Court Opinion

ID: 8965395
Source: CourtListenerOpinion
Date Created: 2022-11-27 10:03:00.270943+00
Date Added: 2024-06-11T17:10:18.485069
License: Public Domain

SLOVITER, Circuit Judge,
dissenting.
I respectfully dissent from the majority’s decision. The majority’s conclusion ren*790ders the no-shop provision of the Letter of Intent nugatory and undermines this court’s recent holding in Channel Home Centers v. Grossman, 795 F.2d 291 (3d Cir.1986), which permits enforcement of such letters as contracts requiring the parties to proceed thereafter in good faith. Of even more concern is the majority’s reversal of the district court’s factual finding that representatives of Greiner breached the binding terms of paragraph seven of the Letter of Intent between STV and Greiner by soliciting an outside offer. The district court’s finding of a breach of paragraph seven involved “interpreting” the meaning of this provision as intended by the parties, a function of the district court as trier of fact, and thus can be reversed by this court only if there has been clear error. I believe that the majority’s holding that the finding of the district court is subject to plenary review because the court was “construing” the contract results from a misreading of Ram Construction Co., Inc. v. American States Insurance Co., 749 F.2d 1049 (3d Cir.1984).
I.
After a bench trial, the district court made findings of fact as required under Rule 52, which fully set forth the history of the negotiations culminating in the Letter of Intent, the intent of the parties, and the participation of Greiner’s highest officer group in the subsequent events which resulted in the breakup of the STV-Greiner deal. Significantly, neither the defendants nor the majority challenge any of the relevant facts, which are only sparsely alluded to by the majority.
The initial discussions with STV on behalf of Greiner were conducted by William H. Bowen, who was Chairman of Greiner’s Board and its principal shareholder, controlling approximately 15% of its stock, and Russell Cleveland, a Greiner director who owned 6% of the stock. In its original draft of the Letter of Intent, STV sought a million dollar termination fee and an opportunity to acquire the 22% stock share of Bowen and Cleveland in the event Greiner ultimately accepted a higher offer from another bidder. These provisions were deleted in favor of the Letter of Intent as revised.
Paragraph seven of the Letter of Intent, expressly made to create legally binding obligations, stated that “Greiner will not, and will not permit its representatives to, solicit or encourage any acquisition proposal” and required that “[i]f an acquisition proposal is received by Greiner or any ... information [concerning Greiner's business, properties or assets] is furnished [in respect to another solicitation], Greiner will promptly notify STV of such fact.” App. at 1464. Significantly, the Letter of Intent was signed on behalf of Greiner not only by the negotiating team of Bowen and Cleveland but also by Frank T. Callahan, Greiner's president and chief executive officer.
The district court found that paragraph seven was agreed to by Greiner “in response to STV’s concern that Greiner not use the STV offer to build on or be a springboard for other offers or to put the company in some sort of an auction circumstance or in play for a bid from some other source at a higher price.” App. at 1362-63. Yet this is precisely what happened and, despite our opinion in Channel holding letters of intent are binding if so intended by the parties, the majority holds the provision had no real effect.
On the very day on which the Greiner board agreed to the Letter of Intent, Greiner’s vice-president and chief operating officer, James E. Sawyer, and the manager of Greiner’s largest regional division, Sam Militello, were “if not participating fully, at least pursuing some interest” in soliciting another institution to provide financing to permit a management buy out of Greiner. App. at 1372. This search may have originally been intended only to solicit financing from several institutions on the employees’ own behalf, and therefore arguably was not barred by paragraph seven. As the district court found, “the effort by the employees in trying to have their own buy-out [did not interfere] with STV’s or Greiner’s obligations to proceed as they envisioned in the letter of intent.” App. at 1387.
*791But, as the district court further found, when “the representatives of this management group ... went outside of Greiner and communicated with Westinghouse, ... they breached paragraph 7.” App. at 1389. Westinghouse’s own representative, R. Stewart Kahn, testified that “the strength of the management buy-out was coming from four or five top key senior management people, including Militello, Sawyer, [Robert L.] Costello, [vice president and secretary of Greiner] and Callahan,” app. at 1374, who was one of the signatories of the Letter of Intent.
The court found that “[f]rom May 25th through June 6th, information about Greiner was being furnished to Westinghouse in furtherance of the solicitation of Westinghouse.” App. at 1374. This information about Greiner’s assets and financial status was collected from various departments of the company. Militello and Sawyer reviewed a draft of a letter from Westinghouse which was to be directed to Greiner’s board and proposed working changes to strengthen Westinghouse’s offer. Callahan, who I stress was the chief executive officer of Greiner and a signatory to the Letter of Intent, was informed of the employee meeting on May 21 shortly thereafter and was advised by his vice-president Sawyer and Militello by at least May 24 that there were negotiations with Westinghouse.
Despite the notification requirements in paragraph seven, STV was notified neither of the solicitation efforts by Greiner’s management nor that Greiner employees had furnished what appears to be confidential information about the company to Westinghouse. Callahan did not inform STV of Westinghouse’s interest in Greiner until June 6, when Callahan received the formal letter from Kahn stating that Westinghouse was “prepared to make a proposal for the management buyout of the shareholders” through funds advanced by Westinghouse, secured by the assets of Greiner. App. at 1519.
Based on these facts and others, the district court found that when members of the management group, including Sawyer and Militello, communicated with Westinghouse, assembled information about the company’s finances and sent it to Mr. Kahn, pledged the company’s assets, and “encouraged” Westinghouse to make an alternative acquisition proposal, they were acting “in the name of the corporation and not themselves” and thus caused Greiner to breach paragraph seven. App. at 1389.
II.
The court’s finding that the members of the management group were acting as representatives of Greiner in assembling and providing information about Greiner’s assets and encouraging and assisting Westinghouse in making an alternative acquisition proposal is a finding of fact, reviewable under the clearly erroneous standard. The majority eschews analyzing that finding for clear error, relying instead on Ram Construction Co., Inc. v. American States Insurance Co., 749 F.2d 1049 (3d Cir.1984), for its exercise of plenary review.
In Ram Construction, we distinguished between the “interpretation” of contracts which, because it entails discerning the meaning of the words used by the parties, is a factfinding reviewed for clear error, and the “construction” of contracts which, because it entails application of the law to determine the legal effect of these words, is subject to plenary review. Id. at 1053. As explained in Corbin’s authoritative treatise, interpreting a contract involves discerning the meaning of the communications between the parties, see A. Corbin, 3 Cor-bin On Contracts § 534, at 10 (1960), and thus involves ascertaining the “parties’ intent.” See, e.g., John F. Harkins Co., Inc. v. Waldinger Corp., 796 F.2d 657, 659-60 (3d Cir.1986), cert. denied, 479 U.S. 1059, 107 S.Ct. 939, 93 L.Ed.2d 989 (1987). Construction of the contract, on the other hand, involves giving the intent of the parties legal effect. In the course of construction, a court may fill in gaps in the terms of an agreement when, for example, “long after the parties have made their agreement, an event occurs that they did not foresee.” A. Corbin, supra, at 11-12. This process is referred to as construction, *792not interpretation, as it cannot accurately be said that the court is discerning the parties’ intent. Id. at 12.
In this case, the ambiguity that requires interpretation is the meaning and scope of the paragraph seven reference to “representatives.” Indeed, the difference between the district court’s view of that word and the view of the majority evidences its ambiguity.
The majority blurs the distinction between “construction” and “interpretation” in holding that when the district court determined that Sawyer and Militello were acting as Greiner representatives, the district court was engaged in the process of construction because it was determining “the legal effect of an agreement on an event not foreseen by the parties.” Majority op. 787, supra. The solicitation of an outside offer by representatives of Greiner clearly was an event contemplated by the parties; this possibility was precisely what the parties intended to prohibit in paragraph seven. The district court’s determination that Sawyer’s and Militello’s actions caused Greiner to breach paragraph seven involved both ascertaining the activities that the parties intended to prohibit through the language of this paragraph and making factual findings as to whether such activities occurred. Both of these determinations are questions of fact, reviewable under the clearly erroneous standard of Fed.R.Civ.P. 52. See Cooper Laboratories v. International Surplus Lines, 802 F.2d 667, 671 (3d Cir.1986) (parties’ intent reviewable under Rule 52). There was more than ample evidence to support the district court’s findings, and they therefore should have been left undisturbed.
The majority seeks to divorce the actions of Greiner’s chief executive group from Greiner itself. This is simply wrong. The supply of data by high company officers, those the district court held “had authority to give out knowledge and information on company letterheads,” app. at 1388, which was a violation of Greiner’s contract, imposed liability on Greiner, whether or not the officers were authorized to act as they did. It does not differ in principle from imposition of corporate liability for other unauthorized acts by company management, such as, for example, price-fixing activities.
Moreover, section seven bound Greiner, and certainly its signatory Callahan, not to “permit its representatives to, solicit or encourage any acquisition proposal.” Thus, when Callahan contributed $1,000 on behalf of a competing proposal via his son, see app. at 581-82, 828-38, 1474, and failed to take any steps to try to nip in the bud the shopping activities of the management group, that alone was ample evidence of a breach for which STV was entitled to recover damages.
To the extent that the majority is “construing” paragraph seven, and is holding that standard “no shop” provisions may not bind the company’s top management, I believe that the majority is establishing an unprecedented rule of law in the absence of legal authority or a persuasive rationale. A company can act only through the individuals who lead it. The Greiner board itself construed the reference to Greiner in the Letter of Intent to include the company’s officers. App. at 1523. While it is possible, as the district court held, that “no shop” clauses do not bar management takeovers per se, persons dealing with a company are entitled to rely on the good faith of its management. In this case, management undermined the company’s agreement by soliciting Westinghouse’s participation in management’s proposal, and it is evident from the record that Westinghouse contemplated an equity interest in the very company that had promised not to shop for a better offer. The facts on this record amply support the district court’s factual findings, and I would uphold its award to STV of reliance damages in the amount the parties agreed covered STV’s expenses in connection with the negotiation of the Letter of Intent and the merger efforts.