Gustafson v. Alloyd Co.

513 U.S. 561 (1995)

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Nature of the Case

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Facts

Gustafson, McLean, and Butler (Ds) were the sole shareholders of Alloyd, Inc., a manufacturer of plastic packaging and automatic heat sealing equipment. In 1989, Ds decided to sell Alloyd and engaged KPMG Peat Marwick to find a buyer. Wind Point Partners II, L. P., agreed to buy substantially all of the issued and outstanding stock through Alloyd Holdings, Inc.(P), a new corporation formed to effect the sale of Alloyd's stock. The shareholders of Alloyd Holdings were Wind Point and a number of individual investors. Wind Point undertook an extensive analysis of the company, relying in part on a formal business review prepared by KPMG. Alloyd's practice was to take inventory at year's end, so Wind Point and KPMG considered taking an earlier inventory to use in determining the purchase price. In the end, they did not do so, relying instead on certain estimates and including provisions for adjustments after the transaction closed. P and D executed a contract of sale. P and D executed a contract of sale. P agreed to pay $18,709,000 for the sale of the stock plus a payment of $2,122,219, which reflected the estimated increase in Alloyd's net worth from the end of the previous year, the last period for which hard financial data were available. D included assurances that the company's financial statements 'present fairly . . . the Company's financial condition' and that between the date of the latest balance sheet and the date the agreement was executed 'there had been no material adverse change in . . . Alloyd's financial condition.' The contract also provided that if the year-end audit and financial statements revealed a variance between estimated and actual increased value, the disappointed party would receive an adjustment. Alloyd's actual earnings for 1989 were lower, and P had a right to recover an adjustment amount of $815,000 from D. P brought suit seeking outright rescission of the contract under § 12(2) of the Securities Act of 1933. P alleged that the contract of sale was a 'prospectus,' so that any misstatements contained in the agreement gave rise to liability under § 12(2) of the 1933 Act. D remitted the $815,000 plus interest. The Court granted D's motion for summary judgment, holding 'that section 12(2) claims can only arise out of the initial stock offerings.' The court of appeals reversed in that the inclusion of the term 'communication' in the Act's definition of prospectus meant that the term prospectus was defined 'very broadly' to include all written communications that offered the sale of a security. It held that Section 12(2)'s right of action for rescission 'applies to any communication which offers any security for sale . . . including the stock purchase agreement in the present case.' The Supreme Court granted certiorari.