Court Opinion

ID: 9755000
Source: CourtListenerOpinion
Date Created: 2023-08-28 20:20:33.325352+00
Date Added: 2024-06-11T07:28:01.386652
License: Public Domain

JOHNSON, J.,
dissenting.
¶ 1 I must respectfully dissent from my distinguished colleagues’ Majority Opinion. I find the Majority’s analysis flawed in three respects. First, the Majority errs in interpreting the plain language of the Buy/ Sell Agreement to exclude cash-out mergers. Secondly, the Majority errs in concluding that the proposed merger is solely a corporate act, and as such does not constitute “shareholder action.” Thirdly, the Majority errs in failing to properly consider the intent of the parties, which underlies accurate interpretation of the Buy/Sell Agreement. I shall address each of these deficiencies, one after another.
¶ 2 Firstly, I find that the Majority improperly interpreted the language in the Buy/Sell Agreement. The Majority strictly construes the Buy/Sell Agreement and relies on Banks Eng’g Co., Inc. v. Polons, 697 A.2d 1020 (Pa.Super.1997), to conclude that since the term “merger” is not explicitly included in the Buy/Sell Agreement, our Court will not insert the term because the parties either “intended to exclude *750mergers, or did not anticipate or consider such an event.” Majority Opinion at 744.
¶ 3 In my view, a cash-out merger clearly falls within the parameters of the Buy/ Sell Agreement, even when strictly construed. The proposed transaction is called a “cash-out merger,” but this Court cannot, as the Majority has done, rely on this label alone in determining whether such a transaction is contemplated in the Buy/Sell Agreement; rather, we must look at the substance of the transaction, including its consequences. In Farris v. Glen Alden Corp., 393 Pa. 427, 143 A.2d 25 (1958), our Supreme Court recognized the difficulty of properly characterizing business transactions and provided the following guidance:
[T]o determine properly the nature of a corporate transaction, we must refer not only to all the provisions of the agreement, but also to the consequences of the transaction and to the purposes of the provisions of the corporation law said to be applicable.
Farris, 393 Pa. at 432, 143 A.2d at 28 (emphasis added). See also Bruns v. Rennebohm Drug Stores, Inc., 151 Wis.2d 88, 442 N.W.2d 591, 595 (App.1989) (concluding that the substance of the transaction prevails over its form).
¶ 4 The proposed plan of merger in this case is a “reverse subsidiary cash merger.” Memorandum, Seven Springs Status Report, 6/17/98, ¶ (2)(i). The substance of it is as follows: the “[cjapital stock of Seven Springs Farm, Inc. (“SSF”) [will be] acquired in a cash out merger, with Booth Creek subsidiary merging into SSF.... ” Id.; N.T. Trial, 9/30/98, at 167. The Booth Creek subsidiary (created by the Booth Creek parent corporation for the sole purpose of this proposed merger) will merge into Seven Springs, and Seven Springs will remain as the surviving corporation. In the language of the Agreement of Merger, the transaction requires the shareholders to “surrender” their shares and the shares will be “Converted” in exchange for the right to receive cash on the effective date of the merger. Agreement of Merger, 8/28/98, §§ 2.2(c), 2.3. As a consequence, the family shareholders will not retain ownership of any shares in the surviving corporation after the merger:
From and after the [date the articles of merger are filed with the Department of State of Pennsylvania (designated as the “Effective Time”)], [the shareholders] shall have no rights with respect to' the Surviving Company by virtue of their ownership of such shares immediately prior to the Effective Time, and each certificate which formerly represented a [share] shall, from and following the Effective Time, represent only the right to receive the respective [cash consideration].
Id. at § 2.2(c).
¶ 5 I conclude that this arrangement falls squarely within the parameters of the following provision of the Buy/Sell Agreement:
[N]o Stockholder ... shall transfer, assign, sell, pledge, hypothecate, mortgage, alienate or in any other way encumber or dispose of all or any part of his stock in the Corporation ... without giving to all other Stockholders and to the Corporation at least 30 days written notice by registered mail or personal delivery with receipt acknowledged in writing of his intention to make a disposition of his stock.
Buy/Sell Agreement, 7/1/59, ¶ 2, at 2 (emphasis added). Where language is clear and unambiguous, we are to interpret its meaning within the “four corners of the document.” Banks Eng’g Co., Inc. v. Polons, 697 A.2d 1020, 1023 (Pa.Super.1997) appeal granted, 550 Pa. 715, 706 A.2d 1210 (Pa.1998) (quoting First Home Sav. Bank, FSB v. Nernberg, 436 Pa.Super. 377, 648 A.2d 9, 14 (1994)). In the absence of technical terminology, words of a contract are to be construed according to their plain and ordinary meaning. Warren v. Greenfield, 407 Pa.Super. 600, 595 A.2d 1308, 1311 (1991). Where the words are clear and unambiguous, they shall not be *751interpreted to conflict with their plain and ordinary meaning. Id. at 1312.
¶ 6 I conclude that the language of Paragraph 2 of the Buy/Sell Agreement is clear and its use of the term “dispose” is sufficiently broad to encompass the transaction at issue in this case. The plain meaning of dispose is “to get rid of’ or “to transfer into new hands or to the control of someone else.” See Webster’s ThiRd New International Dictionary, Unabridged 654 (1976). Our courts have construed “disposition” to mean “transfer.” Gosewisch v. Com., Dep’t of Revenue, 40 Pa.Cmwlth. 565, 397 A.2d 1288, 1292 (1979) (defining “disposition” in the context of an income tax case). In turn, a transfer “embraces every method - direct or indirect, absolute or conditional, voluntary or involuntary - of disposing of or parting with property or with an interest in property.” Black’s Law Dictionary 1503 (7th ed.1999) (emphasis supplied).
¶ 7 The proposed cash-out merger qualifies as a transaction where the shareholders will be “disposing of,” “parting with,” or “getting rid of’ their shares. As Seven Springs will be the surviving corporation, the shareholders will be required to “surrender” their shares upon the merger. Agreement of Merger, 8/28/98, §§ 2.2(c), 2.3. Pennsylvania’s Business Corporation Law (BCL) uses similar language in that a plan of merger must set forth the manner by which shareholders are to “surrender ... any certificates” in exchange for cash. 15 Pa.C.S. § 1922(a)(3). By “surrendering” their shares, the shareholders will have “disposed of’ or will have “gotten rid of’ their shares in a cash-out merger transaction. Accordingly, the Buy/Sell Agreement was contemplated to embrace situations, such as this, where shareholders are disposing of their shares.
¶ 8 The parties in the instant case anticipated every such potential disposition, by virtue of the plain language in the Buy/Sell Agreement: “[N]o Stockholder ... shall transfer, ... or in any other way encumber or dispose of all or any part of his stock .... ” Buy/Sell Agreement, 7/1/59, ¶ 2, at 2 (emphasis added). Although the Majority purports to use plain meaning in interpreting the Agreement, the Majority declines to define any of these operative terms in the Agreement. Once those terms are defined according to their plain and ordinary meaning, the conclusion that a cash-out merger fits into the purview of the Agreement is inescapable.
¶ 9 Secondly, the Majority errs in concluding that the merger is solely a corporate act and that the disposition of shares arises through operation of law, not through shareholder action. Majority Opinion at 745-46. Likewise, Appellees argue that “[bjecause the Buy/Sell Agreement restricts only certain stockholder acts (‘no Stockholder shall ... dispose of [stock]’), it does not encompass a merger.” The Majority and the Appellees overlook the following provision in the Buy/Sell Agreement, which states in pertinent part:
11. Agreements by the Corporation. In consideration of the promises of the Stockholders, the Corporation agrees for itself and for its successors and assigns that it shall perform every act that may be required of it to effectuate the provisions of this Agreement including, but not limited to, the following:
(a) it will not transfer or reissue any of its shares of stock in violation of this Agreement or without requiring proof of compliance with this Agreement.
(b) all stock certificates issued by the Corporation during the life of this Agreement shall be endorsed as stated above;....
Buy/Sell Agreement, 1/10/69, ¶ 11 (emphasis added). Clearly, Seven Springs, as a corporation, is bound to effectuate all of the provisions in the Buy/Sell Agreement. This includes effectuating the restrictions on transfer in Paragraph 2 of the Buy/Sell Agreement.
¶ 10 Additionally, notwithstanding the provisions of the Buy/Sell Agreement, as a *752matter of law, a cash-out merger is not solely a corporate act. Rather, it requires shareholder action. Pennsylvania’s Business Corporation Law requires that shareholders approve the merger plan. 15 Pa. C.S. § 1924(a). Exceptions to this requirement exist, but none of them are applicable to the cash-out merger in the instant case. 15 Pa.C.S. § 1942(b) (indicating that shareholder approval for merger not required in cases of, inter alia, a stock-for-stock merger).
¶ 11 .Accordingly, the Majority’s reliance on Shields v. Shields, 498 A.2d 161, 168-69 (Del.Ch.1985), is misplaced. Shields involved a stock-for-stock merger where the shareholders retained an ownership interest in the surviving corporation. Here, the Majority relies on the false premise that Seven Springs will cease to exist, and thus the Seven Springs stock will cease to exist. However, our BCL indicates that in a merger, one of the corporations continues to exist. 15 Pa.C.S. § 1929(a). In this case, the Majority completely overlooks that the Plan of Merger expressly provides for Seven Springs to remain as the surviving corporation. However, unlike those shareholders in Shields, the shareholders in the instant case will not continue to hold a stock interest in Seven Springs. Here, some of the shareholders voted to dispose of their stock in exchange for cash, and they will not retain any ownership interest.
¶ 12 The facts of the instant case are more congruous with Bruns v. Rennebohm Drug Stores, Inc., 151 Wis.2d 88, 442 N.W.2d 591 (App.1989), where a shareholder, wishing to-dispose of his stock in a closely held corporation, was subject to a shareholders’ agreement that restricted the sale of stock by vesting the right of first refusal in other shareholders. The shareholder argued, as do the Appellees in the instant case, that the shareholders’ agreement did not apply to a merger because a merger was “not a sale, but a transfer of assets by operation of law.” Bruns, 442 N.W.2d at 594. Under the proposed transaction in Bruns, the shareholders were to receive something of value in exchange for their stock (like the cash-out merger in the instant case). The court determined that the elements of a sale were present, regardless of whether the shareholders were compensated for their shares in cash or in kind. Id. at 595. Consequently, the Bruns court rejected the transfer-by-operation-of-law argument, and determined that sales were covered under the shareholder agreement. Id. Thus the proposed transaction, although deemed a merger, in substance triggered application of the restrictions on transferability.
¶'13 Furthermore, the shareholders in Bruns were obligated to comply with the agreement before the merger was ever accomplished. Id. at 597 (holding that shareholder’s obligation under stock alienation agreement “probably arose” when shareholder agreed 'to merger and “certainly arose” when shareholder entered into agreement and plan of merger).
¶ 14 Similarly, Paragraph 2 of the Buy/ Sell Agreement explicitly provides that the “intention to make a disposition of [one’s] stock” is the factor that triggers the rights of notice and first refusal under the Buy/ Sell Agreement. Buy/Sell Agreement ¶ 2 (emphasis added). Thus, the majority shareholders’ obligation to provide notice of their intent to dispose of their shares and allow the corporation and minority shareholders’ the opportunity to exercise the right of first refusal certainly arose at least by the time the majority shareholders voted in favor of the Plan of Merger with Booth Creek on October 3, 1998. However, the intent to dispose of the stock probably arose prior to this final vote, i.e. at the June 13, 1998 shareholders meeting where the majority shareholders voted to pursue divestiture exclusively with Booth Creek. R.R. 785a.
¶ 15 Thus, I reject Appellees’ argument that the only action the shareholders took was to vote on the merger, and voting is not proscribed conduct under the Buy/Sell Agreement. Voting was merely the means *753of effectuating a transaction that involves the disposition of, or “surrender” of, the family-owned shares in exchange for cash. Furthermore, it is the “intention” to dispose of one’s shares that triggers application of the Buy/Sell Agreement. As I have concluded, this “intention” arose at least by the time the majority shareholders voted to effectuate the merger. Accordingly, the rights to notice and first refusal arise prior to the consummation of the proposed merger.
¶ 16 Thirdly, the Majority overlooks the parties’ intent as expressed in the Buy/Sell Agreement. The primary object in contract interpretation is to “ascertain and effectuate the intent of the parties.” Warren, 595 A.2d at 1312 (quoting 4 Williston on CONTRACTS § 601 (3d ed.1961)).
When we, as a reviewing court, are asked to interpret or review the meaning of a contract, the intent of the parties is paramount, and our objective is to ascertain the parties’ intent as it is manifestly expressed in the agreement itself. The intent of the parties to a written contract is regarded as embodied in the writing itself.
Warren, 595 A.2d at 1311. We must read the contract as a whole and give effect to each provision of the contract to properly determine the parties’ intent. Bethlehem Steel Corp. v. MATX, Inc., 703 A.2d 39, 42 (Pa.Super.1997). To further discern the parties’ intent, we may look at “the surrounding circumstances, the situation of the parties when the contract was made and the objects they apparently had in view and the nature of the subject matter.” In re Estate of Mather, 410 Pa. 361, 369, 189 A.2d 586, 589 (1963).
¶ 17 The predecessors of the present shareholders unanimously agreed to a restrictive shareholder agreement intending to keep the Seven Springs stock within the family “so as to prevent interference therein by outsiders.” Buy/Sell Agreement, 7/1/59, at 2. A new Buy/Sell Agreement, executed in 1969, reinforced the shareholders’ intention to keep control of the corporation within the family:
WHEREAS the Stockholders desire to promote their mutual interests and the interests of the Corporation by imposing certain restrictions and obligations on themselves, the Corporation, and the shares of stock of the Corporation,
It is therefore agreed ...
Buy/Sell Agreement, 1/10/1969, Preamble. The “mutual interest” of the parties and the “interests of the Corporation” include restricting transfers to family members and to Seven Springs, the corporation. Id. ¶¶ 1, 2. The Buy/Sell Agreement provides specifically that a shareholder may transfer stock by will or gift to his child, but if the stock were made in trust, then the trustee would have to be approved by the other shareholders. Id. ¶ 1. Furthermore, a shareholder wishing to dispose of his stock outside of the family must first offer his stock to the corporation and then to the other shareholders. Id. ¶¶ 2, 3.
¶ 18 The cover letter to the 1969 Buy/ Sell Agreement, composed by the shareholders’ attorney at that time, Ralph E. Becker, indicated:
[T]he agreement requires that the corporation shall have a first option on any proposed transfer of stock (with the exception of a transfer in the bloodline) with the remaining shareholders having a proportionate second option for any stock not purchased by the corporation. The stock may be sold to outsiders only after both options are waived.
Cover Letter from Ralph E. Becker to Herman Dupre, 1/2/69 (Exhibit DX-118), R.R. at 481a. Attorney Becker also stated that Paragraph 2 of the 1969 Buy/Sell Agreement was drafted to prevent a shareholder from “circumventing the intent of preventing transfers to outsiders in all cases.” Id. (emphasis in original). In a prior letter suggesting provisions for the 1969 Buy/Sell Agreement, Attorney Becker stated:
*754Seven Springs is a classic example of a closely held corporation and it is understood that the family does not wish its shares to fall into the hands of outsiders. To accomplish this purpose, it is recommended that the corporation and its shareholders execute a mutual obligation buy-sell agreement covering all common and preferred stock outstanding. The present agreement [referring to the 1959 Buy/Sell Agreement] is inadequate.
Letter from Ralph E. Becker to Seven Springs, Helen K. Dupre, Philip Dupre, Herman Dupre, and Luitgarde Dupre Su-jansky, 10/18/68, (Exhibit DX-4), R.R. at 467a. Luitgarde Dupre Sujansky, one of the signatories to the 1969 Buy/Sell Agreement testified as follows:
Q. Mrs. Sujansky, can you tell the Court as best you can recall what were you and your brothers and your mother attempting to achieve by this Buy/Sell Agreement in 1969?
A I think to protect each individual — I mean to protect one from the other as not I myself, I couldn’t use my stock for collateral or jeopardize it in any way. I think it’s for the individual, for the three of us at that time in our family.
Q. So it was to keep—
A. The shareholders, yes.
Q. So it’s to keep the stock in the family?
A. Yes; uh-huh.
Q. Was it to keep one of you from selling some of your shares to somebody else against the wishes of the others?
A. Yes; uh-huh.
N.T. Trial, 9/30/98, at 196; R.R. at 199a. James McClure, the President and Chairman of the Board of Seven Springs, who is not a shareholder, assured the shareholders that, “at 75%, it is still impossible for two families (66 2/3%) to conduct a share sale, so if protection of your interest is of concern, you still have that protection.” James N. McClure Memorandum, 12/10/97, (Exhibit DX-24), R.R. at 522a; N.T. Trial, 9/30/98, at 139-40, R.R. 142a-143a. Clearly the protective purpose to be achieved by the Buy/Sell Agreement was, and remains, to keep the Seven Springs stock within the family, as it has been since the incorporation of Seven Springs in 1959. The 1969 Buy/Sell Agreement serves to foster that objective, not to defeat it, as the Majority would assume.
¶ 19 Moreover, I disagree with the Majority’s conclusion that shareholders’ agreements restricting share transferability are disfavored in Pennsylvania. Majority Opinion at 747. To the contrary, Pennsylvania’s BCL approves shareholder agreements that impose any lawful restriction on the transfer of shares. 15 Pa.C.S. § 1529(b), (e). For example, shareholders’ right of first refusal and right to consent to any proposed transfer are restrictions specifically authorized in an agreement restricting share transferability:
(c) Restrictions specifically authorized. — A restriction on the transfer of securities of a business corporation is permitted by this section if it:
(1) obligates the holder of the restricted securities to offer to the corporation or to any other holders of securities of the corporation or to any other person or to any combination of the foregoing a prior opportunity, to be exercised within a reasonable time, to acquire the restricted securities;
5{! * * *
(3) requires the corporation or the holders of any class of securities of the corporation to consent to any proposed transfer of the restricted securities or to approve the proposed transferee of the restricted securities ....
15 Pa.C.S. § 1529(c)(1), (3). The Pennsylvania Supreme Court has said that restrictions on the transfer of shares serve a *755“useful purpose” and are “lawful and en-forcible [sic].” Bechtold v. Coleman Realty Co., 367 Pa. 208, 214, 79 A.2d 661, 664 (1951). Our Supreme Court has also said, “family agreements are always favored in the law.” In re Estate of Mather, 410 Pa. at 369, 189 A.2d at 590 (upholding validity of stock transfer restrictions among family members where there was no evidence of fraud or deceit when the agreement was created, and the agreement operated to the mutual benefit of all parties). See also Bruns, 442 N.W.2d at 595 (“[A] right of first refusal or first purchase is not a restraint on the alienation of property if its terms are reasonable as to price and time.... A reasonable right of first refusal does not reduce the opportunity to sell; in fact, it provides a possible buyer who is constantly available.”). The valuable purpose to be served by such agreements among family members includes preventing intrusion by outsiders into the family-business. In re Estate of Mather, 410 Pa. at 369, 189 A.2d at 589.
¶ 20 The Buy/Sell Agreement in the instant case provides a reasonable and lawful restraint on transferability of shares, which is specifically approved by our BCL. These terms include the requirement that a shareholder, who intends to dispose of his shares, first offer the shares to Seven Springs and then to other shareholders. Buy/Sell Agreement, 1/10/69 ¶¶ 2, 3. This right of first refusal is to be exercised within a reasonable time, i.e. at a shareholders’ meeting to be held within 30 days from the time the shareholder wishing to dispose of his stock gives written notice of his intention to dispose of his stock. Id. A separate provision entitled, “Free Transferability of Shares,” permits a shareholder to dispose of his stock freely if the right of first refusal vested in the corporation and shareholders is not exercised within the required time frame. Id. at ¶4. The Buy/Sell Agreement required a unanimous vote of the shareholders to waive the restrictions on the transfer of stock. Id. at ¶ 5. However, this provision was later amended to require at least 75% of the shareholder vote instead of a unanimous vote to effectuate a waiver of the restrictions on the transferability of shares. Buy/Sell Agreement Amendment, 12/6/97. Nevertheless, the majority shareholders pursued disposal of their shares outside of the family in contravention of a reasonable and lawful Buy/Sell Agreement. At the shareholders’ meeting on June 13, 1998, 66 2/3% of the shareholders (also referred to as the majority shareholders) voted to proceed with the divestiture process exclusively with Booth Creek. Shareholders Meeting, 6/13/98; R.R. at 785a. The majority shareholders (66 2/3%) subsequently voted in favor of the cash-out merger on October 3,1998.
¶ 21 The Buy/Sell Agreement inures to the benefit of all shareholders by providing protection to this family-owned business against intrusion by outsiders. Its terms are reasonable, and it is an agreement among family members; therefore, its existence and purpose is favored in Pennsylvania. See In re Estate of Mather, 410 Pa. at 369, 189 A.2d at 590. My colleagues’ conclusion that these agreements are disfavored is contrary to the established law in Pennsylvania.
¶ 22 Finally, Appellant raises the question of whether an asset sale would circumvent the restrictions on transferability of shares in the Buy/Sell Agreement. Although the Majority does not analyze this issue, the trial court, in response to the issue raised by Seven Springs’ counsel during closing arguments, concluded that an asset sale would not be subject to the Buy/Sell Agreement. Trial Court Opinion, 10/30/98, at 5-6. The trial court made this finding despite its recognition that an asset sale was “not the subject of this litigation.” Id. at 6. Since an asset sale was not in controversy, the issue of whether such transaction would be subject to the Buy/ Sell Agreement was not ripe for adjudication in a declaratory judgment action. See Cherry v. City of Philadelphia, 547 Pa. 679, 685, 692 A.2d 1082, 1085 (1997). I *756would vacate the trial court’s ruling on this issue.
¶ 23 Moreover, I note that the board of directors failed to pursue an alternative proposal, introduced by the minority shareholder representative, Lynda M. Dupre. Her proposal called for an employee stock ownership plan (ESOP), which would permit the shareholders who wished to retain their shares to do so, and those who wished to sell, to do so at a price superior to the Booth Creek offer. Letter from Lynda M. Dupre to James McClure, 8/10/98, (Exhibit DX-118), R.R. at 718a. In response, James N. McClure denied Ms. Dupre’s request for a meeting with department heads and key employees to discuss the ESOP proposal. He further stated that % of the shareholders wanted to pursue Booth Creek’s merger proposal and that the board had directed him to pursue the same. Id. He encouraged Ms. Dupre not to pursue the ESOP, as it would confuse, disrupt, and further stress the staff and management of Seven Springs. Id.
¶24 Directors of a corporation have a fiduciary duty toward the corporation and its shareholders. 15 Pa.C.S. §§ 512(a), 1712(a). See also Korman Corp. v. Franklin Town Corp., 34 Pa. D. & C.3d 495 (Com.Pl.1984). Directors must serve the best interests of the corporation and act in good faith. 15 Pa.C.S. § 512(a). This duty includes an obligation to make reasonable inquiries and act with the skill and diligence that an ordinary person would use under similar circumstances. Id. Both directors and majority shareholders owe the minority shareholders a duty of care, diligence, and good faith, and therefore must act to protect the minority shareholders’ interests. Baran v. Baran, 166 Pa.Super. 532, 72 A.2d 623 (1950).
¶25 If the board of directors failed to adequately address Ms. Dupre’s ESOP proposal, the board members may have breached their fiduciary duty to the shareholders, although the trial court made no specific findings on this issue. The board’s alleged failure to explore alternative proposals that may have been more advantageous to the shareholders, if established, would place in question the propriety of the board’s approval of the cash-out merger.
¶26 Finally, adoption of the Majority’s conclusion that the cash-out merger is not subject to the terms of the Buy/Sell Agreement would place in jeopardy the validity and effect of restrictive shareholder agreements in closely held corporations throughout the Commonwealth. Board members of such corporations will be on notice that they may use the device of the cash-out merger to circumvent shareholders’ agreements heretofore understood to be binding. I find this to be a troubling precedent, if permitted to be established.
¶27 For the foregoing reasons, I conclude that the vote by some of the members of the family, on October 3, 1998, to adopt the Plan of Merger constituted a shareholder’s act, which triggered the right of first refusal contained in the Buy/ Sell Agreement as amended. I conclude that the subject Buy/Sell Agreement does apply to the proposed merger. Accordingly, I would reverse the Order entered on December 2, 1998 in the Court of Common Pleas of Somerset County and remand with directions that judgment be entered in favor of Lynda Dupre Croker at No. 535 Civil 1998, and in favor of Lynda M. Dupre at No. 543 Civil 1998, with costs on Seven Springs Farm, Inc. at both actions.
¶ 28 CAVANAUGH, J. and MUSMANNO, J. join this Dissenting Opinion.