Opinion ID: 1824389
Heading Depth: 1
Heading Rank: 3

Heading: Purchase Option Price

Text: The Densmores argue that the application of the two-thirds book value formula to the INB stock in arriving at a purchase option price for the INB stock is contrary to Lou Carpenter's intent. They assert that Carpenter set the option purchase price for the Monticello State Bank stock at two-thirds of book value because this is equivalent to the market value of the bank stock and Carpenter's intent was merely to provide a market in the stock. The Densmores assert that application of the two-thirds book value formula to the INB stock and cash received in exchange for the bank stock would confer an economic benefit on the optionees that Carpenter could not have foreseen nor intended and would effectively rob the residuary beneficiaries of a considerable sum of money. The optionees argue that Lou Carpenter was sophisticated in financial matters, could have foreseen the change in the market value of the bank stock, and did intend to confer an economic benefit on the optionees due to her appreciation for their support of her and dedication to the bank. Carpenter's intent guides our resolution of this question. Rogers, 473 N.W.2d at 39; Anderson, 359 N.W.2d at 480. The fifth paragraph of item XIX of Lou Carpenter's will is latently ambiguous. On its face, it provides a formula for the calculation of an option purchase price for Monticello State Bank stock. However, the outside fact of the occurrence of the merger renders the formula ambiguous with regard to the proper formula for the calculation of an option purchase price for the securities and cash which have replaced the stock of the bank. Cf. Strauss, 521 N.Y.S.2d at 644 (divestiture of AT & T rendered bequests of AT & T stock latently ambiguous). We may therefore look to extrinsic evidence as an aid in determining Carpenter's intent. Rogers, 473 N.W.2d at 39. In the fifth unnumbered paragraph of item XIX, Carpenter provided that the optionees have the right to purchase her remaining shares of the Monticello State Bank stock at two-thirds of the shares' book value as of December 31 prior to her death. The trial court applied this formula to the INB shares and cash exchanged in place of the bank shares in arriving at its determined option purchase price. The optionees argue that Carpenter could have foreseen an increase in the market value of the Monticello State Bank and that she intended to confer an economic benefit on the bank employees due to their dedication to the bank and their service to her needs. The optionees also assert that Carpenter was financially sophisticated and understood the difference between book value and market value. Although the record is sparse of direct evidence of Lou Carpenter's intent in the event of an unanticipated bank merger, it does provide adequate indications of her general intent. She was well aware of the pattern of sales of bank stock priced at two-thirds of book value. On its face, the phrase two-thirds of book value connotes a valuation at less than the stock's true worth. Without knowing anything more, the phrase indicates a discounted price. To construe the phrase two-thirds of book value to mean market value would mean that the bank was carrying on its books a book value of one-third more than the stock was worth. There is nothing in the record to suggest that the bank's books would so reflect. Moreover, this inversion of meaning from normal understanding would pervert the words to fit a pricing structure created by the trading of insiders. The evidence shows that when a small group of shares of bank stock is sold, the sale price is at a substantial discount because the buyer does not gain a control position in the financial institution. James Maurice testified that he did not necessarily believe that two-thirds of book value was the market value of the stock. He testified that he discussed the two-thirds book value option with Lou Carpenter, that she understood the concept of book value, and he was pretty sure that she understood that book value is different from market value. The inventory of Lou Carpenter's conservatorship of the Monticello State Bank stock is shown as market value unknown. Value shown is two-thirds book value, a further indication that the terms were never considered to be synonymous. Item XIX of Lou Carpenter's will allows the optionees to buy Monticello Bank stock at two-thirds of book value as of December 31 prior to her death. James Maurice testified that the December 31 date was selected because the bank would definitely have a computation of its book value as of that date. Item XIX further defined book value to be the total of the bank's capital, surplus, and undivided profits divided by the number of outstanding shares of the bank's common stock. No mention of the term market value is made in the will, which could have been done by Lou Carpenter, had she intended her bequests to be keyed to a market value concept. The record is abundantly clear that Lou Carpenter intended by her testamentary provisions to benefit her friends and bank employees. After providing for her relatives by her will there were still some stocks left, so she told James Maurice that she wanted to see the employees rewarded by giving them an option to buy stock. Maurice stated that Lou Carpenter wanted to favor long term employees, many of whom started work at the bank and then retired from the bank after many years of service. Allowing them to buy stock at two-thirds of book value, a discounted price, would assure them of a benefit, whereas if they had to pay market value, any benefit would be less certain and possibly illusory. Given these considerations, I believe that Lou Carpenter's intent is carried out by construing her use of the phrase two-thirds of book value to mean a price not fixed by market value, but reflected by calculating two-thirds of the book value as fixed by the bank on its own books. The trial court found that pursuant to the stock conversion of 1989 each share of Monticello State Bank stock is worth 72.71 shares of Iowa National Bank Shares of Waterloo stock plus $994.10. The court calculated that two-thirds of the book value of each Iowa National Bankshares share on December 31, 1990 was $20.96 and two-thirds of $994.10 was $662.73. Therefore, the selling price for each share of option stock is 72.71 multiplied by $20.96 ($1524) plus $662.73 for a value of $2,186.73. I agree with the trial court's calculations of these option prices. The respective percentages delineated by the fifth paragraph of item XIX grant James Maurice, Louis Morf, and those individuals constituting other active officers of the Monticello State Bank the right to respectively purchase INB shares and cash traceable to 112.4 shares of bank stock and grant the former beneficiaries of the Monticello State Bank Profit Sharing Trust the option to purchase the INB shares and cash traceable to 224.8 bank shares.