Opinion ID: 2029197
Heading Depth: 1
Heading Rank: 3

Heading: Mr. Jacobs's Pledge of Company Stock.

Text: As of December, 1976, Mr. Jacobs had guaranteed approximately $90,000 in loans made by the Commonwealth Bank and Trust Company to companies, unrelated to this company, with which Mr. Jacobs was affiliated. These companies were not meeting their income projections. Hence, the bank approached Mr. Jacobs, as a guarantor, and requested that he secure his guarantee. The bank requested that Mr. Jacobs pledge his shares of stock in the company to the bank. At that time, Mr. Jacobs owed between $550,000 and $600,000 to creditors, and he did not want to pledge his stock in the company to the bank. On or shortly before December 17, 1976, Mr. Jacobs requested that the company's directors have a meeting to discuss this request from the bank. At the ensuing directors' meeting, Mr. Jacobs explained to Marshall and Lever the status of the various loans he had made or guaranteed, the bank's request that he pledge his company stock, and his own personal preference for not complying with that request. Marshall was concerned that Mr. Jacobs would lose his shares of stock involuntarily to a trustee in bankruptcy who might be obliged to sell them to an outsider  even to one of the company's competitors. Accordingly, the directors decided that the best way to protect the company was to allow Mr. Jacobs to pledge the shares to the bank on the condition that if the bank acquired them, the company would be able to repurchase the shares at a predetermined price. In return, the company could require Mr. Jacobs to repurchase these shares from the company at the price the company paid the bank. The directors accepted $60,000 as the predetermined redemption price and Mr. Jacobs and the bank agreed. The master found that this price was not intended to reflect the market value of the 1,569 shares of the company's stock held by Mr. Jacobs. At some time following commencement of litigation, the company did redeem the pledged stock from the bank for $33,000. The company has never asked Mr. Jacobs to repurchase those shares of stock from it in accordance with Mr. Jacobs's commitment to do so. At several points during the hearing before the master, Mr. Jacobs offered to purchase the shares either for $60,000 or for $33,000 plus interest. The company had not accepted this offer at the time the master filed his report. Mr. Jacobs did not advise the company or Marshall whether or not to approve the pledge arrangement. Similarly, Mr. Jacobs did not suggest that the company receive independent advice of outside counsel.