Gustafson v. Alloyd Company, Inc. - Oral Argument - November 02, 1994

Gustafson v. Alloyd Company, Inc.

Media for Gustafson v. Alloyd Company, Inc.

Audio Transcription for Opinion Announcement - February 28, 1995 in Gustafson v. Alloyd Company, Inc.

Audio Transcription for Oral Argument - November 02, 1994 in Gustafson v. Alloyd Company, Inc.

William H. Rehnquist:

We'll hear argument now in Number 93-404, Arthur L.... do you know how your client's full name... is it Gustafson, or Gustafson?

Donald W. Jenkins:


William H. Rehnquist:

Arthur L. Gustafson v. Alloyd Company, Incorporated.

Mr. Jenkins.

Donald W. Jenkins:

Mr. Chief Justice and may it please the Court--

As the briefs indicate, this case turns in large part on whether or not the phrase, by means of a prospectus or oral communication, as used in section 12(2) of the Securities Act of 1933, is a phrase of limitation.

The case also turns on whether, by section 12(2), the act covers negotiated private transactions even though the act does not otherwise intrude into such business arrangements.

The House report answers both these questions, stating the bill affects only new offerings of securities.

It does not affect ordinary redistribution of securities.

As to liability provisions, the report states the bill's civil liabilities attach only when there's been an untrue statement of material fact in the registration statement or the prospectus, the basic information on which the public is solicited.

This case involves no new offering of securities, and presents the paradigm example of a private transaction the act plainly left free from regulation other than by its section 17.

Art Gustafson, Dan McLean, and Francis Butler sold their company to a sophisticated investor which conducted its own due diligence and negotiated the deal it wanted.

The buyers had full access to information about Alloyd.

Indeed, Mr. McLean and Mr. Butler were officers and shareholders of the buyer.

The stock purchase agreement contained numerous riskallocating provisions.

In particular, the parties knew that Alloyd's interim earnings were estimated, so, as is common, they closed with an estimated purchase price subject to a later dollar for dollar adjustment after an audit determined actual earnings.

They plainly could have, but did not, agree that some multiple of the variance should apply to the transaction.

After the audit, the parties agreed that the estimated price had been 815,000 dollars too high, and sellers paid that amount to buyers as the agreement required.

Buyers, who knew Alloyd's interim earnings were estimated, now claim that sellers warranted a certain level of such earnings in the agreement.

They claim a breach of that warranty, which is a contract law matter, and also claim a violation of section 2 of the... 12(2) of the Securities Act.

They have made no claim of fraud.

As to the section 12(2) claim they assert, it is that the purchase agreement itself, the negotiated purchase agreement, was a prospectus, and they claim they are entitled to rely on oral communications during due diligence about Alloyd's inventory, even though the agreement specifically provided such oral statements were superseded by the terms of the agreement.

Buyers seek rescission of the transaction or rescissionary damages, even though by the agreement they agreed that they would not seek rescission.

The act, and section 12(2) in particular, makes a seller, we submit, a fiduciary only when there is an initial public offering of securities.

It does not do so in the context of ordinary secondary transactions such as privately negotiated resales of stock that have never been publicly distributed.

A stock purchase agreement memorializing the terms of a negotiated deal is not a prospectus, nor are discussions in the course of due diligence regarding the reliability of inventory estimates.

Ruth Bader Ginsburg:

If it had been an offering circular... not just a purchase agreement, but would an offering circular fit within the definition of section 2(10)?

Donald W. Jenkins:

An offering circular would certainly be a circular, I think, within the meaning of section 2(10).

It specifically uses that phrase.

But the preceding words in 2(10) is, the very first definition of prospectus is prospectus itself, which as commonly defined then had a public solicitation connotation.