Opposition Brief — Versyss Inc. v. Coopers & Lybrand

€ Boprame Court, U.S.

92-1802 |) *trF?

| MAY 19 1993

No. 92- | |

QMFfICe or rare BLEXK |

a

IN THE

Supreme Court of the GQnited States

October Term, 1992

VERSYSS INCORPORATED,

Petitioner,

Vv.

COOPERS & LYBRAND, A PARTNERSHIP;

WILLIAM K. O’BRIEN,

AS MANAGING PARTNER OF COOPERS & LYBRAND,

Respondents.

ON PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE FIRST CIRCUIT

RESPONDENTS’ BRIEF IN OPPOSITION

CHRISTIAN M. HOFFMAN

Counsel of Record

STEVEN W. PHILLIPS

PETER M. CASEY

FOLEY, HOAG & ELIOT

One Post Office Square

Boston, Massachusetts 02109

(617) 482-1390

Counsel for Respondents

May 19, 1993

BATEMAN & SLADE. ING BOSTON. MASSACHUSETTS

i

Question Presented

|. Whether, in a statutory corporate merger, registered sec-

urities of a corporation extinguished by the merger should be

deemed to be acquired by the surviving corporation, thereby

giving root to suits against professionals under Section 11 of

the Securities Act of 1933?

Table of Contents.

Question presented i

Table of authorities i

Statement of the case

A. Introduction |

B. Facts 2

C. The judgments 4

Summary of argument 4

5

Argument

Versyss’ predecessor did not acquire NDS stock. Ra-

ther, by statutory merger, the predecessor acquired

the assets and liabilities of NDS. Accordingly, Ver-

syss has no viable Section 11 claim 5

Conclusion 10

Appendix follows page 10

iil

Table of Authorities Cited.

CASES.

Aaron v. SEC, 466 U.S. 680 (1980)

Dasho v. Susquehanna Corp. , 380 F.2d 262 (7th Cir. ),

cert. dented sub nom. Bard v. Dasho, 389 U.S. 977

(1967)

Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976)

Fischman v. Raytheon Mfg. Co., 188 F.2d 783 (2d Cir.

1951)

Fransden v. Jensen-Sundquist Agency, Inc. , 802 F.2d

941 (7th Cir. 1986)

Herman & MacLean v. Huddleston, 459 U.S. 375

(1983)

Holmes v. Securities Investor Protection Corp.,

Aste ances FS OAR. 9311 (1992)

Junker v. Crory, 650 F.2d 1349 (Sth Cir. 1981)

Mader v. Armel, 402 F.2d 158 (6th Cir. 1968), cert.

denied sub nom. Young v. Mader, 394 U.S. 930

(1969)

In re Penn Central Securities Litigation, 494 F.2d 528

(3d Cir. 1974)

SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344

(1943)

SEC v. National Securities, Inc. , 393 U.S. 453 (1969)

Shields v. Shields, 498 A.2d 161 (Del. Ch.), appeal re-

fused, 497 A.2d 791 (Del. 1985)

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

Cir. 1974)

Sn

6

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Sn

6

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iV

TABLE OF AUTHORITIES CITED.

Touche Ross & Co. v. Reddington, 422 U.S. 560

(1979) 9

Vine v. Beneficial Finance Co., 374 F.2d 627 (2d Cir.),

cert. denied, 389 U.S. 970 (1967) Sn

STATUTES.

15 U.S.C. § 77k(a) passim

IS U.S.C. § 77k(e) 4,6

8 Del. C. § 259(a) 6

OTHER AUTHORITY.

Black's Law Dictionary (6th ed. 1990) 6

No. 92- 7

IN THE

Supreme Court of the United States

October Term, 1992

VERSYSS INCORPORATED,

: Petitioner,

COOPERS & LYBRAND, A PARTNERSHIP;

WILLIAM K. O'BRIEN,

AS MANAGING PARTNER OF COOPERS & LYBRAND,

Respondents.

ON PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE FIRST CIRCUIT

RESPONDENTS’ BRIEF IN OPPOSITION

Statement of the Case

A. Introduction.

Versyss Incorporated’s (“Versyss”) Petition for a Writ of

Certiorari (“Petition”) presents no special or important reason

for further review of its claim against Coopers & Lybrand

under Section 11 of the Securities Act of 1933. A Section 11]

cause of action is available only to those who acquire a security

issued pursuant to a registration statement. In this matter,

Versyss’ corporate predecessor, in whose shoes Versyss

stands, did not acquire any securities; rather, it consummated a

5

—

merger, thereby acquiring the assets and liabilities, and extin-

guishing the corporate existence and securities, of the regis-

trant. Thus, the courts below judged correctly that Versyss

had no Section 11 claim because there was no acquisition of

any registered securities. Because Versyss’ Petition lacks

merit, no Writ of Certiorart should issue.

B. Facts.

Versyss is the putative assignee of and/or successor to Contel

Corporation (“Contel”) and Contel’s wholly owned subsidiary ,

NDS Merger Corporation (“Contel Subsidiary”). Respondents

Coopers & Lybrand and its managing partner William K.

O'Brien (“C&L”) were alleged to have been contributing ex-

perts in a registration statement filed by Northern Data Sys-

tems, Inc. (“NDS”) in August, 1984, when NDS undertook a

public offering. JA-4, 16 to 21.'

Versyss’ purported Section 11 claim does not arise out of

NDS* 1984 public offering. Instead, it relates to a statutory

merger (the “Merger’’) the following year. In July, 1985, NDS

merged into Contel Subsidiary, pursuant to an agreement and

plan of reorganization among Contel, Contel Subsidiary, NDS

and NDS’ principals, dated May 17, 1985 (the “Merger Con-

tract”). JA-143 to 175, 286. In a third amended complaint,

Versyss asserted that, in undertaking the Merger, Contel and

Contel Subsidiary relied on NDS* August, 1984 initial public

offering registration statement, which it claimed contained mis-

leading financial statements. JA-16 to 21.

The Merger was a statutory merger undertaken “in accord-

ance with the . . . Delaware General Corporation Law and

References to “JA-___” are to the joint appendix filed with Versyss’ appeal to

the United States Court of Appeals for the First Circuit

3

Massachusetts Business Corporation Law.”’ JA-148. The

Merger Contract, which governed the Merger, provided for

the transfer of NDS assets and liabilities to Contel Subsidiary,

and for the extinction of NDS and all of its securities, including

the stock registered in 1984. Both Contel Subsidiary’s sole

stockholder, Contel, and the NDS stockholders voted to ap-

prove the Merger, and the Merger was consummated. JA-132,

161, 164.

Pursuant to the Merger Contract, on consummation of the

Merger, Contel Subsidiary acquired the assets and liabilities

of NDS; NDS’ corporate existence terminated; and NDS stock

automatically converted to Contel stock, making NDS share-

holders Contel shareholders.‘ JA-148, 289 to 290.* The Merger

Contract contained no mirroring provision that Contel or Contel

Subsidiary would become a stockholder of NDS, or that any

Contel stock would convert to NDS stock. Instead, after the

Merger, the former NDS shareholders, whose shares had con-

verted to Contel stock, exchanged on a formula basis their old

NDS certificates for marketable Contel stock certificates

through Contel’s exchange agent. JA-150.

Massachusetts law applied only with respect to the appraisal rights of any

dissenting shareholders. JA-148, 150 to 151, 168.

“The separate corporate existence of NDS shall terminate on the [Merger] Date,

and Contel Subsidiary, from and after the [Merger] Date, shall possess all the

rights, privileges, immunities and franchises of NDS, and all property, real, personal

and mixed, and all debts due on whatever account, and any and all other choses

in action, and all and every other interest of or belonging to or due NDS shall be

taken and deemed to be transferred to and vested in Contel Subsidiary, without

further act or deed, and all debts, liabilities and duties of NDS shall attach

to Contel Subsidiary as the surviving corporation of the Merger.” JA-148

‘“[Ejach outstanding certificate that represented shares of NDS stock prior to

the [Merger] Date shall be deemed for all corpor:ite purposes to evidence ownership

of the shares of Contel Stock into which such shares of NDS stock have been

converted.’ JA-150

C. The Judgments.

On C&L’s motion for summary judgment, the United States

District Court for the District of Massachusetts dismissed Ver-

syss’ Section 11 claim. Appendix to Petition (hereinafter, “Pet.

App.) A23 to A24.° See id. A26 to A27, reprinting 15 U.S.C.

§ 77k(a). It ruled that in the Merger neither Contel nor Contel

Subsidiary acquired NDS’ registered stock, the sine qua non

of a Section 11 claim. Pet. App. A20. The United States Court

of Appeals for the First Circuit affirmed. The First Circuit

held that, under the Merger Contract, “the NDS securities

ceased to exist at the time of the merger because the corporation

ceased to exist.” Pet. App. A7 to A8. Contel acquired the

assets and liabilities, but not the stock, of NDS. Pet. App.

A8. The Court rejected Versyss’ argument that Contel acquired

NDS stock after executing the Merger Contract, but before

the Merger was consummated. ““[T]he merger agreement. . .

was not a step on the road to Contel’s acquiring of NDS

securities but rather was an agreement to merge NDS out of

existence.” Pet. App. A7. Versyss’ claim also clashed with

Section I! 1°s exclusive damages prevision, which requires a

plaintiff actually to receive registered securities and then to

hold or dispose of them “in the market.” Pet. App. A7 to A&.

See id. A29 to A30, reprinting 15 U.S.C. § 77k(e). “It would

be fantasy to speak of the non-existent NDS [stock] as suffering

a post-merger decline in value or being resold for less than

the purchase price.” (footnote omitted) Pet. App. A8.

Summary of Argument

Versyss’ petition presents no important question under Sec-

tion 11. Because Contel/Contel Subsidiary did not acquire any

*“C&L’s opposition will cite to the Appendix to the Petition for reference to the

decisions of the courts below as well as the relevant provisions of Section 11, 15

U.S.C. § 77k

5

NDS stock in the Merger, Versyss has no Section 11 claim.

The First Circuit properly rejected Versyss’ claim, which

would have required rewriting Section 1] to provide a remedy

for those who do not acquire securities in a statutory merger.

Argument

VerRSYSS’ Prepecessor Dip Not Acguire NDS Stock.

RATHER, BY STATUTORY MERGER, THE PREDECESSOR AC

QUIRED THE ASSETS AND LIABILITIES OF NDS. ACCORDING-

LY, Versyss HAS No VIABLE SECTION I] CLAIM

Section 11(a) provides in relevant part:

In case any part of the registration statement .

contained an untrue statement of a material fact or

omitted to state a material fact required to be stated

therein or necessary to make the statements therein

not misleading, any person acquiring such security

TS. ec: :

15 U.S.C. § 77k(a) (emphasis added).* “A suit under § 11

. . may be maintained only by one who comes within a narrow

class of petsons i.e. those who purchase [/.e., acquire] securi-

ties that are the direct subject of the . . . registration statement

_.. Fischman v. Raytheon Mfg. Co., 188 F.2d 783, 786 (2d

Cir. 1951) (Frank, J.). Accord, Herman & MacLeanv. Huddle-

ston, 459 U.S. 375, 382 (1983).

In the Merger, NDS merged into Contel Subsidiary, prede-

cessor of Versyss. As the surviving corporation, Contel Subsid-

iary acquired NDS’ assets and liabilities; and neither Contel

(assignor of Versyss) nor its subsidiary acquired the stock reg-

‘Section I1(a), 1S U.S.C. & 77k(a), 1s reprinted at Pet. App. A26 to A27

6

istered by NDS the prior year. Pursuant to the Merger Contract,

NDS, as well as its stock, ceased to exist. As the First Circuit

observed, this is “ordinary merger-law jurisprudence.” Pet.

App. AS, citing Frandsen v. Jensen-Sundquist Agency, Inc.,

802 F.2d 941, 944 (7th Cir. 1986) (“in a merger the shares

of the acquired firm are not bought, they are extinguished”).

See also Shields v. Shields, 498 A.2d 161, 168 (Del. Ch.)

(“at the moment a stock for stock merger is effective, the stock

in a constituent corporation (other than the surviving corpora-

tion) ceases to exist legally”), appeal refused, 497 A.2d 791

(Del. 1985); 8 Del. C. § 259(a) (reprinted in appendix hereto).

In applying the federal securities laws, “the starting point

in every case . . . 1s the language itself,” Ernst & Ernst v.

Hochfelder, 425 U.S. 185, 197 (1976), and the courts will

accept the language as it is set forth in those statutes. SEC v.

C.M. Joiner Leasing Corp., 320 U.S. 344, 355 (1943). The

plain meaning of “acquire” — “to gain by any means. . . to

get as one’s own”, Black's Law Dictionary 24 (6th ed. 1990)

— compels the conclusion that no one here acquired NDS

stock. The transaction described in the Merger Contract was

not a stock for stock swap, a tender offer, or any other acqui-

sition of NDS stock by Contel Subsidiary, the “acquiring”

entity. As provided in the Merger Contract, on the date of the

Merger, the outstanding shares of NDS stock were automatic-

ally converted into Contel stock, making NDS shareholders

Contel shareholders. The “exchange” described in the Merger

Contract is an exchange of shares held by the NDS shareholders

(who have no claim here) for Contel stock. No other exchange

of shares took place. Neither Contel nor Contel Subsidiary

got, gained, received or otherwise became an owner of NDS

stock, whose corporate existence was extinguished by act of

merger.

Section |1°s damages provision confirms that Contel did

not acquire NDS stock. Section |1(e) requires that a plaintiff

7

(1) acquire a security and (2) either continue to possess it as

of the date of suit or dispose of the security “in the market.”

Pet. App. A29 to A30. As the First Circuit reasoned, it would

be “fantasy” to suppose that Contel or Contel Subsidiary could

have acquired and then retained and/or disposed of stock “in

the market” which had been extinguished in the Merger.’ Pet.

App. A&. Thus, Section 1 1(e) — as well as the plain language

of Section | 1(a) — foreclose Versyss’ unprecedented assertion

that it somehow acquired non-existent stock.

Versyss concedes that the Merger Contract governed the

transaction, provided expressly for a statutory merger under

Delaware General Corporation Law, and effected the extinction

of NDS and NDS stock. Petition 4-5, 12 n.12, 14.n.16. Versyss

has no support for its contradictory suggestion that the courts

below should have ignored the parties’ express agreement.

Petition 10-11. The Merger Contract provided for Contel’s

acquisition of NDS’ assets and liabilities but not its stock.

Contel or Contel Subsidiary could have acquired NDS stock

only if the Merger Contract provided for such an acquisition.

The Contract did not."

Contrary to Versyss’ assertion, the decisions below do not

“undercut[ ] [the 1933 Act’s] broad remedial mandate”. Peti-

tion 11. “[GJeneralized references to the ‘remedial purposes’

of the securities laws will not justify reading a provision more

broadly than its language and the statutory scheme reasonably

permit.” Aaron v. SEC, 446 U.S. 680, 695 (1980) (citations

Versys acknowledges that the First Circuit's conclusion on this point follows

from a “literal” reading and application of Section | l(e). Petition 8 n.6. It presents

no reason for a figurative reading or application of Section 1 1(e), or 11(a).

“Versyss seeks to avoid the consequences of its predecessor's election to acquire

NDS via a statutory merger by asserting that the decisions below elevate “form”

over “substance” and rely on the “vagaries” of state corporate merger law. Petition

11. The parties, however, freely contracted for the form of the Merger, which

reflects its substance, i.e., Contel Subsidiary acquired NDS assets and liabilities,

not NDS registered securities. A statutory merger is perfectly straightforward and

clear, both in form and substance.

x

and internal quotation marks omitted). Section 1} l(a) requires

an actual acquisition of registered securities; and Section | 1(e)

demonstrates in formulating damages that “acquire” means

actual acquisition of registered securities. Here, neither Contel

nor Contel Subsidiary acquired any such seeurity of NDS.

The case law on which Versyss relies is irrelevant. Applying

the “purchase” or “sale” requirement of Section 1O(b) of the

Securities Exchange Act of 1934, the cases cited recognize

Standing tor: (1) those who actually received stock of the entity

surviving a merger,’ (11) defrauded sellers who issue securities

ina merger;'’ and (it) “forced sellers” in “freeze out” mergers,

in which the seller has no choice but to accept cash or stock

ot the surviving entity.'' These cases might have supported a

Section 10(b) claim by the former NDS shareholders as pur-

chasers of Contel stock, if Contel had made fraudulent misrep-

resentations in connection with the Merger. SEC v. National

Securities, Inc., 393 U.S. 564, 572 (1969) (in Section 10(b)

case, Court expressly holds that shareholders of entity extin-

guished in merger, who received shares in new company,

* ‘purchased’ shares in the new company by exchanging them

for their old stock”). But they do not even begin to support a

claim under Section | 1 against C&L that Versyss’ predecessor

acquired the registered NDS stock. Moreover, the holdings in

these Section 10(b) cases, none of which addresses whether a

“SEC v. National Securities, Inc., 393 U.S. 453, 467 (1969), Mader vy Armel,

402 F.2d 158, 159 (6th Cir, 196%). cert. denied sub nom. Young v. Mader. 394

U.S. 930 (1969), Smallwood v. Pearl Brewing Co., 489 F 2d 579. 59i (Sth Cir

1974): In re Penn Central Securities Litigation, 494 F.2d 52%, 532, 535-36 (3d

Cir. 1974). Junker v. Crory, 650 F.2d 1349, 1359 (Sth Cir. 1981), also cited by

Versyss, was a case under § 12(2) of the 1933 Act, in which the plaintiff. a

shareholder of the merging corporation, received the shares of the surviving corpo-

ration, and thus purchased securities.

“ Dasho v. Susquehanna Corp. , 380 F.2d 262 (7th Cir), cert: dented, sub nom

Bard ¥. Dasho, 389 U.S. 977 (1967)

Vine v. Beneficial Finance Co. , 374 F.2d 627, 633-34 (2d Cir), cert. denied,

389 US. 970 (1967)

9

plaintiff has acquired securities for Section 11 purposes, are

neither unusual nor apposite. As this Court has recognized,

Section 10(b) provides standing to a much broader class of

persons. Herman & MacLean v. Huddleston, supra, 459 U.S.

at 382. a

There is no reason to extend Section || to provide reliet

for plaintiffs who do not acquire registered securities. Even if

Versyss’ predecessor had been harmed as Versyss alleges,

common law remedies in state court provide avenues of relief.

““!T]hat a [federal securities] statute has been violated and

some person harmed does not automatically give rise to a

private cause of action in favor of that person.” ” Touche Ross

& Co. v. Reddington, 442 U.S. 560, 568 (1979) (citation omit-

ted). Further, this Court has “abandoned” the practice of imply-

ing causes of action in federal securities laws, especially where

an express cause of action exists. Holmes v. Securities Investor

Protection Corp., PD. ceeesy FEZ G.CX. ISTE, 13929 (1992)

(Scalia, J., concurring)."’

Versyss attacks a straw man in arguing that the First Circuit erred in alluding

to the parties sophistication when considering whether to recognize Versyss’ Sec-

tion 11 claim. After concluding that Contel Subsidiary did not acquire NDS stock,

the First Circuit observed only that the legislative purpose and history of the 1933

Act does not support stretching Section | | to encompass Contel Subsidiary 's receipt

of NDS assets and habilities. Thus, the First Circuit correctly refused to create an

implied cause of action under Section |i See Touche Ross & Cov Reddington

supra, 442 US at 574 (“where [an] express civil remedy for misstatements in

reports created by Congress is by its terms limited to purchasers and sellers

of securities, we are extremely reluctant to imply a cause of action that is

significantly broader than the remedy that Congress chose to provide ™)

10

Conclusion

For the foregoing reasons, Versyss’ Petition for a Writ of

Certiorari to review the decision of the United States Court of

Appeals for the First Circuit in this matter lacks merit and no

Writ should issue.

Respecttully submitted,

Coopers & LYBRAND AND

WILLIAM K. O'BRIEN

CHRISTIAN M. HOFFMAN

Counsel of Record

STEVEN W. PHILLIPS

PETER M. CASEY

FOLEY, HOAG & ELIOT

One Office Square

Boston, Massachusetts 02109

(617) 482-1390

Counsel for Respondents

May 19, 1993

_ Appendix

8 Del. C. § 259

Status, rights, liabilities, of constituent and surviving

or resulting corporations following merger or consoli-

dation.

(a) When any merger or consolidation shall have become

effective under this chapter, for all purposes of the laws of

this State the separate existence of all the constituent corpora-

tions, or of all such constituent corporations except the one

into which the other or others of such constituent corporations

have been merged, as the case may be, shall cease and the

constituent corporations shall become a new corporation, or

be merged into | of such corporations, as the case may be,

possessing all the rights, privileges, powers and franchises as

well of a public as of a private nature, and being subject to

all the restrictions, disabilities and duties of each of such cor-

porations so merged or consolidated; and all and singular, the

rights, privileges, powers and franchises of each of said corpo-

rations, and all property, real, personal and mixed, and all

debts due to any of said constituent corporations on whatever

account, as well for stock subscriptions as all other things in

action or belonging to each of such corporations shall be vested

in the corporation surviving or resulting from such merger or

consolidation; and all property, rights, privileges, powers and

franchises, and all and every other interest shall be thereafter

as effectually the property of the surviving or resulting corpo-

ration as they were of the several aff respective constituent

corperations, and the title to any real estate vested by deed or

otherwise, under the laws of this State, in any of such con-

stituent corporations, shall not revert or be in any way impaired

by reason of this chapter; but all rights of creditors and all

A2

Sayer Nene? a Nef a,

lia mT : B %

liens upon any property of any of said constituent corporations

shall be preserved unimpaired, and all debts, liabilities and

duties of the respective constituent corporations shall thence-

forth attach to said surviving or resulting corporation, and may

be enforced against it to the same extent as if said debts, liabili-

ties and duties had been incurred or contracted by it.

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