

applied the standards articulated by this Court in its prior

decisions interpreting Section 29(a) of the Securities

Exchange Act of 1934 (the “Exchange Act”) to the facts of

this case and properly concluded that enforcement of the non-

reliance and merger clauses at issue in this case to bar AES’s

fraud claims under the Exchange Act as a matter of law would

violate Section 29(a).

COUNTER-STATEMENT OF THE CASE

A. The Fraud by Dow and Destec

This case was brought by AES against Dow and Dynegy

Power Corporation (formerly Desiec Energy, Inc.) (“Destec’’),

formerly a subsidiary of Dow. The Amended Complaint alleges

that Dow and Destec violated Sections 10(b) and 20(a) of the

Exchange Act and Securities and Exchange Commission Rule

10b-5, Sections 33A(2) and 33F of the Texas Securities Act,

Section 27.01 of the Texas Business and Commerce Code, and

participated in fraud, negligent misrepresentations and a civil

conspiracy, in connection with a transaction in which AES

purchased 100% of the stock of an international subsidiary of

Destec, Destec Engineering, Inc. (“DET”), in 1997.’ (C.A. App.

A32, J 1; A68-89, F§] 66-177.)

The Amended Complaint describes a comprehensive

scheme by Dow to sell Destec at an artificially inflated price

by misrepresenting the financial worth and prospects of DEI.

(Id. at A32, J 1; A55-A57, J¥ 53-61.) As part of this scheme,

' AES’s claims against Destec were resolved by means of a

settlement and, thus, only its claims against Dow remain.

cy

Dow and Destec knowingly and recklessly disseminated

false and misleading information to AES, and withheld

material information from AES, regarding DEI’s sole asset,

a contract to engineer, procure and construct a power

plant in Terneuzen, The Netherlands (“the Elsta Project”).

(Jd. at A32-A33, J] 1-2; A43-A44, 99 28-29; A57-A67,

{1 62-65.) Dow and Destec falsely represented to AES,

in numerous documents and oral presentations, that the

Elsta Project would be substantially complete by September

30, 1997, and would result in a profit of $31 million for DEI.

(Jd. at A33, 7 2; A57, ¥ 62.)

These misrepresentations and omissions fraudulently

induced AES to enter into the stock purchase transaction and

caused AES to pay a vastly inflated price for the shares of

DEI. (/d. at A33, J 2.) AES paid dollar for dollar the value

that Dow and Destec placed on the Elsta Project during due

diligence for the stock purchase transaction, and thus paid

$31 million for the shares of DEI. (Jd. at A52, | 46.)

When AES took over the Elsta Project after the

consummation of the transaction, it shortly discovered that

the Project was far behind schedule and far from completion,

and thus represented a substantial loss to DEI, rather than

the $3! million profit that was promised by Dow and Destec.

(Id. at A54, 49 51-52.) The Elsta Project finally was complete

on September 19, 1998, almost a full year after the

represented completion date, and the Project has represented

a loss in excess of $70 million to AES. (/d. at A33, q 2.)

Thus, AES has been damaged by more than $100 million by

Dow and Destec’s dishonesty during the negotiation of the

stock purchase transaction. (/d.)

AES first expressed an interest in acquiring Destec’s

international assets, including DEI, in October 1996. (/d. at

a

4

A47, J 36.) Before Destec or Dow would provide AES with

any information regarding Destec’s assets, Destec required

AES to sign a Confidentiality Agreement. (/d. at A118; A194-

A198.) As Dow concedes, AES signed the Confidentiality

Agreement on October 24, 1996, before it had conducted

any due diligence on Destec or even had decided to pursue

the transaction. (/d. at A118.) The Confidentiality Agreement

contained the following provision, which required AES to

waive all potential claims under the securities laws prior to

receiving any information regarding Destec:

We [AES] acknowledge that neither you [Destec],

nor Morgan Stanley [Destec’s Investment Banker]

or -ts affiliates, nor your other Representatives,

nor any of your or their respective officers,

directors, employees, agents or controlling

persons within the meaning of section 20 of the

Securities Exchange Act of 1934, as amended,

make any express or implied representation or

warranty as to the accuracy or completeness of

the Information, and we agree that no such person

will have any liability relating to the Information

or for any errors therein or omissions therefrom.

We further agree that we are not entitled to rely

on the accuracy or completeness of the

Information and that we will be entitled to rely

solely on any representations and warranties as

may be made to us in any definitive agreement

with respect to the Transaction, subject to such

limitations and restrictions as may be contained

therein.

(Id. at A197, 9 5.) Dow was not a party to the Confidentiality

Agreement.

5

Five days later, Destec sent AES a unilateral

offering memorandum (the “Offering Memorandum’) which,

as later revelations demonstrated, contained material

misrepresentations about Elsta Project, including the

representation that the Project would result in a $38 million

profit for DEI, and that the plant would be commercially

operational on October 1, 1997. (/d. at A47, {| 35-36; AS7,

4 62; A318-A322.) The Offering Memorandum also included

a disclaimer by Destec of all liability under the securities

laws based on “the information contained herein or made

available in connection with any further investigation of

Destec,” and further stated that AES “shall be entitled to

rely solely on any representations and warranties made

to it by Destec in any final acquisition agreement, if any.”

(/d. at A319.) Based on ‘he representations made in the

Offering Memorandum, AES became interested in purchasing

the international assets of Destec. (Id. at A47, § 36.)

During the course of due diligence in late 1996 and early

1997, when AES repeatedly sought to determine the financial

condition and construction status of the Elsta Project, Dow

and Destec repeatedly provided AES with false written and

oral information. Dow and Destec made documents available

to AES and other potential bidders in a document room in

Houston, Texas, and allowed AES to interview certain Destec

employees. (/d. at A48, § 37.) However, the written and oral

information provided to AES through these sources about

the Elsta Project was uniformly consistent with the

information in the Offering Memorandum, and thus

prevented AES from discovering the true facts about the

status of the Project and the true value of the DEI shares.

(/d. at A57, | 62.) When AES made further attempts tu

confirm that the information Dow and Destec had provided

to AES about the Elsta Project was true by visiting the Elsta

6

plant in person with its experts, AES and its experts again

were misled by Destec employees with false information.

(Ud. at AS1-A52, 9 44-45; A5S7, | 62.)

The Amended Complaint alleges specific facts known

to Dow and Destec that contradict the optimistic

representations that they made during due diligence about

the Elsta Project, which show that Dow and Destec

intentionally misled AES prior to the consummation of the

transaction. (Jd. at A61, 4 65.) The Amended Complaint

identifies numerous internal Dow and Destec documents that

AES found at the Elsta site after the sale which show that

Dow and Destec knew before and during the due diligence

process that the actual cost of the Elsta Project to-date was

understated and could not be verified. (/d. at A61, § 65(b).)

A document dated within days of an assurance to AES that

there would be no reduction in the Elsta Project’s $31 million

profit, for example, states that the project’s profit was “going

south.” (/d. at A62, § 65(d).) No one gave AES any such

information.-

The numerous material misrepresentations and omissions

by Dow and Destec concerning the Elsta Project, which were

communicated to AES both orally and in writing, induced

AES to enter into a contract to purchase the international

assets of Destec, including DEI, for $407 million in February

1997. (Id. at A33, § 2; AS2-A53, Y§] 47-48.) The purchase

was part of a larger transaction in which AES and NGC

Corporation (“NGC’’) together purchased Destec from Dow.

NGC purchased Destec’s domestic assets and AES purchased

Destec’s international assets. (Jd. at AS2-A53, 9 47-48.)

The purchase transaction was structured in two steps.

First, on February 17, 1997, Dow, Destec and NGC entered

7

into the Agreement and Plan of Merger by and among Destec

Energy, Inc., The Dow Chemical Company, NGC Corporation

and NGC Acquisition Corporation II (the “Merger

Agreement”), whereby NGC purchased all of Destec from

Dow. (Id. at A53, § 48; A199-A268.) Second, on February

17, 1997, NGC and AES entered into the Asset Purchase

Agreement by and between NGC Corporation and The AES

Corporation (amended June 29, 1997) (the “Asset Purchase

Agreement”), whereby AES purchased the international

assets of Destec, including the shares of DEI, from NGC.

(/d. at AS3, J 48; A269-A316.)

The Merger Agreement, to which AES was not a party,

included a clause which stated that: “[e]xcept for the

representations and warranties contained in this Article IV,

neither Dow nor any other Person makes any other express

or implied representation or warranty on behalf of Dow.”

(Jd. at A235, § 4.6.) A parallel provision applied to Destec.

(/d. at A233, § 3.20.) The Merger Agreement contained very

limited substantive warranty provisions. (/d. at A215-A233,

§§ 3.1-3.20; A233-A234, §§ 4.1-4.6.) Most of the warranties

by Dow and Destec address the technicalities related to the

sale and have nothing to do with the assets of Destec

ultimately purchased by AES. None of the warranties

mentions the Elsta Project or, for that matter, any other part

of the actual business of Destec. The warranties, instead,

contained little more than the standard terms needed to effect

the stock transaction.

The Merger Agreement also included a merger

clause, which provided that “[t]his Agreement and the

Confidentiality Agreement, and certain other agreements

executed by the parties hereto as of the date of this

Agreement, constitute the entire agreement, and supersedes

8 ~

all prior agreements and understandings (written and oral),

among the parties with respect to the subject matter hereof.”

(Id. at A265, § 9.9.)

The Asset Purchase Agreement executed by AES and

NGC also included a clause which stated that,.“[e]xcept for

- the representations and warranties contained in this Article

III, neither NGC nor any other Person (as defined in the

Merger Agreement) makes any other express or implied

representation or warranty on behalf of NGC.” (/d. at A280-

A281, § 3.4.) The Asset Purchase Agreement also included a

standard merger clause.” The substantive warranty provisions

included in the Asset Purchase Agreement were even

more limited than those included in the Merger Agreement

and none related to the Elsta Project or to Destec’s assets.

(Id. at A279-A281, §§ 3.1-3.4.)

B. Proceedings Below

AES brought this action against Dow in the United States

District Court for the Southern District of Texas on November

30, 1998, alleging, inter alia, federal securities fraud

in connection with AES’s purchase of DEI’s stock.’

On September 29, 1999, upon Dow’s motion, the case was

? The merger clause stated: “[t]his Agreement constitutes the

entire agreement, and supersedes all prior agreements and

understandings (written and oral), among the parties with respect to

the subject matter hereof, including, without limitation, that certain

Joint Bidding Agreement, dated February 10, 1997, by and between

Parent and NGC.” (/d. at A298, § 9.9.)

> Federal subject matter jurisdiction was based on Section 27

of the Exchange Act, 15 U.S.C. § 78aa, and 28 U.S.C. §§ 1331

and 1337.

9

transferred pursuant to 28 U.S.C. § 1404(a) to the United

States District Court for the District of Delaware.

On January 7, 2000, Dow moved to dismiss the Amended

Complaint for failure to state a claim upon which relief could

be granted. Discovery was automatically stayed during the

i pendency of that motion ‘pursuant to Section 21D(b)(3)(B)

of the Private Securities Litigation Reform Act (“PSLRA”), :

15 U.S.C. § 78u-4(b)(3)(B). In support of its motion to

dismiss, Dow argued, inter alia, that the merger and non-

reliance clauses included in the agreements for the stock

purchase transaction precluded AES, as a matter of law, from

proving that it had reasonably relied on the alleged fraudulent

misrepresentations by Dow and Destec. The district court

denied the motion to dismiss on January 19, 2001. (C.A. App.

at A92-A110.) In denying the motion, the district court found

that AES had adequately alleged facts to Support its claim

that Dow and Destec had fraudulently misrepresented the

value of DEI to AES in the course of the stock purchase

transaction. (/d. at A96.) The district court declined to address

Dow’s argument concerning the merger and non-reliance

Clauses, finding that it would be more appropriately raised

on a motion for summary judgment. (/d. at A103.)

Ns SCOT he bs ik

Pellets ce ian at

On March 2, 2001, Dow filed a motion for summary

judgment, and on March 5, 2001, moved to Stay discovery

pending resolution of the Summary judgment motion.

At a March 8, 2001 conference between the parties, the

district court granted the discovery stay. In Support of its

motion, Dow relied solely on the written agreements for the

stock purchase transaction. Dow argued that the merger and

non-reliance clauses included in the Confidentiality

Agreement, the Offering Memorandum, the Merger

Agreement and the Asset Purchase Agreement precluded

10

AES, as a matter of law, from establishing its justifiable

reliance on any representations not contained in the parties’

final written agreements for the transaction.

On August 2, 2001, the district court granted Dow’s

motion for summary judgment on AES’s federal securities

law claims. The district court held that as a result of the

merger and non-reliance clauses, AES’s reliance on Dow’s

misrepresentations was unreasonable as a matter of law,

foreclosing AES’s ability to pursue any claim under the

federal securities laws. The district court rejected

AES’s argument that the clauses cannot be given such force

in light of Section 29(a) of the Exchange Act. The district

court concluded that in the circumstances of this case,

“Section 29(a) of the Exchange Act does not bar the

enforcement of a clause disclaiming representations and

warranties not appearing in a final agreement negotiated

between sophisticated parties in an arm’s length transaction.”

(Pet. App. 30a.) It then dismissed the state law claims by

AES for lack of jurisdiction.

The Third Circuit reversed the judgment of the district

court on April 14, 2003. It held that “enforcement of the non-

reliance clauses to bar AES’s fraud claims as a matter of law

would be inconsistent with Section 29(a).” (Pet. App. 9a.)

The Third Circuit reasoned, as the First Circuit had in Rogen

v. llikon, 361 F.2d 260 (1st Cir. 1966), that the clauses were

waivers of compliance with the Exchange Act within the

meaning of Section 29(a) because there is “‘no fundamental

difference between saying ... “I waive any rights I might

have because of your representations or obligations to make

full disclosure” and “I am not relying on your representations

or obligations to make full disclosure.”’” (Pet. App. 10a.)

The Third Circuit further reasoned that Section 29(a)

1]

“expressly forecloses contracting parties from ‘defin[ing!

the boundaries of the[ir] transaction’ in a way that relieves

a party of the duties imposed by [the Exchange] Act.”

(Pet. App. 16a.)

The Third Circuit went on to explain that “this is not to

say that a plaintiff’s declaration in a contract of an intent not

to rely may not be evidence that he or she did not rely on

representations of the defendants.” (Pet. App. 11a.) It found

that “[t]hat declaration, alone or in conjunction with other

evidence of non-reliance, may establish an absence of reliance

and, when unrebutted, may even provide a basis for summary

judgment in the defendant’s favor.” (/Jd.) In this case,

however, it found that the evidence of non-reliance was

rebutted by AES and that “Dow does not contend that the

information provided by it and its associates played no

material role in AES’s decision to enter the agreement.” (/d.).

The Third Circuit remanded the case to the district

court to consider, in light of all of the relevant facts, the

reasonableness of AES’s reliance on Dow and Destec’s

alleged misrepresentation. In describing the issue for decision

on remand, the Third Circuit explained that “[t]he non-

reliance clauses are, of course, among the circumstances to

be considered in determining the reasonableness of any

reliance here.” (Pet. App. 12a.)

One of the three Circuit Judges filed an opinion

concurring and dissenting in part from the opinion of the

majority. Circuit Judge Wallace concurred with the reversal

of the district court’s judgment, but dissented from the

majority’s holding that the merger and non-reliance clauses

could be used as evidence that AES’s reliance on Dow’s

misstatements was unreasonable. (Pet. App. 17a.) Circuit

12

Judge Wallace found that the merger and non-reliance clauses

at issue in the case “are waivers of compliance [with the

Securities Exchange Act], and under the express terms of

section 29, they are ‘void.’” (/d.) Noting that “(t]he majority

holds that the void stipulation can nonetheless be evidence

of the reasonableness of AES’s reliance,” he wrote “separately

because I cannot join in the majority’s interpretation of the

word ‘void.’” (/d.) Citing the plain meaning of the word,

Circuit Judge Wallace wrote that “[i]f we permit the void

stipulation to have evidentiary value, it is no longer a nullity,

ineffective, or useless.” (Pet. App. 17a-18a.) “Instead,”

he explained, “it becomes a very potent weapon in the 10b-

5 defendant’s arsenal. This is precisely what section 29(a)

prohibits.” (Pet. App. 18a.) Circuit Judge Wallace concluded:

To permit the void stipulation to serve as evidence

of a lack of reasonable reliance would be to take

the teeth out of section 29. It would make a 10b-

5 claim logically possible, but essentially

hopeless. Congress meant more when it enacted

section 29(a).

(Id.).

Dow filed timely petitions for re-hearing and re-hearing

en banc on April 28, 2003. The Third Circuit denied Dow’s

petitions on May 13, 2003. (Pet. App. 33a-34a.)

REASONS FOR DENYING THE PETITION

The Third Circuit’s decision does not, as petitioner

contends, create a conflict among multiple circuits on the

issue of the enforceability of merger and non-reliance clauses

under Section 29(a) that requires resolution by this Court at

this time. Nor does it conflict with this Court’s prior decision

13

in Shearson/American Express, Inc. y. McMahon, 482 US.

220 (1987). Rather, the Third Circuit correctly applied

the standards articulated by this Court in Shearson to the

facts of this case to properly conclude that the mere

inclusion of merger and non-reliance clauses in the

agreements for the stock purchase transaction cannot bar

AES’s fraud claims under the Exchange Act as a matter of

law under Section 29(a).

I. The Third Circuit’s Decision Does Not Create

Multiple Conflicts with Other Circuits

Petitioner argues that this Court should grant certiorari

to settle the issue of whether Section 29(a) of the Exchange

Act limits the enforceability of merger and non-reliance

clauses in a negotiated agreement for the sale of securities.

(Pet. 13.) The Third Circuit’s decision, however, does not

create a conflict among multiple circuits on this issue that

requires resolution by this Court.

The Third Circuit’s decision does not, as petitioner

contends, conflict with decisions by the Seventh, First and

D.C. Circuits. In Rissman vy. Rissman, 213 F.3d 38] (7" Cir.

2000). Jackvony v. RIHT Financial Corp., 873 F.2d 411

(1* Cir. 1989) (Breyer, J.), and One-O-One Enterprises, Inc.

v. Caruso, 848 F.2d 1283 (D.C. Cir. 1988) (Ruth Bader

Ginsburg, J.), the Seventh, First and D.C. Circuits did not

address, let alone mention, Section 29(a) or the question

presented by this case of whether that statutory provision

bars or otherwise limits the enforceability of merger and non-

reliance clauses in a contract for the sale of securities.4

* The district court in Rissman, moreover, did not, as petitioner

Suggests, address and “specifically reject[]” the argument that the

non-reliance clauses at issue in that case were unenforceable under

(Cont’d)

14

The First Circuit’s decision in One-O-One Enterprises,

Inc., moreover, does not discuss or even cite its prior decision

in Rogen v. Ilikon Corp., 361 F.2d 260 (1* Cir. 1966), which,

thirty-three years earlier, considered the effect of Section

29(a) on a non-reliance clause in a contract for the sale of

stock. There is no conflict between the Third Circuit’s

decision and this prior decision by the First Circuit. In Rogen,

the former president and largest single stockholder of the

defendant corporation brought suit alleging that during

negotiations for the sale of his stock, the officers and directors

of the corporation failed to disclose material information

about the possibility of new prospects for the company.

(Cont'd)

Section 29(a). (Pet. 19.) The district court, instead, concluded that

there was no basis for the plaintiff’s 10b-5 claims and, accordingly,

that “we need not address the import of Section 29(a) of the Securities

Exchange Act, 15 U.S.C. § 78cc(a) on the Agreement and its

releases.” Rissman v. Rissman, No. 98 C 3656, 1999 U.S. Dist. LEXIS

10611, at *47 (N.D. Ill. June 30, 1999), aff’d, 213 F.3d 381 (7th Cir.

2000). Because the district court did not decide the question of the

effect of Section 29(a) on the non-reliance clauses, the Seventh Circuit

did not address that issue on appeal.

Lower courts in the Seventh Circuit and other circuits, however,

have addressed the question of the effect of Section 29(a) on merger

and non-reliance clauses in other cases. Like the Third and First

Circuits, these courts have held that merger and non-reliance clauses

are void because they weaken a plaintiff’s ability to recover under

the federal securities laws and, thus, may not be invoked to bar a

plaintiff’s federal securities claims as a matter of law. See MBI

Acquisition Partners, L.P. v. The Chronicle Publ’g Co., No. 01-C-

0177-C, 2001 U.S. Dist. LEXIS 15387, at *25 (W.D. Wis. Sept. 6,

2001), FS Photo Inc. v. Picturevision Inc., 61 F. Supp. 2d 473, 480-

81 (E.D. Va. 1999); Jadoff v. Gleason, 140 F.R.D. 330, 333-34

(M.D.N.C. 1991); Katz v. First of Michigan, No. K87-264 CA4, 1989

U.S. Dist. LEXIS 19141, at *30-*31 (W.D. Mich. Mar. 13, 1989).

15

The district court granted summary judgment after finding

no non-disclosure or misrepresentation of material fact and

no reasonable reliance by the plaintiff on any such

non-disclosure. /d. at 266. In reviewing the district court’s

finding of non-reliance as a matter of law, the First Circuit

considered whether Section 29(a) precluded such a finding

based on the inclusion of a non-reliance clause in the contract

for the sale of the plaintiff’s stock. The First Circuit held

that, under Section 29(a), the existence of a non-reliance

clause could not “constitute[] the basis (or a substantial part

of the basis) for finding non-reliance as a matter of law.” Jd.

In the last thirty-five years, the Second Circuit is

the only other circuit to have considered the enforceability

of merger and non-reliance clauses under Section 29(a).

While the Third Circuit declined in this case to adopt the

reasoning of the Second Circuit in Harsco v. Segui, 91 F.3d

337 (2d Cir. 1996), there are significant factual differences

between this case and Harsco.

In Harsco, the Second Circuit conceded that the non-

reliance clause in that case could “be described as weakening

Harsco’s ability to recover under § 10(b) of the Exchange

Act.” /d. at 343. The Second Circuit, however, further found

“that in the circumstances of this case such a ‘weakening’

does not constitute a forbidden waiver of compliance” under

Section 29(a). Jd. (emphasis added). The Second Circuit

concluded that the Harsco case not only involved a “detailed

writing developed via negotiations among sophisticated

business entities and their advisors,” id., but that “Harsco

further protected itself by negotiating for two weeks of

confirmatory due diligence — the purpose of which was to

confirm the accuracy of MultiServ’s disclosures” and that it

could have terminated the deal if it had been unable to

16

confirm the truth of the detailed disclosures and

representations during that due diligence period. /d. at 344.

The Second Circuit concluded that, “[i]n short there is

nothing in the complaint or the Agreement that indicates that

Harsco was duped into waiving the protections of the

securities laws.” /d.

In contrast, the factual record in this case reveals that

AES, unlike the plaintiff in Harsco, was “duped” into waiving

the protections of the securities laws. AES alleges that it

attempted to determine the financial condition and

construction status of the Elsta Project repeatedly during the

due diligence process, but consistently was provided with

false written and oral information by Dow and Destec that

frustrated its efforts. AES, unlike Harsco, thus had no real

opportunity to confirm the accuracy of the information it was

provided concerning the Elsta Project as a result of Dow and

Destec’s fraud. Because AES had no access to truthful! and

reliable information about the Elsta Project despite its diligent

attempts to verify the information provided by Dow and

Destec, it was not in a position to protect itself by negotiating

detailed representations and warranties relating to the Project.

Given these significant factual differences, there is no

reason to believe that the Second Circuit, if presented with

this case, weuld reach the same result as it did in Harsco.

The Second Circuit’s decision in Harsco does not, as

petitioner contends, suggest that merger and non-reliance

clauses can never “weaken” a plaintiff’s ability to recover

under the Exchange Act to such an extent that it constitutes

“a forbidden waiver of compliance” with the provisions of

the Act. Cf 91 F.3d at 343. Instead, the Second Circuit in

Harsco decided only that “in the circumstances of [that]

case,” the weakening of Harsco’s ability to recover under

ee ee

a a ee ee ee

17

the Exchange Act did not constitute such a forbidden waiver

of compliance. /d. In fact, in a case presenting facts

substantially similar to those of this case where the plaintiff

alleged that it was “duped” into waiving the protections of

the securities laws, a lower court in the Seventh Circuit

declined to follow Harsco and instead concluded that the

Second Circuit’s reasoning in Harsco was limited to the facts

of that case. See MBI Acquisition Partners, L.P. vy.

The Chronicle Publishing Co., No. 01-C-177-C, 2001 U.S.

Dist. LEXIS 15387, at * 23-*25 (W.D. Wis. Sept. 6, 2001).

Even if the Second Circuit were to reach the same result

in this case as it did in Harsco, this case presents a poor

vehicle for the resolution of any conflict between the Second

and Third Circuits on the enforceability of merger and non-

reliance clausés under Section 29(a). The question at issue

in this case has arisen at the interlocutory summary judgment

stage before the taking of any discovery. On remand, and

after discovery is conducted, the district court may yet grant

summary judgment in favor of Dow, in consideration of the

merger and non-reliance clauses at issue. If that were to

happen, the question Dow presents for review in its petition

would be moot.

A grant of certiorari to review the issue of the

enforceability of merger and non-reliance clauses under

Section 29(a) in this case also would be premature where

only two of the twelve circuits have considered the issue in

the last thirty-five years. If, as petitioner contends, this issue

is “likely to arise again and again in significant corporate

transactions” (Pet. 13), the Court would benefit from allowing

the issue to further percolate in the lower courts before

settling the matter.

18

II. The Third Circuit’s Decision Does Not Conflict with

This Court’s Opinion in Shearson

Petitioner argues that review by this Court also is

necessary because the Third Circuit’s decision

“misinterprets” this Court’s decision in Shearson/American

Express, Inc. v. McMahon, 482 U.S. 220 (1987). (Pet. 24.)

Petitioner’s argument is incorrect and based on a mis-reading

both of this Court’s decision in Shearson and of the decision

of the Third Circuit. The Third Circuit correctly applied the

standards articulated by this Court in Shearson to find that it

would offend Section 29(a) to bar AES’s claims under the

Exchange Act as a matter of law based solely on the inclusion

of the merger and non-reliance clauses 1n the agreements for

the stock purchase transaction.

In Shearson, the plaintiffs argued, inter alia, that Section

29(a) barred the enforcement of pre-dispute arbitration

agreements between a securities broker and his or her

customers because of the “frequent inequality of bargaining

power’ between the parties. 482 U.S. at 230. The Court

rejected this “unlikely interpretation” of Section 29(a), and

held that “[t]he concern that § 29(a) is directed against is

evident from the statute’s plain language: it is a concern with

whether an agreement ‘waive[s] compliance with [a]

provision’ of the Exchange Act.” Jd. The Court held that

“(t]he voluntariness of the agreement is irrelevant to this

inquiry: if a stipulation waives compliance with a statutory

duty, it is void under § 29(a), whether voluntary or not.” Jd.

The Court explained, “[t]hus, a customer cannot negotiate a

reduction in commissions in exchange for a waiver of

compliance with the requirements of the Exchange Act, even

if the customer knowingly and voluntarily agreed to the

bargain.” Jd. The Court went on to hold that Section 29(a)

19

“is concerned, not with whether brokers ‘manuever|[ed

customers] into’ an agreement, but with whether the

agreement ‘weaken[s] their ability to recover under the

[Exchange] Act.’” Jd. (quoting Wilko v. Swan, 346 U.S. 427,

432 (1953)) (alterations in original). The latter, it found,

“is grounds for voiding the agreement under § 29(a).”

Id. at 231. The Third Circuit correctly applied these standards,

and considered whether the merger and non-reliance clauses

in the agreements “weaken[ed]” AES’s ability to recover

under the Exchange Act. (Pet. App. 8a.)

Petitioner argues that the Third Circuit misinterpreted

this Court’s decision in Shearson as “compelling the

conclusion that, no matter how sophisticated the parties or

how detailed their agreement, a non-reliance clause can never

be dispositive of the issue of reliance in a federal securities

fraud case.” (Pet. 25.) Shearson, however, makes clear that

factors such as the voluntariness of the contractual provision

or the sophistication of the parties are irrelevant to the

question of whether the provision waives compliance with a

statutory duty or weakens the plaintiff’s ability to recover

under the Exchange Act. The Third Circuit, thus, properly

concluded that Section 29(a) is not “susceptible of [a] reading

that would make an exception for sophisticated parties and

detailed agreements.” (Pet. App. 16a.)

The Third Circuit’s decision accords not only with this

Court’s holding in Shearson, but also with the plain language

of Section 29(a). The plain language of the statute does not

distinguish between the parties it protects. Rather, it prohibits

the enforcement of “‘/a/ny condition, stipulation, or provision

binding any person to waive compliance with any provision”

of the Exchange Act. 15 U.S.C. § 78cc(a) (emphasis added).

a oe oer

20

Petitioner argues that the Third Circuit’s rationale is

“circular” because “Section 29(a) does not come into play

unless the court first decides that the plaintiff had a viable

claim under the federal securities laws.” (Pet. 25.) Petitioner’s

argument incorrectly pre-supposes that Section 29(a) applies

only to existing or matured claims. The statutory language

and this Court’s decision in Shearson establish that

anticipatory waivers of unmatured claims are barred by

Section 29(a). Petitioner’s argument, moreover, ignores the

important fact that in this case, the district court already has

concluded, in its denial of Dow’s prior motion to dismiss,

that AES has stated a viable claim under the federal

securities laws.

III. The Third Circuit’s Decision Will Not Result in the

Negative Consequences for Negotiated Securities

Transactions Predicted by Petitioner

Petitioner contends that the failure to enforce merger and

non-reliance clauses will result in a host of negative

consequences for negotiated securities transactions, including

the promotion of uncertainty in commercial relationships and

impediments to the “free flow of information.” (Pet. 22-23.)

However, petitioner’s contentions are not supported by the

facts of this case.

This case is not, as petitioner suggests, analogous to one

in which a company merely shared with a counterparty its

internal projections, or allowed a bidder to speak directly to

its employees. The Amended Complaint cites numerous

documents in which Dow knowingly and purposely lied in

order to induce AES to purchase the shares of DEI. As a

result, AES was unable to engage in fair, good-faith

negotiations about the merger and non-reliance clauses and

21

the representations and warranties contained in the final

agreements for the transaction. The facts of this case, thus,

are easily distinguishable from one in which a buyer engaged

in “sharp practices” by “reneg[ing]” on a contract provision.

(Pet. 24.) Here, AES was “duped” into the contract terms by

the pervasive fraud undertaken by Dow and Destec.

Furthermore, because many, if not most, of AES’s

allegations of fraud by Dow concern written, rather than oral,

misrepresentations, this case also does not implicate concerns

about the risks of unmanageable future litigation over the

true intent and meaning of prior oral statements. Here, there

can be no dispute as to what Dow and Destec represented to

AES to fraudulently induce it to purchase the DEI stock.

CONCLUSION

For the reasons set forth above, the petition for a writ of

certiorari filed by Dow should be denied.

Dated: New York, New York

September 18, 2003

Respectfully submitted,

JAMES W.B. BENKARD

Counsel of Record

FRANCES E. BIVENS

KELL! J. STENSTROM

Davis PoLk & WARDWELL

450 Lexington Avenue

New York, New York 10017

(212) 450-4000

Attorneys for Respondent

The AES Corporation