Opinion
C.A. No. 99C-09-284 WCC.
Submitted: February 14, 2000.
Decided: June 30, 2000.
On Defendant's Motion to Dismiss. Granted.
Ronald A. Brown, Jr., Pricket, Jones Elliott, 1310 King Street, P.O. Box 1328, Wilmington, Delaware, 19899. Attorney for Plaintiffs.
William M. Lafferty, Esquire; Morris, Nichols, Arsht Tunnell, 1201 N. Market Street, P.O. Box 1347, Wilmington, Delaware, 19899. Attorney for Defendant.
MEMORANDUM OPINION
This is Viacom, Inc.'s ("Viacom") motion to dismiss for failure to state a claim upon which relief can be granted pursuant to Superior Court Rule 12(b)(6). It arises from an individual and class action complaint filed by Peter M. Gutheim and Elaine Gutheim (the "Plaintiffs"), on behalf of former holders of Viacom's Five Year Warrants (the "Warrants"), alleging that, under New York law, Viacom breached the Warrant Agreement by not providing notice of the Warrant's expiration date.
According to the Warrant Agreement, New York law governs.
See infra note 3.
FACTS
The Warrants were issued to stockholders of Paramount Communications, Inc. ("Paramount") in connection with Viacom's acquisition of Paramount. Each Warrant entitled the registered holder to purchase one share of Viacom Common Stock at $70, subject to adjustment, at any time on or prior to the expiration date of the Warrants. The Warrant Agreement, dated July 1, 1994, specified that the Warrants would terminate and become void as of the close of business on the Expiration Date and defined the "Expiration Date" as "the fifth anniversary of the Effective Time." The "Effective Time" was defined as "the date of the filing of a certificate of merger with the Secretary of State of the State of Delaware in connection with the merger of Viacom Sub Inc. with and into Paramount pursuant to the Merger Agreement or such later date and time as set forth in the Merger Agreement." The face of the Warrant Certificate stated that it "shall terminate and become void as of the close of business on the fifth anniversary of the filing of a certificate of merger with the Secretary of State of the State of Delaware in connection with the merger of Viacom Sub Inc. with and into Paramount Communications Inc. (the "Expiration Date")." The Certificate of Merger was filed with the Delaware Secretary of State on July 7, 1994.On February 25, 1999, Viacom declared a two for one stock split in the form of a stock dividend, effective on March 31, 1999, for record holders of Viacom Common Stock on March 15, 1999. The terms of the Warrant Agreement provided for an adjustment to the Warrants effective on April 1, 1999 retroactive to March 15, 1999. As such, for each Warrant, the exercise price was reduced to $35 and the number of shares doubled. Pursuant to Section 8 (i) of the Warrant Agreement, "Notice of Adjustment," Viacom was required to give written notice of any adjustments to the Warrant holder:
Whenever the number of shares of Common Stock or stock or property issuable upon the exercise of each Warrant is adjusted, as herein provided, the Company shall promptly give written notice to the Warrant Agent of such adjustment or adjustments and shall cause the Warrant Agent promptly to mail by first class mail, postage prepaid, to each Holder notice of such adjustment or adjustments and shall deliver to the Warrant Agent a certificate of a firm of independent public accountants . . . setting forth the number of shares of Common Stock or other stock or property issuable upon the exercise of each Warrant after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. . . .
As such, a letter dated February 25, 1999 was sent from Viacom to the Warrant holders advising them that Viacom had declared a two for one stock split, explaining the details as outlined above. This letter did not specify the Warrant's calendar expiration date.
The Plaintiffs also alleged in their complaint that Viacom breached its express obligation under Section 8(i) of the Warrant Agreement by failing to provide proper notice of an adjustment. Specifically, the Plaintiffs argued that the reading of Section 8(i) required notice of a stock adjustment after it occurred. As such, the Plaintiffs asserted that because Viacom provided notice prior to an adjustment in its February 25, 1999 letter, it was improper. But after oral argument on December 1, 1999 on Viacom's motion to dismiss and the Plaintiffs' motion for partial summary judgment, the Court found that the Plaintiffs' reading of this provision in the Warrant Agreement was without merit and that the notice's timing was sufficient. As such, the Court granted Viacom's motion to dismiss as to this allegation and denied the Plaintiffs partial summary judgment motion.
While 4.5 million Warrants were exercised on or prior to July 7, 1999, which was the fifth anniversary of the Effective Time, over 400,000 Warrants, of which the Plaintiffs held 44, expired unexercised. Since the closing market price for Viacom on July 7, 1999 was $43 3/8 per share, each unexercised, expired Warrant effectively lost $16.75 in value with the Plaintiffs alleging a total loss for all unexercised Warrants of more than $7.3 million.
The initial Warrants entitled the registered holder to purchase one share of Viacom Common Stock at a price of $70 per share subject to adjustment. Based on the adjustment effective April 1, 1999, each Warrant entitled the holder to purchase two shares of Common Stock for $35 per share. As such, because the closing market price for the Common Stock was $43 3/8 per share on July 7, 1999, the Plaintiffs calculated a loss of $16.75 in value ($43 3/8-$35 x 2) for each unexercised expired Warrant.
STANDARD OF REVIEW
A motion to dismiss pursuant to Superior Court Civil Rule 12 (b)(6) for failure to state a claim upon which relief may be granted is considered by the Court to determine whether a plaintiff may recover under any reasonably conceivable set of circumstances susceptible to proof under the complaint. When a defendant moves to dismiss pursuant to Rule 12(b)(6) and offers affidavits in addition to the pleadings, the motion is considered a motion for summary judgment. Here, Viacom submitted an affidavit with attachments and Viacom's Form 10-K Annual Report for fiscal year ending December 31, 1998 in response to Plaintiffs' motion for partial summary judgment, which had been denied. As such, the present motion will be treated as a motion for summary judgment.A motion for summary judgment may be granted where the evidence shows that there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. The moving party bears the burden of showing that no genuine issue of material fact exists and the record must be reviewed in the light most favorable to the non-moving party.
Borish v. Graham Ct. al., Del Super., 655 A.2d 831, 833 (1994); Gallegos v. State Farm Mutual Automobile Ins. Co., Del. Super., C.A. No. 98C-11-224, Toliver, J. (Apr. 26, 1999) (ORDER).
DISCUSSION
The Plaintiffs claim that Viacom breached the Warrant Agreement in one of two ways. First, the Plaintiffs assert that Viacom's adjustment notice of February 25, 1999, notifying Warrant holders of the stock split, was deficient and unreasonable because it did not provide the Warrant's expiration date. Secondly, they argue that Viacom faile4 to comply with an implied contractual obligation to provide reasonable notice of the Warrant's actual expiration date in advance so that the Warrants could be timely exercised. In support of both assertions, the Plaintiffs rely upon Van Gemert v. Boeing Company.In Van Gemert, the Second Circuit found that under New York law, Boeing failed to provide fair and reasonable notice of the redemption call to the debenture holders. On their face, the convertible debentures required the company to provide notice before exercising its option to redeem them. But, because the debentures did not specify the kind of notice that would be provided, the Court found that there was a duty of reasonable notice of the redemption call and such notice was not provided.
A "debenture" is a long-term, unsecured debt security. An "indenture" is a contract between the issuing corporation and indenture trustee pursuant to which debentures are issued. Lorenz v. CSX Corp., 3d Cir., 1 F.3d 1406, 1409 n. 1 (1993).
The debentures themselves provided:
The holder of this Debenture is entitled, at his option, at any time on or before July 1, 1980, or in case this Debenture shall be called for redemption prior to such date, up to and including but not after the tenth day prior to the redemption date, to convert this Debenture. . . . The Debentures are subject to redemption as a whole or in part, at any time or times, at the option of the Company, on not less than 30 nor more than 90 days' prior notice . . .Van Gemert, 520 F.2d at 1376. The indenture, a 113-page printed booklet, which was available upon request but was not circulated generally with the warrants or debentures, provided specific notice requirements. However, the Court found that putting the notice provisions in the indenture was, in essence, giving no notice. The Court further found that it was not reasonable for the company to expect the less sophisticated investors to send for and read the 113 paged indenture in order to find out what notice would be provided. Id.
Id. at 1383-84.
As such, the Plaintiffs argue that under the notice provision in Section 8(i) or, alternatively, under an implied obligation, the Warrant holders, like the debenture holders in Van Gemert, expected reasonable notice of the Warrant's expiration date. It is this expectation of reasonable notice that the Plaintiffs ask the Court to find and protect. Unfortunately for the Plaintiffs, the unique facts of this case lead to a different conclusion.
First, Section 8(i) of the Warrant Agreement specifically provided the procedure to be followed when the number of issuable shares were adjusted. If this occurred, Viacom was obligated under this section to give notice by first class mail of three factors: (a) the number-of shares issuable after the adjustment; (b) a brief statement of the facts which perpetuated the adjustment and (c) the computation of the adjustment. There is no dispute that these three requirements were met in the February 25, 1999 letter sent to the Warrant holders. In spite of this, the Plaintiffs urge the Court to expand these provisions or interpret them to include a requirement that notice of the Warrant's expiration date also be furnished upon adjustment. But, such action would be contrary to the terms of the Warrant Agreement and would add provisions simply not contemplated by the parties. Applying the reasoning in Lorenz v. CSX Corporation, the Court finds no merit in the Plaintiffs' argument.
3d Cir., 1 F.3d 1406 (1993). Similarly to Van Gemert, the Court in Lorenz applied New York law.
In Lorenz, the debenture holders were entitled to receive notice if there was some modification to their rights or the company's obligations under the indenture. But, the Third Circuit found that as long as the obligations under the express terms of the indenture were fulfilled, no additional, implicit duties or obligations were owed to the debenture holders, except to avoid conflicts of interest. While the implied covenant of good faith and fair dealing prohibits either party from doing anything which would prevent the other party from receiving the fruits of the contract, the covenant also cannot be used to insert a new term that was not bargained for. Such a covenant would only be implied when it was consistent with the express terms of the contract. In other words, where the terms-of the contract expressly address the terms of a dispute, those express contractual terms, not an implied covenant of good faith and fair dealing, govern the parties' relations. In addition, the Third Circuit interpreted Van Gemert to mean that when a debenture or indenture expressly requires notice, the implied covenant of good faith and fair dealing requires the defendant to provide notice which is reasonably calculated to enable the debenture holders to obtain the benefit of their contract. As such, the Court distinguished Van Gemert by stating that the Lorenz indenture did not require the bank to provide notice of securities violations and that it would not add such a new term.
Id. at 1415 ( citing Kirke LaShelle Co. v. Paul Armstrong Co., N.Y. Ct. App., 188 N.E. 163, 167 (1933)).
Lorenz, 1 F.3d at 1415 ( citing Sabetay vy v. Sterling Drug, Inc., N.Y. Ct. App., 506 N.E.2d 919, 922 (1987)).
See Abex, Inc. v. Koll Real Estate Group, Inc., Del. Ch., C.A. No. 13462, Jacobs, V.C. (Dec. 22, 1994) (Mem.Op.). The implied covenant of good faith and fair dealing is also recognized by Delaware law.
Lorenz, 1 F.3d at 1416.
As in Lorenz, Section 8(i) of the Warrant Agreement did not obligate Viacom to provide the Warrant holders with the calendar expiration date, and this new term will not be added by the Court. The expiration date was contained in the Warrant, and there was no express contractual obligation to do more. As such, the adjustment notice of February 25, 1999 was not deficient or unreasonable.
Having found no express obligation of notice under the terms of the Warrant Agreement, the Plaintiffs urge the Court to find one implied based on the confusing language set forth in the Warrant as to when one's ability to exercise the Warrant would expire. The Warrant Certificate states:
"This Warrant Certificate shall terminate and become void) as of the close of business on the fifth anniversary of the filing of a certificate of merger with the Secretary of State of the State of Delaware in connection with the merger of Viacom Sub, Inc. with and into Paramount Communications, Inc. (the "Expiration Date")." . . . As provided in the Warrant Agreement and subject to the terms and conditions therein set forth, the Warrants are immediately exercisable. At 5:00 p.m. (New York City time) on the Expiration Date, each Warrant not exercised prior thereto shall terminate and become void and of no value.
At first blush, ones s inclination is to be so disconcerted by the legalities of the expiration language that one would find support in the Plaintiffs' position and putting aside the legal arguments for a moment, the Court believes this language comes close to being the legal equivalent of the Abbott and Costello comedy skit of "Who's on First." While the Court is confident that this provision made perfect sense when it was drafted by Viacom, they miserably failed to consider or concern themselves with the everyday, unsophisticated investor to whom the expiration date may actually be important.
However, in spite of the Court's personal distaste for such writing, it would be inappropriate to interject those views in determining the legal sufficiency of the notice. Parties have a right to expect consistency and reliability in the Court's interpretation of contractual language unless the terms of the agreement are so outrageous that they shock and violate one's reasonable belief of fairness. While the Court is not pleased with the maimer in which the expiration date was drafted or the process one must go through to determine that date, the Court cannot say that the language is so confusing that it requires additional notice by Viacom under an implied obligation.
Even an unsophisticated investor would realize that the warrant had a five year exercise period and if they wanted to obtain the benefit of the Warrant, they would have to exercise it within that time frame. The Warrant Certificate even referenced the Warrant Agreement of July 1, 1994, which was six days before the filing with the Secretary of State, and common sense and reason would dictate exercising the Warrant within at least five years of July 1, 1994 or within close proximity to that date. Whether intentional or not, the Plaintiffs' action not to execute the Warrant for years after the issuance makes it difficult for the Court to now have sympathy for the Plaintiffs' predicament. While they and others have lost an economic opportunity, the Court finds that they had sufficient notice to exercise it within the time limits of the Warrant. Although not written in everyday common language, it was clear that a time limitation existed as to the exercise of the Warrant, and it was equally incumbent upon the investor to take reasonable steps to ensure compliance. Their failure to do so cannot now be rectified by the Court.
Despite the noted concerns, the Court finds no genuine issue of material fact and further finds that Viacom is entitled to judgment as a matter of law. As such, Viacom's motion is granted.