Deciding a matter of first impression, the Ninth Circuit Court of Appeals recently held that an individual who holds contingent contractual rights to receive stock in a company has standing to bring an action under Section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act") and Rule 10b-5 promulgated thereunder.
H. James Griggs was a shareholder in Bancroft Holdings, Inc. ("BHI"), an insurance holding company that merged with the Pace American Group ("PAG") on March 15, 1993. Pursuant to the merger agreement, BHI shareholders had the option of receiving cash, PAG stock, or both in exchange for their BHI shares, and also received "PAG stock earn-outs" i.e., rights to additional PAG stock that were contingent on certain performance criteria being fulfilled. Griggs redeemed his BHI shares for cash, and also received PAG stock earn-outs. He did not receive any PAG stock.
In January 1994, PAG's stock suffered a "precipitous decline" after key officers in the company were suspended pending an internal investigation of "improper transactions." The stock declined further in July 1994 after PAG issued a press release indicating that it intended to restate its revenues for 1992 and the first quarter of 1993 to reflect $3 million in losses. In July 1995, Griggs filed a class action suit on behalf of the former shareholders of BHI alleging that various officers and directors of PAG and its independent auditor, Coopers & Lybrand, committed securities fraud under Section 10(b) of the 1934 Act and Rule 10b-5 thereunder by misrepresenting the financial condition of PAG, and thereby inducing the then-BHI shareholders to approve the merger.
In January 1997, Coopers & Lybrand learned that Griggs had not received PAG stock in the 1993 merger, and subsequently moved for summary judgement dismissing the complaint. The United States District Court for the District of Arizona granted the motion, reasoning that Griggs lacked the requisite standing to assert his federal securities fraud claims because he was not an "actual purchaser" of securities as required under 1934 Act. As the district court held, "Griggs had nothing more than a contingency to PAG stock which never ripened."
On appeal, the Ninth Circuit reversed. The Ninth Circuit observed that Section 3(a) of the 1934 Act defines the term "purchase" to include "any contract to buy, purchase, or otherwise acquire" securities. The Court then noted that it previously had held that the acquisition of contractual rights to receive stock in the future are included in the definition of "purchaser" for purposes of the 1934 Act. According to the Court, "there is no good reason why the attachment of a contingency to a contractual right to receive stock 'should remove that right from securities law coverage simply because it increases the risk that [the] plaintiff will not obtain the shares.'" The Court reasoned that if Congress had intended to distinguish between different types of contractual rights for the purposes of delineating the scope of the 1934 Act, it would have inserted a restrictive modifier in the statutory definition of "purchase." Because "the attachment of a contingency to a contractual right to receive stock does not remove that right from the coverage of the federal securities laws," the Ninth Circuit held that Griggs had standing to assert his claim as a "purchaser" of securities under the 1934 Act. *
Griggs v. Pace American Group, Inc., No. 97-16619, 1999 WL 129504 (9th Cir. Mar. 12, 1999).