In re U.S Office Products Co.Securities Lit.

Decision Date04 March 2003
Docket NumberDoc. No. 44, 62, 63.,File No. No. 99-MS-137 (RMU).,Civil Action No. 99-63(GMS).,No. 1271.,1271.
Citation251 F.Supp.2d 77
PartiesIn re U.S. OFFICE PRODUCTS CO. SECURITIES LITIGATION. Jack Meehan, Fran Meehan, Christopher Meehan, Beth Meehan, Gordon Tingets, Les Asher, Michael Dickens, and William Durniak, Plaintiffs, v. U.S. Office Products Co., Jonathan J. Ledecky, and James Claypoole, Defendants.
CourtU.S. District Court — District of Columbia

David Patrick Donovan, Wilmer, Cutler & Pickering, Washington, DC, Herbert Esar Milstein, Daniel S. Sommers, Cohen, Milstein, Hausfeld & Toll, P.L.L.C, Washington, DC, Lester L. Levy, Wolf Popper LLP, New York, NY, Richard B. Dannenberg, Jill Rosell, Richard Bemporad, Lowey Dannenberg Bemporad & Selinger, White Plains, NY, Andrew L. Barroway, David Kessler, Schiffrin & Barroway, LLP, Bala Cynwd, PA, Jules Brody, Aaron L. Brody, Stull, Stull & Brody, New York, NY, Richard E. Castiglioni, Diserio Martin O'Connor & Castiglioni LLP, Stamford, CT, James Linwood Quarles, III, Hale & Dorr, Washington, DC, Burton Hyman Finkelstein, Finkelstein, Thompson & Loughran, Washington, DC, Ann H. Rubin, Carmody & Torrance LLP, Dickinson Wright, Rock A. Wood, Grand Rapids, MI, for plaintiffs.

John Christopher Keeney, Jr., Hogan & Hartson, L.L.P, Washington, DC, David Patrick Donovan, John Quinn Rounsaville, Jr., Matthew A. Brill, Wilmer, Cutler & Pickering, Washington, DC, Richard A. Roth, Ira S. Meyerowitz, Littman, Krooks, Roth & Ball, P.C, New York, NY, Wiley E. Mayne, Charles W. Groscup, Denver, CO, for defendants.

MEMORANDUM OPINION

GRANTING IN PART AND DENYING IN PART DEFENDANT USOP'S MOTION To Dismiss;

GRANTING IN PART AND DENYING IN PART DEFENDENTS LEDECKY'S MOTION To Dismiss;

GRANTING IN PART AND DENYING IN PART DEFENDENTS CLAYPOLLE'S MOTION TO DISMISS;

GRANTING THE PLAINTIFF'S MOTION FOR LEAVE TO AMEND THE COMPLAINT

URBINA, District Judge.

I. INTRODUCTION

In October 1997, the plaintiffs sold their company, Aztec International ("Aztec"), to defendant U.S. Office Products ("USOP") in exchange for 720,000 shares of USOP common stock. After the merger and before the plaintiffs sold their USOP stock, the value of the USOP stock decreased significantly. In response, the plaintiffs filed a 20-count complaint claiming contract violations, fraud, negligence, negligent misrepresentation, conspiracy, and breach of fiduciary duty on the part of the defendants. The complaint addresses two contracts: the written Agreement and Plan of Reorganization ("Reorganization Agreement") governing the merger of Aztec and USOP, and an oral contract wherein the defendants allegedly promised to compensate the plaintiffs for the loss in value of their USOP stock. In the Second Amended Complaint ("complaint"), the plaintiffs claim that the defendants breached the contracts, made false statements regarding the contracts, and fraudulently induced the plaintiffs to enter into the contracts.

The plaintiffs originally filed this action in the United States District Court for the District of Delaware. The Judicial Panel on Multi-District Litigation transferred the case to this court for pretrial proceedings as part of the USOP Multi-District Litigation ("MDL") pending in this court. This case and others in the USOP MDL action involve defendants USOP; Jonathan Ledecky, the former President, Chief Executive Officer, and Chairman of USOP; and James Claypoole, the President of the Technology Solutions Division of USOP. This matter is now before the court on the defendant USOP's, Ledecky's, and Claypoole's separately filed motions to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons set forth below, the court grants in part and denies in part the defendants' motions to dismiss.

II. BACKGROUND1
A. Summary of the Case

The plaintiffs are the former owners of Aztec, a closely held Delaware corporation located in Connecticut that the plaintiffs sold to defendant USOP in October 1997. Compl. 114. Plaintiffs Jack and Fran Meehan, Les Asher, and Gordon Tingets reside in Connecticut, plaintiffs Beth and Christopher Meehan reside in Colorado, plaintiff William Durniak resides in New York, and plaintiff Michael Dickens resides in Texas. Id. MI 7-15. The plaintiffs claim that during negotiations regarding the USOP-Aztec merger, the defendants made false and misleading statements and omissions regarding USOP's future business strategy. E.g., id. HIT 38, 62. The plaintiffs detrimentally relied on these false statements and agreed to sell Aztec to USOP based on these statements and omissions. Id. 1138. The plaintiffs state that had they been aware of USOP's true business plans, they would not have sold Aztec to USOP. Id. 1139.

Once the plaintiffs became aware of USOP's new business strategy, they met with defendants Ledecky and Claypoole in the District of Columbia in February 1998 to discuss their concerns. Id. Ml 54, 55. At this meeting, defendant Ledecky guaranteed that USOP would provide the plaintiffs with consideration equal to that agreed upon for the sale of Aztec. Id. 1156. Furthermore, Mr. Ledecky allegedly gave his personal guarantee that he would make the plaintiffs whole if USOP failed to do so. Id. Later, both Mr. Ledecky and USOP refused to provide the plaintiffs with the consideration they allegedly agreed to. Id. ¶ 61.

B. Defendant USOP's Original Business Plan

Defendant Ledecky founded USOP, a company located in the District of Columbia and incorporated in Delaware, in 1994 Id. 1124. USOP's business strategy was to acquire existing companies in exchange for USOP stock and then group these companies together as a single corporate entity to achieve increased reported revenues, thereby increasing the value of USOP stock. Id. To maintain its stock price, USOP used business practices, such as the pooling-of-interests accounting method.2 Id. 1126. USOP could not use the poolingof-interests accounting method, however, if it intended to engage in a buyback or spinoff of an acquired company within two years of the acquisition. Id. 1126.

C. Defendant USOP's Negotiations with Aztec

In early 1997, USOP representatives approached plaintiff Jack Meehan, Aztec's principal owner, about the possibility of acquiring Aztec. Id. 1127. Based on USOP representatives' description of USOP's business plan, Jack Meehan and Eric Schwartz, president of USOP's Computer Network Services Division, entered into a confidentiality agreement. Id. USOP and Aztec then began acquisition discussions. Id. Ill 27-28. During these discussions, USOP Technology Solutions President defendant Claypoole indicated that defendant Ledecky was directing USOP's strategy for this merger and that Mr. Ledecky was the visionary leader who would build USOP into an $8 billion company by the year 2000. Id. ¶ 28.

During the first week of October 1997, Aztec received a Letter of Intent from USOP confirming USOP's intent to acquire Aztec in exchange for 720,000 shares of USOP stock. Id. ¶ 31. USOP representatives refused the plaintiffs' original demand for cash consideration and represented that the all-stock deal would be beneficial to the plaintiffs because it would allow the transaction to qualify for poolingof-interests accounting treatment. Id. To this end, USOP's Letter of Intent stated that "[t]he Proposed Acquisition [of Aztec] must qualify for the pooling-of-interest [sic] accounting treatment." Id.

During late October 1997, Aztec and USOP representatives negotiated the terms of the Reorganization Agreement. Id. ¶ 32. During these negotiations, USOP representatives provided the plaintiffs with copies of USOP's most recent prospectus and supplements, as well as various articles on USOP, Mr. Ledecky, and the nature of USOP's stock. Id. USOP did not mention any planned changes in its business strategy. Id. The Reorganization Agreement provided for total consideration ("Merger Consideration") of 720,000 shares of USOP Common Stock that were trading at a price of $37.5625 per share as of the closing date. Id. 1134. The shares were subject to transfer restrictions in accordance with the pooling-of-interests accounting rules. Id. 1135. These restrictions prohibited the plaintiffs from selling any of their USOP shares until USOP and Aztec operations had been combined for a period of 30 days after publication of their combined results in a public announcement. Id. USOP controlled the timing of this public announcement and the restriction on the plaintiffs' shares was set to expire in mid-February 1998. Id.

On October 24, 1997, the plaintiffs entered into the Reorganization Agreement with USOP and its subsidiary, Mason Acquisition Corporation. Id. 1138. On the same day, the acquisition closed, Aztec became a subsidiary of USOP, and the Aztec shareholders were issued 720,000 shares of USOP stock with a total market value of $27,000,000.00. Ml 39.

D. The Defendants' Alleged Misrepresentations and Omissions During the Negotiation of the Reorganization Agreement

The plaintiffs plead that, during the negotiations, USOP's representatives provided them with false and misleading information and failed to disclose other adverse information. Id. 1138. The plaintiffs relied on this information and, if not for the defendants' omissions and false statements, they would not have entered into the Reorganization Agreement. Id. Ml 39, 42, 45, 62.

From October 4 through 7, 1997, USOP held a Technology Solutions Presidents' Meeting in the District of Columbia. Id. 1137. Mr. Claypoole presided over this meeting, which Computer Network Services Division President Eric Schwartz attended. Id. At this meeting Mr. Claypoole and other unnamed individuals discussed a new business strategy involving entering into a stock repurchase and spin-off transaction. Id. This new business strategy included spinning off the ...

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