Opinion
No. CV 01 0073517 S
November 5, 2007
MEMORANDUM OF DECISION
Background
Harry R. White, II, (hereinafter "the plaintiff" or "Mr. White") is seeking injunctive relief and damages against Gregory Howe, Inc. (hereinafter "the defendant" or "Gregory Howe." The plaintiff is specifically seeking: A judgment that he properly exercised a Warrant on December 18, 2000; A permanent injunction requiring the defendant to issue two hundred and ninety-eight (298) shares of Gregory Howe, Inc., common stock to the plaintiff; monetary damages; cost, attorneys fees and interest; and any and all other relief in law or equity which the court deems just and necessary.
The plaintiff is a natural person residing in Palm Beach, Florida. He is also a very sophisticated investor. The defendant is a Connecticut corporation with its principle place of business in Shelton, Connecticut. It is in the business of drug and alcohol testing.
Mr. George Howe is an individual who for all times pertinent hereto resided in Shelton, Connecticut. From 1995 to the date of trial, Mr. Howe served as the President of Gregory and Howe and held approximately ninety-six percent (96%) of the shares of the company's stock.
The plaintiff was introduced to Mr. Howe sometime around 1992 by the plaintiff's ex-brother-in-law. The purpose of the introduction was that Mr. Howe was looking for investors in the company.
In 1992 the company had three shareholders, Mr. Howe, Allen Gregory and Donna Gregory. Mr. Howe owned twenty percent (20%), while Mr. and Ms. Gregory owned forty percent (40%) each.
Upon learning that Con Edison was one of Gregory Howe's clients the plaintiff became interested in participating in the company.
In January 1993 the plaintiff became a shareholder of the defendant by buying out Donna Gregory's forty percent (40%) interest. The stocks were then redistributed so that each owner had a one-third interest in Gregory Howe. Mr. White paid one hundred and twenty-five thousand dollars ($125,000) for his one-third interest. He additionally made a loan to the company of another one hundred and twenty-five thousand dollars ($125,000.00).
The plaintiff's role in the company was to organize its finances, accounting systems and controls and sales efforts. Unlike the other shareholders, the plaintiff was not a full-time employee of the company.
Gregory Howe had an accountant when Mr. White joined it, but the company hired the services of Howard Grabina, CPA as an outside accountant. Mr. Grabina was known to the plaintiff because he had previously performed accounting services for him on a regular basis.
Mr. Grabina visited the defendant's offices on a monthly basis to prepare profit and loss statements and to assist the company in accounting matters.
The plaintiff became dissatisfied with the way that the defendant company was being operated. He was concerned that Mr. Gregory was taking too many business trips and was unwilling to get involved with the company full-time. He also felt that Mr. Gregory had "the wrong priorities." The plaintiff gave as an example, a time when there was a meeting with a vendor and Mr. Gregory walked past the conference room with gym gear. Instead of attending the meeting, Mr. Gregory informed the participants that he was going to the gym.
The plaintiff believed that Mr. Gregory and Mr. Howe were poorly managing the company's finances. He gave the example of the company spending money on a temporary service agency when it should have hired an employee at less expense.
Mr. Gregory eventually announced that he no longer wanted to work for the company and requested that his one-third interest be bought out. As a result the plaintiff bought Mr. Gregory's interest for eighty thousand dollars ($80,000.00).
As of March 21, 1996, the plaintiff owned eight hundred (800) of the one thousand two hundred (1,200) issued and outstanding shares of Gregory Howe.
Mr. Howe ran the day-to-day operations of the company after Mr. Gregory's departure.
The plaintiff attempted to help the company obtain certain accounts through his connections in the food industry. He also used his other contacts to try to attract business for Gregory Howe.
Eventually Mr. Howe approached the plaintiff about how the company was being operated. This occurred about the same time that a bank was demanding payment of a loan that had been taken out by Gregory Howe before the plaintiff became a member. Mr. Howe wanted the plaintiff to pay the loan and to put more money in the company. He also wanted the company to start paying him a salary.
The relationship between Mr. Howe and Mr. White continued to deteriorate.
The plaintiff eventually agreed to sell his share in the company for three hundred and fifty thousand dollars ($350,000.00), but the parties were unable to come to an agreement.
The plaintiff eventually entered into an agreement to sell his stock in Gregory White. The essence of the agreement was that plaintiff was to forgive an approximately three hundred thousand dollar ($300,000.00) debt that the company owed him and he in turn would receive one hundred thousand dollars ($100,000.00) in cash and a Common Stock Purchase Warrant with a five-year time frame to exercise.
On March 13, 1996, Gregory Howe, Inc. entered into a Common Stock Subscription Agreement with Mr. John Bell of Roslyn, New York. Pursuant to the terms of the agreement the defendant sold 533.33 shares of common stock of the company for one hundred thousand dollars ($100,000.00).
According to the terms of the agreement this represented "44.44% of the outstanding capital stock of the Company on a fully diluted basis after giving effect to all outstanding options, warrants and convertible securities (except for the warrants to purchase up to 298 shares of the Company's Commons Stock issued to Harry R. White II)." See Agreement at Section 2b.
Mr. Bell underwent major heart surgery and died shortly after the agreement was executed.
In June of 1996, Mr. Howe purchased the shares in Gregory Howe from the Bell Estate for eighty-five thousand dollars ($85,000.00). The plaintiff learned of the sale and repurchase of the shares after Mr. Bell's death and after the repurchase had already occurred.
The defendant did not give the plaintiff any notice or otherwise disclose the selling or re-purchasing of the Bell shares. Nor did the defendant give notice to the plaintiff that the shares were available for purchase.
On or about March 14, 1996, Gregory Howe, Inc. entered into a Common Stock Subscription Agreement with Laura H. Kavanagh of Sea Cuff, New York. Pursuant to the terms of the agreement the defendant sold 266.66 shares of common stock of the company for fifty thousand dollars ($50,000.00).
Linda Kavanagh is the wife of Donald Kavanagh, Esq., an attorney who represented Gregory Howe, and was involved in the company's Warrant subscription issue concerning the plaintiff.
The agreement provides that the shares constitute 22.22% of the outstanding capital stock of the company.
The plaintiff was not informed by the defendant about the Kavanagh Common Stock Subscription Agreement.
On March 22, 1996, in exchange for 1,200 shares of issued and outstanding common stock the defendant issued to the plaintiff a Common Stock Purchase Warrant. The Warrant gave the plaintiff the right until March 22, 2001 to purchase two hundred and ninety-eight (298) shares of Gregory Howe common stock.
The Warrant provided that the purchase price per share was two hundred and twenty-five dollars ($225.00) subject to adjustment as provided in the Warrant.
Pursuant to paragraph 7 of the Warrant, the Exercise Price was subject to adjustment if the defendant:
a. Declares a dividend or makes a distribution on its outstanding shares of common stock in shares of common stock or other securities of the company;
b. Subdivides or reclassifies its outstanding shares of common stock into a greater number of shares;
c. Combines or reclassifies its outstanding shares; of common stock into a smaller number of shares.
From March 22, 1996 to March 22, 2001, the defendant did not declare a dividend or make a distribution on its outstanding shares of common stock in shares of common stock or other securities of the company.
From March 22, to March 21, 2001, the defendant did not subdivide or reclassify its outstanding shares of common stock into a small number of shares.
Under the terms of the Warrant, the defendant was to provide the plaintiff with thirty (30) days advance notice of the following transactions:
a. The company declares a cash dividend;
b. The company proposes a merger;
c. The company sells all of its assets
d. The company sells substantially all of its assets other than in the ordinary course of business;
e. The company issues stock or securities convertible into or exchangeable for common stock;
f. The company issues any right to subscribe for or to purchase common stock or any stock or securities convertible into or exchangeable for common stock;
g. The company issues any options to purchase common stock or any stock or securities convertible into or exchangeable for common stock;
h. The company enters into any agreement providing for the issuance of common stock or any stock or securities convertible into or exchangeable for common stock;
i. The company enters into any call commitments or claims of any character relating to common stock or any stock or securities convertible into or exchangeable for common stock.
The more credible and convincing evidence presented at trial indicates that none of the above situations occurred during the subject period of time.
In addition to the foregoing, Section 7f(i) of the Warrant provides in pertinent part that the company was to provide to the plaintiff: "[A]s soon as available and in any event within 45 days after the end of each calendar quarter financial statements, consisting of income statements and balance sheet, which fairly present the financial condition and results of operations, prepared in accordance with generally accepted accounting principles consistently applied, as at the end of, and for, such preceding calendar quarter (subject to normal year-end audit adjustments) . . ."
The Warrant also requires the company to give the plaintiff year-end financial information within 90 days after the end of each fiscal year.
It furthermore requires the company to give the plaintiff annual corporate tax returns.
On November 14, 1997 the plaintiff provided the defendant with its balance sheet dated September 30, 1997 and its income statement for the nine (9) month period ending September 30, 1997.
On December 15, 1997 the defendant passed a resolution pursuant to the provisions of § 33-945 C.G.S., resolving to issue fifty (50) shares of new common stock to Ronald C. Ing. The resolution states that the purpose of the issue was for a year-end bonus to Mr. Ing. The resolution further states that the value of the stock was eleven thousand two hundred and fifty dollars ($11,250.00).
Section 33-945 C.G.S. concerns the keeping of corporate records. This statute provides in pertinent part that: "(a) A corporation shall keep as permanent records minutes of all meetings of its shareholders and board of directors, a record of all actions taken by the shareholders or board of directors without a meeting and a record of all actions taken by a committee of the board of directors in place of the board of directors on behalf of the corporation . . ."
On February 18, 1998 the defendant provided the plaintiff with its balance sheet and income statement for the year ending 1997. However the documentation does not provide that it was drafted in accordance with generally accepted accounting principles.
On June 7, 2000 the defendant provided the plaintiff with its balance sheet dated December 31, 1999 as well as its federal and state tax returns for 1999. Once again the documentation does not provide that it was drafted in accordance with generally accepted accounting principles.
The defendant lost contact with the plaintiff during the plaintiff's divorce proceedings in 1999/2000, and his vacationing in Palm Beach Florida. The defendant subsequently provided the required documents to the plaintiff when the defendant's attorney was able to make contact with the plaintiff.
In order to exercise the rights represented by the Warrant, the holder of the Warrant must:
a. Surrender the warrant, with the purchase form contained in the Warrant, at the principal executive office of the Company or such other address designated by the Company; and
b. Tender payment to the Company of the Exercise Price then in effect for the number of shares of common stock specified in the purchase form, together with applicable stock transfer taxes, if any, in the form of a certified check, cashier's check or money order.
By letter dated December 18, 2000, through his attorney, the plaintiff attempted to exercise his rights under the Warrant to purchase two hundred ninety-eight shares of common stock of the Company. The attempt however was not in compliance with the Warrant; instead, the plaintiff tendered the original warrant, an election to purchase form, and a "good faith" tender of a one thousand dollar ($1,000.00) money order. The plaintiff stated in his tender that Gregory Howe breached the Warrant and prevented Mr. White from determining the appropriate Exercise Price by failing to provide [him] with (i) "copies of all communications to shareholders, including, to the extent made available to shareholders, quarterly and yearly financial information on the Company" (¶ 7(e)): (ii) quarterly and annual financial statements and annual corporate tax returns (¶ 7(f); and (iii) advance notice of transactions set forth in paragraph 7(d). In short, throughout the term of the Warrant, Gregory Howe has provided Mr. White with incomplete or inconsistent information or in many cases, no information at all . . ."
The Warrant provided for a payment of $225.00 per share for 298 shares, therefore the proper amount without adjustments is sixty-seven thousand and fifty dollars ($67,050.00).
Footnote omitted.
On January 8, 2001 the defendant, through its attorney, returned the one thousand dollar ($1,000.00) money order and advised the plaintiff that the defendant believed that the exercise price due was sixty-seven thousand and fifty dollars ($67,050.00) and that the exercise period would had expire on March 22, 2001.
On March 15, 2001 the parties agreed to maintain the status quo for an additional period of time with respect to the plaintiff exercising his rights under the Warrant ("Standstill Agreement," Exhibit 516). The parties agreed to put the plaintiff in the same position he would have been in on March 19, 2001 (i) on the date that the appeals period following a judgment and no appeal having been taken, or (ii) as to an appeal taken, on the date of dismissal or final judgment. In light of the Standstill Agreement the plaintiff still has the ability to exercise his rights under the warrant.
Standards
"A party seeking injunctive relief has the burden of alleging and proving irreparable harm and lack of an adequate remedy at law . . . A prayer for injunctive relief is addressed to the sound discretion of the court." (Internal quotation marks omitted.) Lydall v. Ruschmeyer, 282 Conn. 209, 237, 919 A.2d 421 (2007). "A mandatory injunction . . . is a court order commanding a party to perform an act . . . Relief by way of mandatory injunction is an extraordinary remedy granted in the sound discretion of the court and only under compelling circumstances . . . Ordinarily, an injunction will not lie where there is an adequate remedy at law . . . In sum, [m]andatory injunctions are . . . disfavored as a harsh remedy and are used only with caution and in compelling circumstances." (Citations omitted; internal quotation marks omitted.) Cheryl Terry Enterprises, Ltd. v. Hartford, 270 Conn. 619, 650, 854 A.2d 1066 (2004).
Discussion
The plaintiff alleges that Gregory Howe breached the Stock Warrant by failing to give notice or to otherwise disclose the sale of common stock to John Bell and to Laura Kavanagh. The plaintiff additionally alleges that the defendant prevented him from determining the appropriate Exercise Price by failing to provide him with copies of all communications to shareholders, including, to the extent made available to shareholders, quarterly and yearly financial information on the Company.
A "stock warrant," a type of security, is "an instrument granting the holder a long-term (usu. a five-to ten-year) option to buy shares at a fixed price" and is "commonly attached to preferred stocks or bonds." Black's Law Dictionary (8th ed. 2004) ("warrant"). In other words, a warrant is simply an "option to purchase shares of corporate stock at a fixed price." In re Daig Corp., 799 F.2d 1251, 1253 (8th Cir. 1986); Bradford v. Crown-Bremson Indus., Inc., 255 F.Sup. 1099, 1012 (M.D.Tenn. 1964). A stock warrant differs from a stock option only in the sense that options are granted to employees while warrants are sold to the public. See Black's Law Dictionary (5th ed. 1979).". . . [S]tock warrants are simply `contracts entitling the holder to purchase a specified number of shares of stock for a specific price during a designated time period.' Reiss v. Financial Performance Corp., 97 N.Y.2d 195, 198."
"The elements of a breach of contract action are the formation of an agreement, performance by one party, breach of the agreement by the other party and damages." (Internal quotation marks omitted.) Chiulli v. Zola, 97 Conn.App. 699, 706-07, 905 A.2d 1236 (2006).
It is undisputed that the parties in the instant action entered into an agreement with each other. It is also undisputed that the plaintiff performed by tendering the requisite consideration. The more credible and convincing evidence presented at trial proves that the defendant breached the agreement by failing to provide "within 45 days after the end of each calendar quarter financial statements, consisting of income statements and balance sheet, which fairly present the financial condition and results of operations, prepared in accordance with generally accepted accounting principles consistently applied." (emphasis added)
"It is well settled that in order to recover for breach of contract, a plaintiff must prove that he or she sustained damages as a direct and proximate result of the defendant's breach." Warning Lights Scaffold v. O G, 102 Conn.App. 267, 271, 925 A.2d 359 (2007). "It is axiomatic that the sum of damages awarded as compensation in a breach of contract action should place the injured party in the same position as he would have been in had the contract been performed [by the breaching party]." (Internal quotation marks omitted.) Russell v. Russell, 91 Conn.App. 619, 643, 882 A.2d 98, cert. denied, 276 Conn. 924, 925, 888 A.2d 92 (2005) . . .
"It is well established, however, that `[d]amages are recoverable only to the extent that the evidence affords a sufficient basis for estimating their amount in money with reasonable certainty.' (Internal quotation marks omitted.) Id. In a breach of contract action, although the injured party should receive a damages award that places him in the same position that he would have occupied had the contract been performed properly, he nevertheless `is entitled to retain nothing in excess of that sum which compensates him for the loss of his bargain . . . Guarding against excessive compensation, the law of contract damages limits the injured party to damages based on his actual loss caused by the breach.'" Landry v. Spitz, 102 Conn.App. 34, 51, 925 A.2d 334 (2007).
As to the issue of damages, the plaintiff is demanding that judgment enter in its favor in the amount of one million one hundred sixteen thousand nine hundred dollars ($1,116,900.00). This figure consists of the projected value of the plaintiff's 19.9% interest in Gregory Howe ($616,900.00=19.9% x 3,100,000.00)]. The plaintiff seeks an additional five hundred thousand dollars ($500,000.00) to compensate the plaintiff for the lost opportunity to purchase the block of shares from the Bell Estate.
The plaintiff's allegation of the value of the company.
The damages figures were provided by Mr. Howard Grabina, the plaintiff's expert witness.
The plaintiff's damages figures do not however take the Standstill Agreement into account. As was stated earlier herein, in a breach of contract action, the injured party should receive a damages award that places him in the same position that he would have occupied had the contract been performed properly. The Standstill agreement puts the plaintiff in the position that he would have been in had the contract been properly performed. Furthermore, this Court finds that the evidence presented at trial does not afford a sufficient basis for determining a damage amount. This is in part due to the fact that the court is unable to determine when if ever, before the attempt was made to exercise his options pursuant to the Stock Warrant, the plaintiff would have exercised said options.
Conclusion
For all of the foregoing reasons, this court finds that the plaintiff proved by a fair preponderance of the evidence that the defendant breached the Common Stock Purchase Warrant by failing to submit information on a timely basis and by failing to submit information that complied with general accounting principles as was required by the agreement.
The plaintiff failed to prove by a fair preponderance of the evidence that any of the conditions to paragraph 7 of the Warrant concerning adjustments had occurred. The court therefore finds that the price per share pursuant to the Warrant is two hundred and twenty-five dollars ($225.00) per share.
The plaintiff failed to prove by a fair preponderance of the evidence that he properly exercised the Common Stock Purchase Warrant.
Lastly the plaintiff has failed to prove by a fair preponderance of the evidence, the damages that he alleges.