Opinion ID: 672322
Heading Depth: 2
Heading Rank: 1

Heading: negotiations

Text: 2 The plaintiff in this case is Executone Information Systems, Inc. (Executone). According to its original complaint, Executone is a Virginia corporation with its principal place of business in Connecticut. Executone is the manufacturer of communications products, including telephone equipment. At least at the time this dispute arose, Executone's practice was to market its products to other distributors. 3 Executone brought this action against Lloyd K. Davis, Edward H. White III, and High Technology Specialists, Inc. (HTS). These three parties (collectively referred to in this opinion as the former Isoetec shareholders) are all former shareholders of Isoetec Texas, Inc. (Isoetec), a Texas corporation with its principal place of business in Texas. Executone alleged and the defendants admitted that Davis and White were Texas residents and HTS was a Delaware corporation with its principal place of business in Texas. According to Davis and White, HTS's interest in this suit has been transferred to Davis. 4 It appears that Isoetec was formed in 1985 for the purpose of serving as a Texas distributorship for Executone's products. At some point the parties began negotiations with a view to an eventual purchase of Isoetec by Executone. These negotiations culminated in the execution of a purchase agreement on June 5, 1989. Under the terms of the agreement, Executone agreed to purchase all of the stock or assets of Isoetec by January 1, 1990. The parties also entered into new distributor and marketing agreements on June 5, 1989. As part of the consideration for all of these agreements, Executone, Isoetec, and Isoetec's shareholders executed a broad release agreement whereby Executone released all claims or contracts that it might have against Isoetec and its shareholders, and Isoetec and its shareholders released their claims and contracts against Executone. The release is also dated June 5, 1989. 5 The purchase agreement required Isoetec to furnish Executone with Isoetec's unaudited balance sheets and all related financial statements for the period from January 1 through September 30, 1989, no later than October 31, 1989. The parties agreed that the purchase price would be calculated according to a formula based in part on a multiple of Isoetec's 1989 adjusted pre-tax profits, if any, and that the purchase would be effective no later than January 1, 1990. They further agreed that an interim closing would occur no later than January 19, 1990, and that an interim purchase price would be calculated based upon Isoetec's unaudited financial statements for the purposes of that closing. However, calculation of the final purchase price was agreed to occur only after an audit and a subsequent review of that audit. Isoetec agreed to obtain an audit of its 1989 financial statements by the accounting firm of BDO Seidman and to make that audit available to Executone within twenty-one days of receipt. Executone agreed to obtain a review of the BDO Seidman audit from Arthur Andersen & Co. within twenty-one days of receiving that audit. The final purchase price was to be calculated based on the audit information, and the parties agreed to adjust any consideration paid under the interim purchase price to reflect the final purchase price. The parties also included the following clause in the purchase agreement: 6 Any bona fide dispute over the 1989 Audit, GAAP as that term is defined in Exhibit D [to the purchase agreement], or regarding computation of the Isoetec Purchase Price pursuant to Exhibit B [to the purchase agreement] shall be subject to final resolution by Price Waterhouse within the 21 Day Period [following Executone's receipt of the BDO Seidman audit]. 7 The time-table set forth in the purchase agreement was not strictly observed, although according to the former Isoetec shareholders, Executone did take over the operations of Isoetec on January 1, 1990. The interim closing of the purchase of Isoetec by Executone occurred on February 16, 1990. The interim purchase price established for the purposes of that closing was approximately $3,000,000, based on adjusted pre-tax profits for 1989 of $1,136,001. At the February 16 closing, Executone apparently issued some shares of Executone stock and a $1,000,000 promissory note, plus some cash and other convertible notes, to the Isoetec shareholders as required under the purchase agreement, and the Isoetec shareholders delivered their Isoetec stock to Executone. On or about April 1, 1990, Executone made a payment of $250,000 on the notes issued to the former Isoetec shareholders. 8 The BDO Seidman audit was slow in coming. In the interim, Arthur Andersen notified BDO Seidman in April 1990 of certain irregularities in Isoetec's preliminary financial statements. Executone claims that the BDO Seidman audit was finally made available to Executone on May 30, 1990. Under the BDO Seidman audit, the final purchase price was calculated to be approximately $2,900,000. All parties agree that Executone disputed BDO Seidman's conclusions. Davis contacted Executone's chief operating officer by letter dated June 7, 1990, advising Executone to engage Price Waterhouse and submit whatever disputed matters it wished. The letter concluded by pointing out that the twenty-one day period for such submission would expire on June 20, 1990. In Executone's responsive letter, it accused Isoetec of obstructing the Price Waterhouse arbitration and advised Isoetec that Executone would engage Price Waterhouse within the appropriate time period. 9 Price Waterhouse contacted both Davis and Executone by letter dated June 15, 1990, outlining the conditions under which it would arbitrate the dispute. Counsel for the former Isoetec shareholders contacted Executone and advised that some changes to Price Waterhouse's engagement letter needed to be made. On June 18, 1990, Executone sent Price Waterhouse an executed copy of the engagement letter and a check as a retainer for the engagement. 10 The dispute, however, did not immediately go to arbitration. According to the former Isoetec shareholders, Executone did not pay the installment due on its promissory notes on July 1, 1990. On July 2, 1990, Executone filed suit in federal district court for the Southern District of Texas against Davis, White, and HTS (the Isoetec defendants).