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

Heading: Transfer of Company Equity Ownership to Washington Associates.

Text: In the spring of 1973, Marshall became concerned with various aspects of the equity structure of the company. Marshall wanted to increase his equity ownership of the company to greater than 50%, increase the equity interest held by certain active employees, and eliminate the equity holdings of parties, including Hughes, not actually involved in the company. Mr. Jacobs negotiated a series of transactions to accomplish these goals by mid-July, 1973. During this period, Marshall also sought to involve Mr. Jacobs more closely with the company. According to the master, Marshall was extremely pleased with the various financial transactions which Jacobs had negotiated for the Company and for Marshall since the Summer of 1972. Jacobs had, in essence, assumed the role of the financing `partner' which Hughes had failed to fill. Marshall wanted Jacobs to be a principal in the Company who would be committed to the continued growth of the Company.... The idea of Jacobs' obtaining an equity in the Company was first brought up by Marshall.... Marshall and Mr. Jacobs had several conversations over a three-month period in which the subject of Mr. Jacobs's obtaining an equity interest in the company was discussed. During some or all of these conversations, Marshall and Mr. Jacobs discussed the percentage of outstanding shares of the company's stock Mr. Jacobs would own, the price to be paid for those shares, and the precise form of ownership which Mr. Jacobs's equity interest would take. While these discussions were taking place, Mr. Jacobs was functioning, in essence, as the company's general counsel and Mr. Jacobs's firm was its only corporate counsel. Mr. Jacobs did not advise Marshall to refrain from transferring some of his stock in the company to Mr. Jacobs. Similarly, he never advised Marshall or the company to obtain independent legal or other advice concerning this proposed transaction. Marshall suggested that Mr. Jacobs should own somewhere between 25% and 30% of the shares which would be outstanding after the various transactions to be made during the summer of 1973 were completed. Marshall chose this range of equity ownership for Mr. Jacobs because it left Marshall with more than 50% of the equity in the company. The price to be paid by Mr. Jacobs for the shares of stock he was going to purchase from Marshall was not a negotiated price; it was not intended to be a reflection of the fair market value or book value of the company. The price was advantageous to Mr. Jacobs. It was established, however, in a manner which Mr. Jacobs and Marshall believed would provide favorable tax consequences for Marshall. During these discussions, Mr. Jacobs informed Marshall that he and his law partners had formed a separate partnership known as Washington Associates which served as a vehicle for holding equity participation received by the law firm in client companies. By agreement among the partners in the law firm, any equity participation in a client company which any partner acquired was to be held by Washington Associates and owned by all the partners according to a ratio which changed annually. Mr. Jacobs also informed Marshall that shares of stock acquired by Washington Associates would ultimately be distributed to the individual partners in accordance with their internal distribution formula. While he would have preferred Mr. Jacobs to own the shares of stock in the company personally rather than through Washington Associates, Marshall understood and accepted the arrangement and agreed to transfer the shares in question to Washington Associates. As a result of the various changes in stock ownership planned by Marshall and Mr. Jacobs in the spring and summer of 1973, Marshall was going to own greater than 50% of the outstanding stock in the company. Marshall, however, also sought a two-thirds majority voting control in the company. Accordingly, Mr. Jacobs, on behalf of Washington Associates, and Marshall agreed that Marshall would, for a period of five years, retain voting control of the shares of stock he was transferring to Washington Associates. That agreement was embodied in a July 19, 1973, letter of agreement between Marshall and Mr. Jacobs. Marshall and Mr. Jacobs did not discuss what effect, if any, the distribution of Washington Associates's shares to its individual partners would have on the agreement. On or about July 19, 1973, Marshall sold Washington Associates 13,075 shares of his stock. These shares represent approximately 27% of the shares of the company outstanding when all the summer 1973 recapitalization transactions were complete. Printed on each stock certificate was a restriction on transfer. The provisions of the restriction were not followed in the transfer of stock from Marshall to Washington Associates, from Washington Associates to Mr. Jacobs's law partners, or from one law partner to a third party. [8] No written consent or minutes of the board of directors of the company records a waiver of the stock restrictions with respect to shares transferred in these transactions. At the time of these stock transfers Marshall owned a majority of the stock in the company and had control of the board of directors. He also was personally aware of the stock transfers and signed every stock certificate documenting those transactions. Mr. Jacobs explained to Marshall in detail the circumstances connected with the stock transfer between Mr. O'Connor and his brother-in-law before Marshall signed the certificate completing the transfer. Marshall was willing to accommodate Mr. O'Connor. At the time of the transfers at issue neither Mr. Jacobs nor any other lawyer in the firm advised Marshall or the company of the respective rights under the stock restriction. The master found that, during his lifetime, Marshall never challenged or raised any questions with respect to any of these transfers of stock either on his own behalf or on behalf of the company.