Opinion ID: 729764
Heading Depth: 1
Heading Rank: 1

Heading: The Stock Purchase Agreement and Sale of Medcom

Text: 3 Baxter acquired Medcom in a stock purchase for more than $50 million in May of 1982. Medcom's primary business was the production and distribution of audiovisual and written training material for health-care providers and consumers, both in the United States and abroad. Medcom's subsidiary, Entertainment Partners, Inc. (EPI), also produced general entertainment films for television. Baxter owned Medcom for four years. During that time, Medcom suffered significant operating losses. 4 In 1986, Baxter sold to MHC all of the outstanding capital stock of Medcom for $3.77 million pursuant to a Stock Purchase Agreement (the SPA). In the SPA, Baxter made several representations and warranties as of the date of the SPA and as of the date of closing. The representations and warranties include the following: that no material fact was undisclosed that was necessary to prevent previous statements from being misleading; that all representations, statements, and information provided to MHC (including the schedules and financial statements contained in the SPA) were true in all material respects; and that Baxter would pay the amount of any overstatement in the September 30, 1986 balance sheet, which it represented had been prepared in accordance with generally accepted accounting principles (GAAP). 5 Subsequent to MHC's purchase of Medcom, MHC discovered various facts that it claims were part of a scheme by Baxter to defraud MHC. In particular, MHC alleged that Baxter falsely represented and warranted that Medcom had a balance sheet with $10 million in assets at book value when Baxter knew that Medcom had a pertinent asset value of only $1 million. Among other evidence of this alleged scheme to defraud, MHC pointed to evidence that Baxter had written down Medcom's assets to a total of $1 million in precisely the same manner as two earlier write-downs, but this time the write-down was reflected only on the Medcom accounting records held at Baxter's corporate offices. It was not reflected on Medcom's September 30, 1986, balance sheet given to MHC. MHC also pointed to evidence that Medcom's Chairman and CEO, Robert Funari, had prepared an analysis of the realizable value of Medcom's assets that was several million dollars less than the value represented to MHC and that A.D. Little, a valuation firm, had conducted a preliminary appraisal that indicated that Medcom's assets were worth only $2.5 million. 6 Baxter presented testimony that Medcom's balance sheet was accurate, fairly presented, and in accordance with GAAP. Baxter also presented evidence that A.D. Little's valuation was a preliminary, unissued draft and did not include substantial fixed assets that were included in the sale to MHC. Baxter also produced testimony that Funari's personal valuation was based on market value, whereas the balance sheet concerned book value. 7 MHC alleged that Baxter had falsely represented the status of Medcom's marketable domestic training programs. The June 1986 offering memorandum for the stock, the Blue Book, stated that Medcom had a current library of over 1600 audiovisual training programs that it marketed in the United States for nurse, physician and consumer health education. The Blue Book also stated that the Famous Teachings in Modern Medicine (FTMM) and the Video Journal of Medicine Series for Physician Education currently contain[] over 500 active programs . . . . MHC alleged that two-thirds of the programs were neither current nor active and could not be sold for current medical instruction. Baxter argued that the Blue Book simply contained an accounting of the number of programs, not a representation as to the contents or marketability of the programs. Baxter also countered MHC's claim with evidence that the vast bulk of programs in Medcom's library were ethically saleable in 1986. 8 MHC alleged that Baxter falsely represented in the Blue Book the existence of a pending $3 million sale of programs to the Daharan Medical Center in Saudi Arabia. Baxter did not disclose that it had information that this sale would not take place and that the sale of any additional programs in Saudi Arabia was unlikely. MHC further alleged that Baxter failed to disclose that millions of dollars worth of previous sales were the results of bribes, not the quality of the product. Baxter introduced evidence that prospective buyers were told that they should put no value on the Saudi Arabian business when looking at Medcom. (R. 658-4 at 384.) 9 MHC also alleged that Baxter did not disclose that the Saudi programs had been the subject of a law suit brought by Medcom's founder, Richard Fuisz, (the Fuisz litigation) against Baxter and Medcom, alleging improper payments to Saudi officials and their family members. Nor did Baxter disclose that the settlement of the suit subjected the purchaser of Medcom to potential liability. Baxter produced evidence that the Fuisz litigation was settled before Baxter sold Medcom to MHC, Baxter was responsible for payment of the settlement, and Baxter was bound by the confidentiality provisions of the settlement agreement. Therefore, Baxter was not obligated to disclose the litigation. 10 MHC alleged that Baxter misrepresented in the June 1986 Blue Book the existence of a newsletter joint venture with the UCLA teaching hospital despite the fact that Baxter already had cancelled this venture by letter in April 1986. Baxter claimed that Medcom had simply given notice to UCLA that Medcom would terminate its contract with UCLA effective October 31, 1986. Baxter claimed that notice was given once Baxter decided to sell Medcom so that any future buyer would not be contractually obligated to keep publishing the unprofitable newsletter. 11 MHC also alleged that Baxter had breached the SPA as it related to Medcom's stock in Entertainment Partners, Inc (EPI). Under the SPA, Baxter was obligated to transfer certain stock in EPI to MHC. Baxter did not transfer this stock until the district court ordered it to do so. This Court affirmed that order of specific performance in Medcom Holding Co., 948 F.2d 223. The parties now dispute what amount of equitable compensation MHC should receive based on Baxter's possession beyond the date the stock should have been transferred pursuant to the SPA. 12 Based on these and other similar claims, MHC alleged that Baxter had schemed to defraud MHC and was liable for damages on a number of theories. Baxter disputed all the claims and argued both that it was not liable and that it had caused MHC no damages.