982 F.2d 653 (1st Cir. 1992), 92-1212, Versyss Inc. v. Coopers and Lybrand
|Citation:||982 F.2d 653|
|Party Name:||VERSYSS INCORPORATED, Plaintiff, Appellant, v. COOPERS AND LYBRAND, ETC., et al., Defendants, Appellees.|
|Case Date:||December 30, 1992|
|Court:||United States Courts of Appeals, Court of Appeals for the First Circuit|
Heard July 31, 1992.
Patrick J. Sharkey, Henry A. Sullivan, John F. Sylvia, and Mintz, Levin, Cohn, Ferris, Glovsky, and Popeo, P.C., Boston, MA, were on brief, for plaintiff, appellant.
Steven W. Phillips, Christian M. Hoffman, Peter M. Casey and Foley, Hoag & Eliot, Boston, MA, were on brief, for defendants, appellees.
Before TORRUELLA, CYR and BOUDIN, Circuit Judges.
BOUDIN, Circuit Judge.
This case presents a common problem in statutory interpretation. Congress drafted a law that clearly embraces some transactions, clearly excludes others, and is now brought to bear on a transaction that Congress probably did not consider. We are left to make a judgment based on clues garnered from statutory language, legislative history, purpose and policy. In our view, the transaction at issue does not fit comfortably within the statutory language, and no clear policy or precedent encourages courts to extend that language beyond its normal bounds.
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 sections 5-16, 15 U.S.C. §§ 77e-77p.
The merger was approved by NDS stockholders, and NDS was merged into the Contel subsidiary on July 16, 1985. In accordance with the merger agreement, Contel's subsidiary as the surviving corporation acquired effective ownership of the assets, and responsibility for the debts, of the former NDS. The merger agreement provided that on the date of the merger, the "separate corporate existence of NDS shall terminate." Thereafter, in accordance with the merger agreement, the former NDS stockholders sent in their now defunct NDS stock certificates to Contel's exchange agent and received their Contel stock certificates.
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, section 11 of the Securities Act of 1933, 15 U.S.C. § 77k, imposes (subject to certain limitations) continuing liability for misstatements or material omissions in registration statements; after the registration statement becomes effective, a federal damage action may be brought, by "any person acquiring such security," against any of a list of specific responsible persons, including the certifying accounting firm. Section 11(a), 15 U.S.C. § 77k(a). Accordingly, the present suit, now conducted by Versyss Incorporated as Contel's assignee, was brought against the accounting firm of Coopers & Lybrand.
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.
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 defendant makes out a statutory defense comprising, in general terms, reasonable inquiry and good faith belief. Sections 11(a)(4), (b), 15 U.S.C. §§ 77k(a)(4), (b).
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, 105 S.Ct. 2297, 2301 n. 1, 85 L.Ed.2d 692 (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 agent, NDS ceased to exist as a corporation. This is ordinary merger-law jurisprudence (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")) and accords with the Contel-NDS agreement already quoted. Delaware's merger statute follows this pattern...
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