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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

----oo0oo----

ALBERT D. BOLT

NO. CIV. S-04-0893 WBS DAD

Plaintiff, 

v. MEMORANDUM AND ORDER RE:

CROSS MOTIONS FOR SUMMARY

JUDGMENT

MERRIMACK PHARMACEUTICALS,

INC.

Defendant.

----oo0oo----

Plaintiff Albert Bolt filed suit seeking a declaratory

judgment that the net worth of defendant Merrimack

Pharmaceuticals, Inc. was over $5,000,000 as of December 31,

2001. This court has jurisdiction based on the diversity of

citizenship of the parties. Both parties move for summary

judgment.

I. Factual and Procedural Background

Albert Bolt has owned 52,488 shares of defendant’s

Series A Non-Convertible Preferred Stock (“Series A shares”)

since before 2001. (Bolt Decl. ¶ 2). He wishes to redeem those

shares for cash. (Bolt Decl. ¶ 3). According to the

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“Description of Capital Stock,” Bolt’s 52,488 shares are

redeemable for $10 each “if the net worth of the Corporation,

determined in accordance with generally accepted accounting

principles and as shown on the balance sheet of the Corporation

as of the end of the fiscal quarter then most recently ended,

equals or exceeds five million dollars.” (Warne Decl. Ex. G ¶¶

B5.2, B5.3). Plaintiff requested redemption in writing, as he

was required to do, on March 28, 2002. (Bolt Decl. ¶ 3; Warne

Decl. Ex. G (Description of Capital Stock) ¶ 5.2). Defendant

denied plaintiff’s redemption request in a letter dated June 13,

2002. (Warne Decl. Ex. G).

During 2001, defendant issued 3,315,201 shares of

Series B convertible preferred stock (“Series B shares”) worth

$11,915,267. (Braunstein Decl. Ex. 1 (audit & financial

statements) at 2, 4). Under the articles of organization, upon a

“deemed liquidation” event, the Series B shareholders are

entitled to redeem those shares for cash or for common stock. 

(Scibetta Decl. Ex. 1 (articles of organization) § C4.2). A

“deemed liquidation” event is defined as the occurrence of 

(i) a consolidation of the Corporation with, or merger of

the Corporation with or into, another business organization,

other than a merger with an affiliate of the Corporation or

a merger in which the Corporation is the surviving

Corporation and the stockholders of the Corporation prior to

such merger continue to hold a majority of the voting power,

or (ii) the sale of all or substantially all of the

Corporation’s business assets.

(Id.). These Series B shares are at the heart of this litigation

because if the $11,915,267 earned from their sale is considered

equity, the net worth of defendant was well over $5,000,000 as of

December 31, 2001. If, on the other hand, the $11,915,267 is

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considered to be a liability, the net worth of defendant was

substantially less than $5,000,000. 

 On May 2, 2002, PricewaterhouseCoopers LLP (“PwC”)

completed an audit of defendant’s December 31, 2001 financial

statements “in accordance with auditing standards generally

accepted in the United States.” (Braunstein Decl. Ex. 1 (audit &

financial statements)). PwC found that the balance sheet

attached to PwC’s letter confirming completion of the audit

“presents fairly, in all material respects, the financial

position of Merrimack Pharmaceuticals, Inc. at December 31,

2001.” (Id.).

The balance sheet is shown on the next page.

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Two arithmetical observations about the above numbers

are in order. “Total liabilities” subtracted from “Total assets”

equals $10,060,840. “Total stockholders’ deficit” added to the

“Total redeemable convertible preferred stock” equals the same

figure: $10,060,840. 

The term “net worth” does not appear on the balance

sheet. Plaintiff contends that “net worth” is computed by

subtracting liabilities from assets. Defendant contends that the

$11,915,267 generated from the sale of Series B shares should be

treated as a liability, and that therefore the net worth of

defendant as reflected in the balance sheet was ($2,402,807).1

Both parties move for summary judgment.

II. Discussion

A. Summary Judgment Standard

The court must grant summary judgment to a moving party

“if the pleadings, depositions, answers to interrogatories, and

admissions on file, together with the affidavits, if any, show

that there is no genuine issue as to any material fact and that

the moving party is entitled to judgment as a matter of law.” 

Fed. R. Civ. P. 56(c). The party adverse to a motion for summary

judgment may not simply deny generally the pleadings of the

movant; the adverse party must designate “specific facts showing

that there is a genuine issue for trial.” Fed. R. Civ. P. 56(e);

see Celotex Corp. v. Catrett, 477 U.S. 317 (1986). Simply put,

“a summary judgment motion cannot be defeated by relying solely

on conclusory allegations unsupported by factual data.” Taylor

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v. List, 880 F.2d 1040, 1045 (9th Cir. 1989). The non-moving

party must show more than a mere “metaphysical doubt” as to the

material facts. Matsushita Elec. Indus. Co. v. Zenith Radio, 475

U.S. 574, 587 (1986).

B. As a Matter of Law, Defendant’s Net Worth on December 31,

2001 Surpassed $5,000,000

The question before this court is whether, as of

December 31, 2001, “the net worth of the Corporation, determined

in accordance with generally accepted accounting principles and

as shown on the balance sheet of the Corporation as of the end of

the fiscal quarter then most recently ended, equals or exceeds

five million dollars.” There are no disputed facts; the court is

only called upon to review the balance sheet to determine the net

worth of defendant according to the balance sheet and generally

accepted accounting principles.

As defendant corporation is formed under the laws of

Massachusetts, the court applies Massachusetts law to this

dispute. See Order of United Commercial Travelers of Am. v.

Wolfe, 331 U.S. 586, 614 (1947)(full faith and credit clause

requires controlling effect to be given to the law of the state

of incorporation in interpreting and determining the

enforcibility of rights under articles of incorporation and bylaws). 

If a contract is unambiguous, its interpretation is a

matter of law that is appropriate for the court to decide on

summary judgment. Seaco Ins. Co. v. Barbosa, 761 N.E.2d 946, 951

(Mass. 2002); see also Brown v. Little, Brown & Co., 168 N.E.

521, 527 (Mass. 1929)(interpreting language contained in

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2 Thus, defendant’s allegation that plaintiff admitted

that the balance sheet shows a negative net worth is entitled to

no weight. The court interprets the contract, analyzes the

balance sheet, and applies generally accepted accounting

principles. How plaintiff reads the balance sheet has no legal

effect.

7

amendments to corporate by-laws). This case is similar to one in

which contract interpretation is required in that the court is

called upon to interpret the written balance sheet.2 See Hercules

v. United States, 626 F.2d 832, 835 (Ct. Cl. 1980)(“the

application of accounting rules to a finite problem raises an

issue or contract interpretation, which is an issue of law”). 

The court finds that the balance sheet unambiguously shows that

defendant had a net worth of greater than $5,000,000.

The court starts with the common sense notion that net

worth of a company is computed by subtracting the total

liabilities from the total assets. See Black’s Law Dictonary

1062 (7th ed. 1999)(defining “net worth” as “[a] measure of one’s

wealth, usu. calculated as the excess of total assets over total

liabilities”); see also Overnite Transp. Co. v. Comm’r of

Revenue, 764 N.E.2d 363, 365 n.1 (Mass. App. Ct. 2002)(“As used

in this discussion, ‘net worth’ means the book value of

[plaintiff’s] total assets less its liabilities”); Nat’l Ass’n of

Mfrs. v. Dep’t of Labor, 159 F.3d 597, 600 n.1 (D.C. Cir.

1998)(net worth “calculated by subtracting total liabilities from

total assets”). 

Nothing in the articles of organization or any other

corporate document defines “net worth” to mean anything different

than total liabilities subtracted from total assets. “Where the

language of a contract is not ambiguous, the words will be given

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their plain meaning, or their well established meaning.” City of

Haverhill v. George Brox, Inc., 716 N.E.2d 138, 141 (Mass. App.

Ct. 1999)(citations omitted).

The balance sheet at issue has an entry entitled “Total

assets” and an entry labeled “Total liabilities.” The court

gives the term “Total” its common meaning as well – that is,

“Total liabilities” includes all liabilities without exception,

and “Total assets” includes all assets without exception. 

Subtracting the total liabilities of $1,270,230 from the total

assets of $11,331,070, the court determines that the “net worth”

of the company as of December 31, 2001, at least according to the

plain meaning accorded that term, is greater than $5,000,000. 

The court next considers defendant’s arguments against that plain

meaning.

1. Defendant’s argument that “net worth” is synonymous

with “Total stockholders’ deficit”

 Defendant argues that “‘net worth’ has been construed

in this circuit and elsewhere to be synonymous with shareholder’s

equity,” (Def.’s Mem. in Supp. of Mot. for Summ. J. at 9), and

that the line entry for “Total stockholders’ deficit” in the

balance sheet is therefore synonymous with “net worth.” 

Plaintiff accurately cites cases in which the Ninth

Circuit and other courts have stated that net worth is equal to

stockholders’ equity. See, e.g., Howard v. Everex Sys., Inc.,

228 F.3d 1057, 1064 (9th Cir. 2000)(“[A]t the end of the fourth

quarter of FY1991, Everex had a net worth i.e., shareholder

equity of $92.1 million.”); Nelson v. O.E. Serwold, 687 F.2d 278,

280 (9th Cir. 1982)(“the actual book value of the stock,

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3 “[P]arty means (i) an individual whose net worth did

not exceed $2,000,000 at the time the civil action was filed,

(ii) a sole owner of an unincorporated business, or a

partnership, corporation, association, or organization whose net

worth did not exceed $5,000,000 at the time the civil action was

filed . . .”

28 U.S.C. § 2412(d)(2)(B)(1984). 

9

determined by dividing the stockholders’ equity (the net worth of

the corporation) by the number of issued and outstanding shares .

. .”); Orjias v. Stevenson, 31 F.3d 995, 1014 (10th Cir.

1994)(“the award is less than 0.2% of the net worth

(stockholders’ equity) . . .”). 

The court does not quibble with defendant’s cases that

note that shareholder equity is equivalent to net worth. 

However, net worth is equal to stockholders’ equity only if all

types of instruments properly classified as equity are considered

as equity. None of the cases defendant cites states that net

worth is not equivalent to liabilities subtracted from assets,

and there is Ninth Circuit precedent squarely on point stating

that net worth is equal to total liabilities subtracted from

total assets. See Am. Pac. Concrete Pipe Co., Inc. v. NLRB, 788

F.2d 586 (9th Cir. 1986). In that case, the court was called

upon to interpret an attorneys’ fees provision under the Equal

Access to Justice Act that only allowed fees to be awarded to a

business association if that association had a net worth of

$5,000,000 or less. Id.; see 28 U.S.C. § 2412(d)(2)(B)(1984).3

The court first noted that “‘net worth’ is not defined in the

legislation.” Amercian Pacific, 788 F.2d at 590. The court held

that, in defining net worth, generally accepted accounting

principles would apply. Id. at 591(“We agree with the Seventh

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Circuit. It is unreasonable to conclude . . . that Congress

could have intended that generally accepted accounting principles

would not apply.”). Applying those principles, the court held

that “net worth is calculated by subtracting total liabilities

from total assets.” Id. at 590(citation omitted).

Not only is there case law defining net worth as

liabilities subtracted from assets, there is also a statement

from the Financial Accounting Standards Board noting that

shareholders’ equity is equal to total liabilities subtracted

from total assets. Financial Accounting Standards Board,

Statement of Financial Accounting Concept No. 6: Elements of

Financial Statements ¶ 60 (1985), available at

http://www.fasb.org/pdf/con6.pdf(“equity is the same as net

assets, the difference between the enterprise’s assets and its

liabilities”).

Defendant has cited no case in which net worth is

defined as only permanent stockholders’ equity (i.e., equity that

can never be converted no matter what conditions occur). 

Defendant should not be permitted to pick and choose which series

of shares it will count towards stockholders’ equity, and which

series it will not. Defendant misreads the “Total stockholders’

deficit” line to equate to the complete representation of equity

in all types of shares. On its face, the balance sheet refutes

defendant’s reading. The balance sheet divides shareholders’

equity into two categories. The first category, labeled “Total

redeemable convertible preferred stock,” is made up of shares

(equity) that can be converted upon the occurrence of conditions

not certain to occur. Shareholders in this category hold shares

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valued at $12,463,647. The second category contained within

total shareholders’ equity is made up of shares that are not

redeemable or convertible and is valued at ($2,402,807). 

Defendant misreads this second category as the complete picture

of all shareholders’ equity. When the dollar amounts of all

types of shares are added together, the sum equals the dollar

amount arrived at by subtracting total liabilities from total

assets.

In conclusion, the balance sheet clearly reflects that

the “net worth” of defendant is above $5,000,000.

2. Defendant’s argument that Series B shares have the

same effect as a liability 

Generally accepted accounting principles require that

financial instruments be classified on a balance sheet as an

asset, liability, or equity:

Because Concepts Statement 6 does not accommodate

classification of items outside the elements of assets,

liabilities, and equity . . . the Board concluded that

presentation of those items [with characteristics of both

liability and equity] between the liabilities section and

the equity section of the statement of financial position

should be prohibited.

Financial Accounting Standards Board, Statement of Financial

Accounting Standards No. 150: Accounting for Certain Financial

Instruments with Characteristics of both Liabilities and Equity

¶¶ B56, B57 (2003)(“FAS 150”). Therefore, the Series B shares

must be classified as either an asset, a liability, or equity. 

Defendant’s argument that the Series B shares should be

classified outside those categories is an argument against

generally accepted accounting principles. 

Defendant argues that the Series B shares have the same

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effect as a liability, even if they are not classified as such. 

Defendant cites the International Accounting Standards Board’s

(“IASB”) International Accounting Standard 32 (“IAS”) and the

Financial Accounting Standards Board’s (“FASB”) Concepts

Statement 6 for this proposition. Under IAS 32:

a preference share that provides for mandatory redemption by

the issuer for a fixed or determinable amount at a fixed or

determinable future date, or gives the holder the right to

require the issuer to redeem the instrument at or after a

particular date for a fixed or determinable amount, is a

financial liability.

(Birnbach Decl. Ex. 17 (IAS 32) ¶ 18(a)). Under FASB Concepts

Statement 6, “liabilities are claims to the entity’s assets by

other entities and, once incurred, involve nondiscretionary

future sacrifices of assets that must be satisfied on demand, at

a specified or determinable date, or on occurrence of a specified

event.” (Birnbach Decl. Ex. 21 (FASB Concept 6) ¶ 54).

Neither of these principles require the court to find

the Series B shares to be classified as a liability. 

Preliminarily, the court again notes the balance sheet itself

does not classify the Series B shares as part of the “Total

liabilities.” Further, the standards set forth by the IASB do

not comprise the “auditing standards generally accepted in the

United States” where they are in conflict with the principles

issued by the FASB. The FASB explicitly states in FAS 150 that

IAS 32 does not comprise the generally accepted accounting

principles in the United States:

IAS 32 requires that preferred shares be classified as a

liability if the holder can choose to require redemption,

even if redemption is uncertain. In contrast, under this

Statement, only shares (whether common or preferred) that

are mandatorily redeemable (upon a specified date,

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4 Defendant might argue that a “deemed liquidation” is an

event certain to occur at some point in the future. As a

practical matter, most corporations will, at some point, merge

with others or sell substantially all of their assets. However,

this argument proves too much. If the “event certain to occur”

referenced in FAS 150 were meant to be interpreted in a

philosophical sense, then no shares could ever be listed as

equity because almost every corporation will cease existing at

some point and the shareholders at that point will be entitled to

their share of assets upon that corporation’s dissolution. 

13

determinable date, or event certain to occur) are classified

as a liability.

(Rogers Decl. Ex. C (FAS 150) ¶ B78)(emphasis added). The FASB

is a more reliable source to reference in determining the

generally accepted accounting principles of the United States

than the IASB. See Rosenberg v. Carlin, No. 902516A, 1994 WL

879765, at *2 (Mass. Super. Ct. May 11, 1994)(“Application of

GAAP requires reference to the Current Text of the Financial

Accounting Standards Board”). In Rumsfeld v. United Technologies

Corporation, the Federal Circuit applied the “GAAP hierarchy”:

GAAP comprises a hierarchy of different sources . . . [The]

Statement on Auditing Standards (SAS) No. 69, issued by the

Auditing Standards Board of the American Institute of

Certified Public Accountants (AICPA) in 1992, defines the

most authoritative pronouncements (i.e., the top level) of

the GAAP hierarchy as ‘Established Accounting Principles.’ 

These include Financial Accounting Standards Board (FASB)

Statements and Interpretations . . . At the lower level in

the GAAP hierarchy is “Other Accounting Literature,” which

includes such things as . . . International Accounting

Standards Committee Statements, accounting textbooks, etc. 

315 F.3d 1361, 1374 n.17 (Fed. Cir. 2003)(emphasis added).

In accordance with the GAAP hierarchy, FAS 150

controls. Under FAS 150, since the Series B shares are not

mandatorily redeemable but are instead only convertible upon an

event not certain to occur, they need not be classified as

liabilities.4

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At first glance, FASB Concept 6 appears to contradict

FAS 150 and support defendant’s position that Series B shares be

classified as a liability because defendant will have to

sacrifice assets upon the occurrence of a specified event. 

However, in a subsequent clarification of Concept 6, the FASB

issued Action Alert No. 04-08 stating that liabilities under

Concept 6 include obligations to “redeem equity instruments if

those obligations . . . do not convey an ownership relationship.” 

Financial Accounting Standards Board, Action Alert No. 04-08

(Feb. 26, 2004), available at

http://www.fasb.org/action/aa022604pf.html(emphasis added). 

Series B shareholders have voting rights and are entitled to

dividends. (Braunstein Decl. Ex. 1 (audit and financial

statements) at 11-12). Therefore, Series B shareholders have

ownership rights and the Series B shares are not appropriately

classified as liabilities under FASB Concepts Statement 6. See

C.I.R. v. Fink, 483 U.S. 89, 95 (1987)(shares in company

conferred “ownership interest entitling [respondents] to future

dividends, future capital appreciation, assets in the event of

liquidation, and voting rights”).

3. Defendant’s argument that SEC regulations require

Series B shares to be listed separately from other shares

Defendant’s next argument is that a securities

regulation requires the convertible shares to be indicated on the

balance sheet separately from common stock, non-redeemable

preferred stocks, and “other stockholders’ equity.” See 17

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5 Defendant characterizes every other type of stock

besides convertible shares as “permanent equity,” but this term

is not to be found in the regulations cited. The term “permanent

equity” is found in Emerging Issues Task Force (“EITF”) document

D-98 issued by the Securities and Exchange Commission staff. 

EITF D-98, entitled “Classification and Measurement of Redeemable

Securities,” merely affirms that convertible shares are to be

listed separately from other types of shares. Nowhere does EITF

D-98 state that convertible shares are not to be counted towards

“net worth” or total equity.

15

C.F.R. § 210.5-02.28-31 (2001).5 

This argument is a misdirection. The court is not

called upon to determine the amount of “permanent equity,” but

instead must determine the “net worth” of defendant. Nowhere in

the cited regulations is “net worth” equated with “permanent

equity,” “common stock,” or “non-redeemable preferred stocks,”

nor is “net worth” defined to exclude convertible shares. The

regulatory requirement that convertible shares be listed

separately from common stock and non-redeemable preferred stock

does not dissuade the court from the common sense determination

that net worth is computed by subtracting total liabilities from

total assets.

In sum, the balance sheet, which was prepared using

generally accepted accounting principles, shows that defendant

had a net worth of greater than $5,000,000 on December 31, 2001. 

C. Other Pending Motions

Defendant’s motion to exclude the testimony of

plaintiff’s expert Jeffrey Rogers is moot because the court does

not rely on that testimony. Defendant’s motions to strike

plaintiff’s jury demand and to strike portions of plaintiff’s

statement of undisputed facts are also moot.

/// 

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IT IS THEREFORE ORDERED that plaintiff’s motion for

summary judgment be, and the same hereby is, GRANTED;

AND IT IS FURTHER ORDERED that defendant’s motion for

summary judgment be, and the same hereby is, DENIED;

Judgment shall be entered DECLARING the net worth of

defendant Merrimack Pharmeceuticals, Inc. to be greater than

$5,000,000 as of December 31, 2001.

DATED: June 17, 2005

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