Opinion ID: 672322
Heading Depth: 4
Heading Rank: 2

Heading: The Particulars of the Purchase Agreement

Text: 67 Having determined that we must uphold the arbitrator's award if the arbitrator's award was drawn from the letter or the purpose of the underlying contract, Brotherhood of R.R. Trainmen, 415 F.2d at 412, we turn to the particulars of the ExecutoneIsoetec purchase agreement. As we have already seen, the parties agreed in mid-1989 that Executone would buy either all of Isoetec's stock or all of Isoetec's assets at the beginning of 1990. The parties further agreed that the purchase price to be paid by Executone would be based on Isoetec's adjusted pre-tax profits for 1989. To ensure that Isoetec's 1989 records accurately reflected its profits for the year, the parties agreed that Isoetec would procure an audit from BDO Seidman and Executone would provide for a subsequent review from Arthur Andersen. From this, it is clear that a predominate purpose of the parties in drafting the purchase agreement was to make sure that the Isoetec purchase price fairly reflected Isoetec's 1989 profits. Indeed, Isoetec specifically agreed to operate normally during 1989 and not manage the business simply to artificially increase 1989 earnings. In sum, the parties agreed to accept a purchase price for Isoetec based on a snapshot view of Isoetec's 1989 earnings, and specifically of Isoetec's 1989 adjusted pre-tax profits, as of December 31, 1989. 2 68 Although the parties contemplated that the audit and review process would extend into 1990, they also contemplated that the change of ownership of Isoetec would occur no later than January 1, 1990. The purchase agreement states, The Isoetec Purchase shall be effective, at Executone's option, as of either September 30, 1989 or January 1, 1990. In transactions of this kind, it is typical for the buyer to take over the operations of the purchased company immediately or shortly after the closing balance sheet date, even though the preparation of the year-end financial statements and the audit are still in progress and the calculation of the final purchase price cannot yet be done. Under generally accepted accounting principles, however, events occurring subsequent to the end of the relevant year can have a substantial impact on a company's profitability for that year; the failure subsequent to year end of a sale apparently completed during the year is just one example of this kind of event. Frequently, if not inevitably, the buyer is presented with opportunities to depress the purchase price by conducting the business of the acquired company in such a way as to diminish the company's profitability for the previous year. 69 This situation may well have occurred in the instant case. We know from the arbitrator that the Stewart Title--Houston transaction, scheduled for completion, and considered by the Isoetec shareholders and their auditor to have been completed, during 1989, was rescinded by Stewart Title after the end of 1989. Indeed, the arbitrator's resolution of the accounting issues reflects that the return of the equipment by Stewart Title after year end was the cause of the accounting adjustment to Isoetec's pre-tax profits for 1989 that eliminated the $295,000 in profits from the Stewart Title transaction that had been recorded by Isoetec and approved by Isoetec's auditor. 3 We do not know (because the testimony before the arbitrator was not transcribed) what actions, if any, Executone, as the manager of the business after 1989, took to resist that rescission or to remedy the problems perceived by Stewart Title. We do know that the dynamics of the purchase agreement could well have provided Executone with an incentive not to resist the rescission and thereby to reduce Isoetec's profitability in 1989 in order to reduce the final Isoetec purchase price. The purchase agreement contains no provision that would allow Executone to operate Isoetec after 1989 in such a way as to manipulate the purchase price adversely to the interests of the former Isoetec shareholders (nor would we expect the former Isoetec shareholders to agree to such a provision), nor does the purchase agreement contain any provision precluding those shareholders from recovering in the event that any such manipulation took place. 70 Further, under the peculiar circumstances of this case, Executone in its capacity as the purchaser of Isoetec's business also had the opportunity before the close of 1989 to manipulate the purchase price of the Isoetec business adversely to the interests of the Isoetec shareholders. Through 1989 Executone continued to perform as Isoetec's supplier of equipment. We know from the arbitrator's report on the accounting issues, see supra note 3, that in September 1989 (which was four months after the date originally scheduled for completion of Isoetec's contract with Stewart Title), Isoetec and Stewart Title agreed upon a timetable for correction of the deficiencies that Stewart Title perceived in the Executone equipment delivered by Isoetec under that contract. We also know that the Isoetec shareholders' response to Executone's submitted issues alleged that Stewart Title ultimately removed the system because EXECUTONE delayed in delivering[ ] additional hardware and software. From these two pieces of information in the record, it is clearly possible that the arbitrator concluded that Executone in its capacity as purchaser of the Isoetec business delayed during late 1989 in delivering the hardware and software necessary for Isoetec successfully to complete the Stewart Title contract, thereby reducing the amount that Executone would be required to pay for Isoetec's business. Again, the purchase agreement contained no provision that would allow Executone to delay supplying Isoetec with the necessary hardware and software to complete the Stewart Title contract so as to manipulate the purchase price adversely to the interests of the Isoetec shareholders, nor does that agreement preclude the shareholders from recovering in the event that any such manipulation took place. 71