Opinion
Civil Action No. 01-3740, Section "A" (1)
December 5, 2002
FINDINGS OF FACT AND CONCLUSIONS OF LAW
This matter came on for trial before the Court, sitting without a jury, on October 28, 2002. Following the close of all evidence, the Court took the matter under advisement, instructed counsel to submit final deposition designations, and ordered that post-trial memoranda be filed no later than Friday, November 1, 2002.
Having now considered the pleadings, evidence offered at trial, arguments of counsel, and applicable law, the Court renders its Finding of Fact and Conclusions of Law pursuant to Federal Rule of Civil Procedure 52(a). To the extent certain findings of fact are more appropriately classified as conclusions of law, they should be so construed. To the extent certain conclusions of law are more appropriately classified as findings of fact, they should be so construed.
FINDINGS OF FACT
Anserphone of New Orleans ("ANO"), Rusty Read, and Baldwin Read entered into an Asset Purchase Agreement, dated November 2, 1998 (the "APA") with Protocol (then known as Protocol Holdings, Inc.) and Anserphone, Inc. ("Anserphone"). Pursuant to the APA, Anserphone acquired substantially all of the assets of ANO in consideration of, among other things, $6,443,724.00 in cash and the issuance of one hundred thousand (100,000) shares of Protocol common stock. of the 100,000 shares of Protocol stock, ANO assigned 50,000 shares to Rusty Read and 50,000 shares to Baldwin Read.
Section 9.1 of the APA provided for a Put Option, pursuant to which ANO could require Anserphone to repurchase all or part of the 100,000 shares of stock under the terms and conditions set forth in Section 9.1. Section 9.1(a) defined the time period during which the Put Option could be exercised by providing in pertinent part as follows:
[ANO] shall have the option, exercisable at any time on or after January 1, 2000 and prior to December 31, 2002, to require [Anserphone] to repurchase all, or any part of the 100,000 shares of [Protocol] Common Stock issued to the [Plaintiffs] pursuant to Section 1.5(a) hereof . . . Notwithstanding the foregoing, in the event that [Anserphone] shall provide written notice to Seller that [Protocol] intends to conduct a public offering of its capital stock, [ANO] shall have thirty (30) days from receip: of such notice to exercise the option. . . or such option shall expire.
According to the APA, the re-purchase price for the 100,000 shares of stock was based upon the value of the assets of ANO and not the value of protocol's shares themselves.
Shortly after the execution of the APA, Rusty Read began requesting financial information from the Defendants through various officers of the corporation. The primary thrust of those early requests was not plaintiffs' need for information in connection with exercising the Option but rather the smooth running of the business. Rusty Read had always tried to impress upon Protocol the need to share information between call centers so as to run the business more efficiently. These early requests for information, most of which were oral, were not sufficiently related to the exercise of the Put Option so as to affect the expiration date of the Option, the key point of dispute in this litigation.
Baldwin and Rusty Read both had employment contracts with Defendants to manage ANO and its local operations.
An email dated October 6, 1999 (Joint Exhibit 24), from Rusty Read to Jerry Lewis is one such written request. Read testified that Defendants did respond to this email.
In late 1999, Michael L. Eckstein, counsel on behalf of the Plaintiffs, began requesting financial information for his clients, the Plaintiffs. These requests for financial information were motivated, at least in part, by plaintiffs' desire to make the most financially advantageous decision possible regarding the exercise of their Put Option. Pursuant to the APA, the Option was to become exercisable beginning January 1, 2000. Eckstein's requests were directed to John D. Vaughn, counsel for protocol.
In letters dated September 23, 1999, (Joint Exhibit 3) and October 12, 1999, (Joint Exhibit 5), Eckstein asked Vaughn to provide specific financial statements. Those financial statements were provided to plaintiffs no later than October 14, 1999. In his letter dated November 10, 1999, Eckstein generally asked for financial information, but the only information he specified was "the financial information given to the other investors recently admitted as shareholders." (Joint Exhibit 6). Eckstein's letters of November 29, 1999, (Joint Exhibit 7) and December 20, 1999, (Joint Exhibit 8) made references to prior requests for information and did not constitute new requests.
In the December 20, 1999, letter Plaintiffs declared that they would be exercising their Put Option on January 3, 2000, but they did not follow through with that declaration. (Joint Exhibit 8). Eckstein stated that Plaintiffs didn't follow through because they were still waiting for financial information that they thought would be forthcoming and because Jerry Lewis had indicated that the stock would be far more valuable after a public offering.
Eckstein testified that Vaughn had always promised all of the requested information, that Vaughn had failed to indicate that a certain private placement memorandum ("PPM") (supposedly created in conjunction with the recapitalization of 1999) did not exist, and that Vaughn failed to tell Eckstein that plaintiffs were not entitled to the information they were requesting. Eckstein further testified that Vaughn agreed with Eckstein that plaintiffs were entitled to the information they were requesting. In emails, Vaughn had indicated that he was working on getting information to Eckstein for Plaintiffs. (Joint Exhibit 9). Eckstein testified that he believed that Vaughn's conduct, in failing to provide the promised information, was so egregious as to constitute the breach of a promise. Vaughn, on the other hand, denied most of these allegations at trial.
Protocol did provide Plaintiffs with certain documents relating to the recapitalization, including an 80-page "Confidential Information Memorandum" prepared by Benedetto, Gartland Company, Inc. (Contested Exhibit 17) and the Recapitalization Agreement and related disclosure schedules (Joint Exhibit 29).
The Court resolves the conflicting testimony in favor of Vaughn's rendition of events. Vaughn did not tell Eckstein that Plaintiffs were not entitled to the information they were seeking, but Eckstein erroneously attempts to turn Vaughn's non- argumentative approach into an affirmative promise for information. Judging Vaughn's credibility from the witness stand, the Court considers it out of character for Vaughn to have made the commitments on behalf of his clients that Eckstein claims occurred. Further, the Court finds it difficult to believe that Eckstein would refer legal business to Vaughn shortly after the time that Vaughan is alleged to have breached the promise made to Eckstein to forward information on behalf of Eckstein's clients. As discussed below, other aspects of Eckstein's testimony were likewise incredible.
The Court also accepts Vaughn's assertion that he at no time misled Eckstein as to the existence vel non of a PPM. Eckstein is the only witness who thought that such a document existed and the Court can discern no reason why Vaughn or any representative of Defendants would have tried to mislead Eckstein as to its existence in the late 1999 time frame. Thus, Eckstein either misunderstood or assumed in error that the document existed. Although it is obvious that Eckstein believed that there was such a document (Joint Exhibit 7), there is no objective evidence to support the theory that anyone tried to mislead Plaintiffs into believing that the phantom document existed.
Vaughn never guaranteed information to the Plaintiffs, but rather forwarded the requests to Defendants. Regardless, Defendants did respond to some of the late 1999 information requests. Moreover, by January 3, 2000, when Plaintiffs failed to follow through on their "threat" to exercise the Option, they were already convinced that it would be in their best financial interest to wait for a public offering of Protocol's stock rather than force Anserphone to redeem the stock before the initial public offering.
Vaughn's representation of Protocol ceased in January or February 2000, well before the Notice was sent.
Besides the fact that Defendants did respond to some of the 1999 information requests, by the time April 2000 rolled around, the information requested in late 1999 would have been stale and of little use anyway. Therefore, to the extent that Defendants did not respond in full to Plaintiffs' information requests in late 1999, and assuming arguendo that Defendants had a legal duty to provide the requested information, the Court is persuaded that any inadequacies in the information of late 1999, had little or nothing to do with the decision the Plaintiffs faced in April 2000 once the Notice was sent.
On or about April 4, 2000, Defendants sent Plaintiffs a notice (the "Notice"), pursuant to Section 9.1(a) of the APA, stating, among other things, that Protocol intended to conduct a public offering of its capital stock (the "IPO") and that Plaintiffs had "thirty (30) days from receipt of this notice to exercise the option. . . or such option shall expire." Plaintiffs acknowledged receipt of the Notice on April 10, 2000, by an email sent from Rusty Read to Raymond Wilson, the Chief Financial Officer ("CFO") of protocol. (Joint Exhibit 10). In that email Rusty Read acknowledged that Plaintiffs had 30 days to exercise the Put Option "as stipulated in section 9.1(a) of the Purchase Agreement between protocol and Anserphone, " and he asked Wilson to provide him with certain financial statements and also to advise him as to the "projected sales price for the stock offering' and the "projected date of the offering." (Joint Exhibit 10).
In response to Plaintiffs' requests, by email dated April 18, 2000, Raymond Wilson advised plaintiffs that they could go to an SEC website, www.freeedgar.com, to get the Form S-1 Registration Statement that protocol had filed with the Securities and Exchange Commission Of April 17, 2000, in connection with the intended IPO. (Joint Exhibit No. 11). Protocol's S-1 Registration Statement contained, among other things, the audited, consolidated financial statements for Protocol and its subsidiaries for 1998 and 1999, and audited financial statements for protocol's subsidiaries for the periods in 1998 and 1999 prior to their acquisition by Protocol.
On May 8, 2000, Ray Wilson and protocol's general counsel, Deborah Zonies, had a telephone conference call with Rusty Read and Baldwin Read. (See Joint Exhibit 31). This telephone conference was held to give the Reads an opportunity to ask any questions they had in connection with their decision to exercise the Put Option. During that conversation Mr. Wilson answered all questions posed by the Reads, including questions concerning the possible pricing and timing of the IPO. The Reads made no demands for additional documents.
Defendants contend that during this conference call, all participants, including the Reads, agreed that the Option would expire on May 10, 2000, in accordance with the express terms of the APA. Zoines, who either participated in the call or was passively on the line, contends that everyone agreed that the Option would expire on May 10th. Rusty Read, however, testified that he never agreed with Ray Wilson's assertion that the Option would expire on May 10th because he knew that he lacked adequate information. Moreover, Read testified that it was always his belief that the Option would not and had not expired on May 10th.
Plaintiffs have tried to argue that Zoines was not on the phone during the call. The Court has no reason to doubt Zoines' assertion that she was on the line. She is the one who set up the call. (Joint Exhibit 31). She was corporate counsel for Protocol so it makes sense that she would participate in the call. Although the Court is not fully convinced that Ms. Zoines made her presence known to the Plaintiffs, the Court does believe that she was also conferenced in.
The only possible relevance that the Court can see as to Rusty Read's state of mind on May 10th is Plaintiffs' need to counter Defendants' contention that the assertions regarding the lack of adequate information were concocted post-May 10th. The APA expressly governed when the Option was to expire. Thus, the Reads' belief one way or the other is irrelevant for the purpose of determining when the Option did in fact expire.
Nevertheless, the Court fails to find Rusty Read's assertion that as of May 10th he believed that the Option was not expiring to be credible. Read, while never meek in the parties' prior business dealings, never conveyed any belief that the Option was to be held in abeyance pending the receipt of any additional information, specifically certain business projections and pro formas. He admitted that he never advised anyone of that belief and that after May 10, 2000, "things just went back to normal." Nor did his lawyer Eckstein, notwithstanding all of the other correspondence he had sent to Defendants on behalf of Plaintiffs, memorialize any such belief until much later.
Rusty Read's credibility was also damaged by the fact that he had executed a prior affidavit in support of his motion for partial summary judgment in which he attested that he had received no information whatsoever from Defendants. Rec. Doc. 25. At trial, he admitted that the affidavit was incorrect and blamed it on his trial counsel, notwithstanding that he personally had signed the affidavit and knew the statement to be untrue.
Eckstein testified that on May 9, 2000, he told Zoines and Vaughn that the Option would not be expiring and the asserted reason was that Plaintiffs had not been given sufficient information. The Court finds Eckstein's assertion suspect given that Eckstein did not put his position in writing notwithstanding that he was purporting to espouse a position contrary to the express provisions of the APA, a position that if he were unable to later prove, would mean that his clients would have no rights with respect to the Option. The record demonstrates that Eckstein never hesitated when it came to memorializing his clients' positions in writing.
At no time on or before May 10, 2000, did Plaintiffs request an extension of the Put Option deadline to give them additional time to review the S-1 or any other information. At no time on or before May 10, 2000, did Plaintiffs take the position in their communications with Defendants that the Put Option would not expire on May 10, 2000 or until Defendants provided additional information.
Moreover, if this assertion were true, it seems that Eckstein would have at least mentioned it in his May 16, 2000, letter to Zoines (Joint Exhibit 26) which was authored on the heels of the entire matter. He never mentioned one word about the Option surviving May 10th due to a lack of information. In that letter he makes mention of not receiving financials. However, he refers only to the Earn Out calculation. Surely, if he and his clients believed that the Option remained viable in contravention of the express terms of the APA, they would have attempted to clarify that point in writing or take some other objective action considering how much money was potentially involved. The only credible explanation is that Plaintiffs were not withholding exercise of the Option on May 10, 2000, because they lacked information. Rather, Plaintiffs had already convinced themselves that they stood to make far more money by holding on to their stock.
Note that at this time the S-1 had not been pulled so Plaintiffs were not even in a position to assert, as a fall back argument, that the Option should be revived due to the aborted IPO. Thus, but for "the lack of information assertion, " which the Court rejects, Plaintiffs had every reason to assume that the Option did in fact expire on May 10, 2000, in accordance with the terms of the APA.
It strains credulity for the Court to believe that a sophisticated businessman like Rusty Read and his able counsel could have truly believed that the Option would be held in abeyance, contrary to the express terms of the APA, because they had unilaterally decided that Defendants had not provided sufficient information, plaintiffs' actions were simply inconsistent with such a belief. Plaintiffs waited until the IPO was aborted months later to notify Defendants of their contention that the Option remained viable after May 10th (Joint Exhibit 27). It was only after the S-1 was pulled, and the hopes of a stock market killing died, that Plaintiffs were heard to complain about the passing of May 10th, Even then, the basis of the complaint was not a lack of information from Defendants. (Joint Exhibit 27).
Furthermore, the Court finds that the Plaintiffs were fully aware prior to May 10th that no more information would be forthcoming from Defendants. According to plaintiffs' own testimony, they had been requesting information from Defendants for months prior to the Notice and were not satisfied with what they had received in return. Rusty Read's assertion that he believed that information would be forthcoming in the April-May 2000 timeframe is completely incredible in light of the prior dealings between the parties. Moreover, Rusty Read's assertion that Defendants' failure to affirmatively deny that Plaintiffs were entitled to the information somehow justified a belief that more information would be forthcoming is utterly unreasonable and requires the Court to impute a naivete to the Reads that the Court finds inconsistent with the traits of the parties involved.
Likewise, the Court rejects Rusty Read's testimony, which was in contravention of the facts as presented by his own trial counsel, that he did not believe that Defendants were only going to provide the S-1 statement in response to his demands for information. To the extent he truly believed this, the Court finds that such a belief was unreasonable in light of the course of dealings between the parties, and therefore, cannot be attributed to any conduct on the part of Defendants. The Court concludes that Plaintiffs were fully aware, or should have been, as of May 10, 2000, that the Defendants had taken the position that the S-1 statement was all plaintiffs were entitled to. There was no indication during the May 8th conference call that more information would be coming as the deadline approached.
See Plaintiffs' Proposed Findings of Fact and Conclusions of Law, ¶ 26 (Rec. Doc. 70) and Pre-Trial Order at 7.
At trial, Rusty Read testified that the S-1 did not appear to be a complete document as there were many blanks in the 800- plus page document. Defendants have never taken the position that the S-1 was in final form. Read admitted under cross examination that he never bothered to print the S-1, and merely perused it online because he did not believe that he should have to print the document when "others" were getting hard copies. No evidence was presented that the S-1 was inaccurate or misleading or that Plaintiffs relied upon the S-1 in any way for any reason. Rusty Read's own testimony belies any inference or assertion that he was misled into believing that the S-1 was complete. Plaintiffs cannot claim to have been lulled into a false sense of security where the S-1 is concerned.
Because the Defendants never took the position that the S-1 was complete, the Court sees little use to the SEC Comment letter that Plaintiffs fought so hard to admit at trial. It was always a foregone conclusion that the SEC took issue with the S-1 as it was filed. However, the fact that the S-1 might have had technical deficiencies for SEC filing purposes had little to do with the type of information the Plaintiffs wanted from Defendants. Also, there was no evidence to establish which of the defiencies would even be pertient to the decision to exercise the Option.
While Plaintiffs take issue with the adequacy of the S-1, the key information they were after, namely the stock offering price and projected date of the offering, was not in the S-1. The Court found Defendants' explanation as to why the information was omitted in the S-1 to be credible. Specifically, the offering date was dependent on circumstances beyond Defendants' control, and the offering price was dependant on stock market conditions at the time of offering, whenever that might be. In sum, as with all the other requests for information, the Court is not persuaded that any deficiencies in the S-1 prevented Plaintiffs from exercising their Option.
On or about October 20, 2000, Protocol requested the withdrawal of its Form S-1 Registration Statement. protocol did not complete its intended IPO. No contention has been made in this case that when Protocol served the April 4, 2000, Notice, it did so merely to trigger the accelerated Put Option expiration. Moreover, no evidence has been presented to support such an inference.
Eckstein's attempt to explain why, if Plaintiffs truly believed the Option survived May 10th, they did not formally attempt to exercise them on November 29, 2000, further undermined his credibility. On that date Eckstein wrote to Defendants on Plaintiffs' behalf and asserted for the first time that the Option remained viable, and communicated plaintiffs' intention to exercise them. (Joint Exhibit 27). When questioned by the Court, Eckstein replied that he thought the parties could "just work together" on it without formality notwithstanding the fact that, according to Eckstein, Vaughn had previously breached a promise to him, and Defendants had allegedly been refusing to cooperate in Plaintiffs' requests for information since the execution of the APA.
Eckstein's letter of November 29, 2000 (Joint Exhibit 27), reinforces the Court's conclusion that the failure to timely exercise the Option had nothing to do with a lack of information. The third paragraph of Eckstein's letter makes clear that while the Reads were on record as complaining about the lack of information, it was "representations" and conversations" with Protocol personnel that made them decide to hold on to their stock. (Joint Exhibit 27). Eckstein testified that among those "representations" was Wilson's statement that the Protocol stock might go public at $60-$100 a share.
In the November 29, 2000, letter, Eckstein asserted that the Put Option was still open as a result of Protocol's withdrawal of the Form S-1 Registration Statement. (Joint Exhibit 27). The Court previously rejected that contention as being unsupported by the terms of the APA when denying Plaintiffs' motion for partial summary judgment (Rec. Doc. 29) earlier this year.
Eckstein's letter of January 18, 2001, is the first objective evidence of Plaintiffs' contention that conduct on the part of Defendants, i.e., their failure to respond to information requests, should excuse plaintiffs' failure to timely exercise the Option. (Joint Exhibit 17). The Court is convinced, however, that Plaintiff s' failure to exercise the Option was not due to the lack of information. Rather, Plaintiffs were convinced that they stood to make significant gains on the Protocol stock when the company went public. Therefore, any conduct on the part of Defendants in failing to provide information cannot be used as a basis to hold the Option in abeyance.
In short, Plaintiffs failed to exercise the Put Option on or before May 10, 2000, which was the time frame dictated by the express terms of the APA. Their failure to do so was based upon their gamble that the Protocol stock would be worth more when the company went public and was not based upon their lack of information. Accordingly, the Put Option expired on May 10, 2000, pursuant to the terms of Section 9.1(a), and none of the asserted conduct by Defendants operated in such a way as to suspend that deadline. Thus, the October 11, 2001 (Joint Exhibits 19 20), attempt by Plaintiffs to give notice of their intent to exercise the Put Option was without legal effect and Defendants were not required to honor it. Moreover, Plaintiffs have not established that they would have actually exercised the Put Option on or before May 10, 2000, if they had known some material fact that Defendants had a duty to disclose but failed to do so.
In conclusion, Plaintiffs have not established any legal basis for being excused from the May 10, 2000, deadline for exercise of the Put Option. Plaintiffs have not established any legal basis for extending the May 10, 2000 deadline for exercise of the Put Option to October 11, 2001.
CONCLUSIONS OF LAW
The Court has subject-matter jurisdiction of this matter pursuant to 28 U.S.C. § 1331 and 1332.
Because the Court concludes that Plaintiffs have failed to establish a causal connection between Defendants' conduct and Plaintiffs' failure to timely exercise the Put Option, any conclusions of law as to Defendants' duty to provide information to Plaintiffs is likely unnecessary at this point. Nevertheless, the Court offers the following legal conclusions.
A. Duty to Disclose
Contractual Provision of the APA
The APA did not contain any provisions requiring Defendants to disclose information to Plaintiffs in connection with their decision whether or not to exercise the Put Option. When the Court asked Eckstein to point out the specific provision of the APA that Defendants had breached by failing to provide information, Eckstein could only point to section 9.1 of the APA which is silent on the issue. In contrast, with respect to the Earn Out provisions, the APA expressly required that certain information be provided to Plaintiffs. (Joint Exhibit 1).In addition to the APA's lack of an express provision, there is no evidence of any confirmed agreement to provide information which Defendants can be found to have breached. Defendants' failure to expressly inform Plaintiffs that they were not getting certain information does not amount to a promise to affirmatively provide such information. Defendants' actions made clear that by the time May 10, 2000, arrived, no more information would be forthcoming and Plaintiffs were unreasonable to rely on any belief to the contrary.
Covenant of Good Faith and Fair Dealing
Delaware law recognizes that in all contracts there exists an implied covenant of good faith and fair dealing. See, e.g., Katz v. Oak Indus., 508 A.2d 873 (Del.Ch. 1986). This implied covenant permits courts to examine the substance rather than the form of an agreement and to hold that substance controls over form. Id. at 880. Under the good faith and fair dealing covenant courts have the power and duty to enforce the parties' reasonable expectations. Id. The implied duty of good faith and fair dealing, however, "cannot override the literal terms of the agreement." Wilmington N. R.R. Co. v. Delaware Valley Ry. Co., 1999 WL 463705, at *6 (Del.Super. 1999) (citing Gilbert v. El Paso Co., 575 A.2d 1131, 1143 (Del. 1990)).
The APA provided that its provisions were to be construed under Delaware law. (Joint Exhibit 1, at 32).
Plaintiffs' contention that the duty of good faith and fair dealing can override the express contractual deadline for exercise of the Put Option must be rejected. "It is elementary that one cannot imply a term or promise in a contract which is inconsistent with the express terms of the contract itself." United States v. Croft-Mullins Elec. Co., 333 F.2d 772, 776 (5th Cir. 1964).
Moreover, Plaintiffs have not established any breach of the implied duty of good faith and fair dealing. This duty generally requires that a contracting party perform its express contractual obligations fairly and in good faith. 23 R. Lord, Williston on Contracts § 63:22, at 516 (4th Ed. 2002). As noted above, however, the APA did not contain any provisions requiring Defendants to disclose information to Plaintiffs in connection with the decision whether or not to exercise the Put Option.
Another problem with Plaintiffs' good faith and fair dealing argument is that to accept it the Court would have to make Defendants' duties and obligations under the APA a "moving target" such that the Option only expired when Plaintiffs were satisfied with the information they received. It is undisputed that Plaintiffs were given some information in response to their requests. Thus, it is unclear where Defendants would cross the line from compliance with the covenant of good faith into breach of the covenant. If Defendants had provided the pro formas and business plans Plaintiffs were seeking, Plaintiffs might very well have asserted that the covenant of good faith and fair dealing required Defendants to provide some other type of information, a particularly tempting argument where a stock market gamble gone bad is involved. Plaintiffs' approach would set the boundaries of the APA to their liking and permit them to hold the Option in abeyance until they obtained whatever information they considered relevant to their decision. Such nebulous requirements would be inconsistent with the overall substance of the APA, which was obviously intended to provide a comprehensive and objective scheme for how the Option was to be exercised. The APA was executed by sophisticated parties, all of whom were represented by counsel. The covenant of good faith and fair dealing simply cannot operate to relieve Plaintiffs of the agreement they negotiated, and the risk they took by holding out for the price of Protocol stock to rise in the open market.
The result is even less favorable to Plaintiffs under Louisiana law where a breach of the duty of good faith requires proof that defendant's actions were intentionally malicious. American Bank Trust v. F.D.I.C., 49 F.3d 1064 (5th Cir. 1995) Plaintiffs have not contended, or presented any proof, that Defendants' actions were intentionally malicious.
Disclosure Under Securities Laws
Plaintiffs have also failed to establish that Defendants violated any duty to disclose under the securities laws. "`The sources of a person's duty to disclose information under the federal securities laws are found either in the express mandates of the statutes and rules promulgated under them or in the general antifraud provisions of the statutes and rules, ' including Rule 10b-5." L.L. Capital Partners, L.P. v. Rockefeller Center Properties Inc., 921 F. Supp. 1174, 1179 (S.D.N.Y. 1996) (citation omitted). It is undisputed that Protocol was a privately-held company that was exempt from registration under the Securities Act of 1933 pursuant to Regulation D.
Moreover, in the APA itself, each of the Reads acknowledges that he is "an `accredited investor' within the meaning of Regulation D of the Securities Act of 1933." (Joint Exhibit 1, at § 2.2(e)). Under Regulation D, a corporation has no duty to deliver any SEC-required disclosure document to an "accredited investor." 17 C.F.R. § 230.502(b)(1). Moreover, each of the Reads acknowledged in the APA that he:
To be an "accredited investor," an individual must have "an individual net worth, or joint net worth with [his] spouse," of over $1 million, or have an individual net income of over $200,000, or joint net income of over $300,000, for the prior two years and a "reasonable expectation of reaching the same income level in the current year." 17 C.F.R. § 230.501(a)(5)-(6).
(i) has such knowledge and experience in financial and business affairs that he. is capable of evaluating the merits and risks involved in purchasing the [Protocol] Common Stock, (ii) is able to bear the economic risks involved in purchasing the [Protocol] Common Stock and (iii) had had the opportunity to ask questions of, and receive answers from, [Protocol] and persons acting on [Protocol's] behalf concerning the terms and conditions of the [Protocol] Common Stock and to obtain any additional information in connection therewith.
Joint Exhibit 1, at § 2.2(d).
The disclosure requirements imposed by the 1933 Securities Act apply only to corporations required to register stock for sale to the public under that law and its regulations. For other corporations, like Protocol, whose stock is not publicly traded and who have an applicable exception from the registration provision, only the antifraud provisions of the Securities Act apply. See I L. Loss J. Seligman, Securities Regulation, at 225 (3d ed. 1998). Accordingly, Protocol had no obligation under securities law to provide Plaintiffs with a registration statement, such as the Form S-1 Registration Statement it filed on April 17, 2000.
Surely some concomitant duty to at least refrain from providing Plaintiffs with inaccurate or misleading information came with Protocol's decision to provide the S-1 to Plaintiffs. But Plaintiffs have never asserted that they were given bad or inaccurate information, just not enough.
Defendants also had no duty to disclose under the antifraud provisions of the securities laws. Moreover, pursuant to the antifraud provisions, "a corporation is not required to disclose a fact merely because a reasonable investor would like to know that fact." In re Time Warner Inc. Securities Litig., 9 F.3d 259, 267 (2d Cir. 1993). Before an omission to disclose information can be actionable under the antifraud provisions, there must be "a legally cognizable duty to disclose" the information. In re Lyondell petrochemical Co. Securities Litig., 984 F.2d 1050, 1052 (9th Cir. 1993).
Defendants had no duty under the antifraud provisions to disclose internal plans and business projections, and had no duty to disclose information simply because it was provided to other investors who were providing Protocol with an $80 millionplus capital infusion. See, e.g., id.
B. Rule 10b-5 Claim
To establish a violation of Rule 10b-5, plaintiff must show (1) a misstatement or omission, (2) of a material fact, (3) made with scienter, (4) on which plaintiff justifiably relied, (5) that proximately caused the plaintiff's injury. Nathenson v. Zonagen, Inc., 267 F.3d 400, 407 (5th Cir. 2001). Where the Rule 10b-5 claim is based upon an alleged omission, plaintiff must also establish that there was a duty to disclose.
The analogous code provision under Delaware law, 6 Del. C. § 7303, is nearly identical to Rule 10b-5 and is governed by similar principles. See Hubbard v. Hibbard Brown Co., 633 A.2d 345, 348-49 (Del. 1993).
Assuming arguendo that Rule 10b-5 applies to the Reads as holders of a Put Option contract, the Court finds that Plaintiffs have failed to establish a violation of Rule 10b-5 because the essential elements of reliance and causation are missing. To the extent the S-1 was deficient, Plaintiffs admit that they were fully aware of that fact and therefore did not rely on the document. The Reads concede never even printing the document. The Reads did not rely on the S-1 for anything.
The Court does not mean to imply that the other elements have been established — only that reliance and causation are clearly not present.
Likewise, causation is lacking because Plaintiffs' failure to exercise their Put Option had nothing to do with the S-1 Statement but rather was due to a calculated risk intended to garner significant gains in the stock market when Protocol went public.
C. Equitable Estoppel
An optionor's conduct will excuse the deadline for exercising an option only when the optionee establishes all of the elements of equitable estoppel. See, e.g., Cattle Feeders, Inc. v. Jordan, 549 S.W.2d 29, 33 (Tex.Civ.App. 1977). Those elements are:
1) a false representation or concealment of material facts; 2) made with actual or constructive knowledge of the facts; 3) to a party without knowledge or means of knowledge of the real facts; 4) made with the intention that it should be acted on; and 5) the party to whom it was made must have relied on or acted on it to his prejudice.549 S.W.2d at 33. Cf. Waggoner v. Laster, 581 A.2d 1127, 1136 (Del. 1990) (recognizing that a party must show that it "lacked knowledge or the means of obtaining knowledge of the truth of the facts in question; relied on the conduct of the party against whom estoppel is claimed; and suffered a prejudicial change of position as a result of his reliance")
Plaintiffs have not established the elements of equitable estoppel. In particular, Plaintiffs have not established: that Defendants made any false representation of material fact or concealed any material fact; that Defendants made any statement or omitted to make any statement with the intention that Plaintiffs should act upon such statement or omission; or that the Plaintiffs relied on any statement or omission of Defendants to their prejudice.
Plaintiffs did not detrimentally rely upon the affirmative actions, representations, or silence of Defendants with respect to requested financial information. Plaintiffs have not convinced the Court that they were led to believe that a PPM existed. Nor is the Court persuaded that the PPM had any useful or relevant information in the time frame relevant here, i.e., April-May 2000. Accordingly, Defendants are not estopped from asserting the contractual Option deadline and Plaintiffs are not entitled to equitable relief from the May 10, 2000, deadline.
Plaintiffs have not established any breach of contract by Defendants (Count I).
Plaintiffs have not established a right to specific performance (Count II).
Plaintiffs have not established a claim for misrepresentation (Count III).
Plaintiffs have not established a claim for negligent misrepresentation (Count III).
Plaintiffs have not established a claim for fraud (Count III).
At the final pre-trial conference, counsel for Plaintiffs conceded that there was no evidence to support a fraud claim and advised that Plaintiffs' fraud claims would not be pursued at trial. Plaintiffs' counsel later clarified that he was referring only to state law fraud claims.
Plaintiffs have not established a claim for breach of fiduciary duty (Count III).
Plaintiffs have not established a claim for violation of the Securities Act of 1933 (Count IV).
Plaintiffs have not established a claim for violation of the Securities Act of 1934 (Count IV).
Plaintiffs have not established a claim for violation of the Delaware Securities Act, 6 Del. C. § 7301, et seq. (Count IV).
Plaintiffs have not established a claim for violation of the Louisiana Securities law, La. R.S. 51:701, et seq. (Count IV).