Opinion ID: 359617
Heading Depth: 2
Heading Rank: 3

Heading: Merger and Estate Settlement Activities

Text: 9 In February, 1969, Bronson contacted Michael Cantor, a broker for companies seeking merger or acquisition. Cantor put Bronson in touch with the Barry Wright Corporation. Coffey was called in to help negotiate Cantor's fees. 10 On March 26, 1969, at the end of the first quarter of the corporation's operation, the first annual meeting was held. 3 Coffey, Picard, Holmes, Bronson and Bateson were present. Cash basis profits of $498,000 were reported by Bronson as Treasurer, and Coffey, prepared a press release which indicated that the company had gross receipts of 6.6 million dollars, an increase of approximately 15% Over the previous year. Despite the company's profitability, it had cash flow problems as a result of its rapid growth and because expenses were incurred and payable long before accounts could be billed. 11 At the March meeting, Bronson also reported that a final settlement had been reached with former partner Nelson. Nelson was to receive $400,000 for his 26% Interest in the partnership. Coffey advised the stockholders that, since they had now formed a corporation, they should agree on some method of determining the value of the stock in the event of death. Holmes, Bateson, and Bronson agreed, according to Coffey, that should anything happen to any one of them, until such agreement was entered into, that the determination of the value of the deceased or withdrawing or discharged partner would be as if they were still a partnership. There was a buy out provision in the partnership agreement specifically providing the method and time period for payment of a deceased partner's share of the business. 4 12 When Holmes died on April 9, 1969, he owned a 46% Interest in the partnership and 350 shares, or 41.7% Of the corporation's capital stock. He had loaned the corporation a total of $244,000. After Holmes's death, Bateson became President of Maguire, and he and Bronson became the sole directors. 13 There is little doubt that Coffey, Bronson, and Bateson all acted under the impression that the remaining partners would buy the estate's interest in Maguire, both the partnership and the corporation, as if the business were still a partnership. Coffey's understanding was that the estate's interest would be bought out by Bronson and Bateson, and that the price would be determined on the basis of the book value of the partnership and corporation as of March 31, 1969, less a 20% Discount. 5 This was the formula actually used by the parties in arriving at a settlement. 14 From the date of Holmes's death until the estate was settled on January 6, 1970, Bateson and Bronson received regular monthly cash statements for both the partnership and the corporation within three weeks of the end of each month. Monthly statements of accounts receivables were also prepared during this period. Bronson met regularly with the accountant, Neff, and both Bateson and Bronson met regularly with the divisional vice-presidents to review accounts receivable and work in progress. None of this information was ever shared with the estate or its representatives. 15 On April 16, 1969, Coffey, Bateson, Bronson, and Neff reported to Tingley (the loan officer) that the bank had been named coexecutor of the estate and that the company's obligation to the estate would be in the vicinity of $600,000 to $700,000. 6 On April 24, 1969, Coffey met with Radoccia and Long of the Trust Department and told them that there was a preexisting arrangement between the partners of Maguire that would provide for buying out a partner's share. Present at the meeting were Mrs. Holmes, Coffey, Radoccia, Bronson, Bateson, Picard, and Neff. Coffey explained the tax effects of the Subchapter S status of the corporation to Radoccia, told him that the company had a growth rate of ten to fifteen percent, grossed over six million dollars in 1968, and had cash flow problems which were reflected in difficulty meeting bills. Coffey also told Radoccia that, as of December 31, 1968, Holmes's share of Maguire was worth at least $650,000. They discussed previous pay outs to partners and the formula by which they had been calculated. Picard testified that he explained, for the benefit of Radoccia and Mrs. Holmes, that the corporation had been formed to facilitate acquisition or merger. At this point, there is no evidence that any of the parties appreciated the complications created by the corporate structure and the application of the Securities and Exchange Act to the sale and purchase of the shares of Maguire stock held by the estate. 16 After Holmes's death and before the first estate meeting on July 24, 1969, Bronson met with representatives of Barry Wright on at least four occasions, and Bateson met with Barry Wright representatives at least once to discuss acquisition. Bronson had periodic telephone contact with Barry Wright's president and supplied Barry Wright with partnership financial data covering a ten year period, which Barry Wright converted into accrual data as a part of its analysis which was completed on or before July 8, 1969. 17 Bateson, Bronson, Coffey, Mrs. Holmes, and Radoccia attended the first estate meeting on July 24, 1969. No financial information was given to the estate at that time, nor was any information concerning merger negotiations revealed. 18 Sometime between the first estate meeting and the second on September 24, 1969, Bateson and Bronson met with a representative of Science Management Corporation to discuss merger or acquisition possibilities. 19 Bronson and Bateson continued to meet with representatives of Barry Wright throughout the summer of 1969. On August 5, 1969, they conferred with its president. On August 14, Bronson prepared, on the corporation's stationery, a memorandum outlining the terms for acquisition by Barry Wright of Maguire's stock. The outline matched the terms embodied in a handwritten memorandum prepared by Barry Wright's president, I. e., purchase of Maguire to be paid for by 140,000 shares of Barry Wright stock. Exhibit 62. Bronson's memorandum contained the following legend: There is one copy of each of these memoranda in my personal file no others exist and needless to say, please keep these (Sic ) data under lock and key. No copy of this memorandum was ever furnished to the estate; nor was it informed of the meetings with Science Management or Barry Wright. 20 Bateson and Bronson also wrote memos to each other concerning their own estimates of the company's net worth which they valued at between six and seven million dollars. Exhibits 28-32. These were never disclosed to representatives of the estate. 21 By September 3, 1969, all divisions of the corporation had delivered job completion information as of June 30, 1969, to Bronson. Although this material was all that was necessary for the preparation of accrual reports to that date, the company's accountant was told to work on other items and no reports were prepared. 22 On September 11, 1969, Bateson prepared a memorandum which projected earnings of $900,000 on an accrual basis for 1969 and valued the corporation at $5,800,000 on a cash basis, and $7,500,000 on an accrual basis. This memorandum included comparisons of the selling prices of other corporations and a statement that it appears that we are worth something in excess of $6,000,000. (emphasis original). Bateson sent this memorandum to Bronson; the estate never received a copy. Exhibit 28. 23 At the September 24, 1969, meeting, Neff provided the estate representatives with a statement of the revised net worth of the combined Maguire entities as of March 31, 1969, and a certified financial statement of the partnership for the year ending December 31, 1968. Radoccia testified that he read these statements. 24 During an early October visit to Combustion Engineering, Inc., (Combustion) on other business, Bronson discussed with Kiamie, Vice-President and Controller of Combustion, the possibility of Combustion's acquiring Maguire. Kiamie put him in touch with James Thornton of the Lummus Company, a wholly owned subsidiary of Combustion, who proceeded to gather information on Maguire. Bateson and Bronson also spent the entire day of October 8, 1969, reviewing merger and acquisition possibilities with representatives of Science Management. On October 17, Bronson met with representatives of Barry Wright to discuss acquisition of Maguire, and, on October 20, he prepared a memorandum comparing the relative advantages of acquisition by Barry Wright and Science Management and projections of the corporation's earnings on an accrual basis from 1969 to 1972. Bronson noted: (T)he opportunities for growth appreciation with the right merger can mean much more in compensation and security (than the sales price), particularly as we become the nucleus of a very broad based acquisition program. Exhibit 30. Neither this memorandum nor the Science Management visit were disclosed to any of the estate representatives at this time or at the October 28, 1969, estate meeting. 25 Radoccia consulted with Rawlinson (a bank trust officer) about the potential tax benefits to the estate from the corporation's cash losses, and, on October 28, 1969, Radoccia met with Mrs. Holmes, Coffey, Bronson, Picard, and Neff. They discussed the corporation's operating loss and its availability to the estate for tax purposes. At this meeting, the parties arrived at $825,000 as the approximate sum that was due the estate for its interest in the combined entities. Neff derived the figure by calculating Holmes's share of the total book value of the corporation and partnership as of March 1, 1969, and deducting a 20% Discount, even though the accounts had been collected. 7 The actual figure determined at a subsequent meeting on November 3 was $815,000. Coffey testified that this figure was strictly in conformance with the partnership agreement and that he was unaware that the accounts had been collected when the discount was applied. No mention is made of any discount in the partnership agreement. Picard testified that the estate's interest was computed as though the partnership and corporation were a single entity. 26 On October 28, 1969, after the estate meeting of that date, Bronson told Picard that when he had been in California working with Combustion, it had expressed interest in exploring the possibility of acquiring Maguire. Picard testified: 27 I told him that I thought under all the circumstances, they ought to complete their transaction with the estate, which was already almost a fact, that if he entered into negotiations, I thought it should be reported to the Estate representatives, because I said there is an obligation to make a disclosure with respect to material facts of that sort, when a purchase or sale of capital stock is involved. 28 Tr. 885. It is important to note that Picard's advice was given while he was unaware of the Barry Wright and Science Management discussions. 29 On November 26, 1969, the parties met to execute a formal agreement to the effect that the business owed the estate $815,000. A determination of the allocation between the partnership and the corporation was not made. 30 On December 8, 1969, Bronson wrote to Tingley (the loan officer), with a copy to Coffey, stating that, on December 15, 1969, Maguire would have our nine month accruals which would provide a meaningful measure of realistic performance. Exhibit CCC. These statements for the nine months ending September 30, 1969, were delivered to the bank on December 15, and supplementary material was delivered on the 18th. Exhibits 32 & 52. They revealed an accrued profit before taxes of $720,000 for the nine months. These statements were not disclosed to any of the representatives of the estate unless the bank's loan officer is considered such a representative. 31 Bronson wrote to Radoccia setting up a meeting for January 6, 1970, Exhibit 48, to execute the final estate settlement documents, and telephoned Kiamie the next day in order to set up a meeting to discuss the possibility of Combustion's acquisition of Maguire which was scheduled for January 7. At the closing on January 6, 1970, Bateson, Bronson, Picard, Radoccia, Mrs. Holmes, Coffey, and Neff were present. Neff produced a sheet showing the allocation of the amounts due from the corporation and the partnership of the agreed payment of $815,000. Exhibit 15. The breakdown shows corporate liability for capital stock in the amount of $4,453.62 and for notes payable to Holmes or his estate in the amount of $577,150 for a total of $581,603.62. Payment was to be made in seven annual installments of $83,086 without interest. The balance of $233,397 (815,000 minus $581,603) was due from the partnership. Neff also provided the parties with a summary of distributive shares of the estimated corporate loss. Exhibit 16. The estimated cash loss of $1,300,000 for the corporation was the net corporate operating loss that was available to the parties for tax purposes as a result of the Subchapter S election. Neff did not produce the accrual statements which had just been sent to Tingley, and, indeed, he had not seen them himself. 8