Opinion
Filed: July 1, 1999.
Appeal from the Order entered December 2, 1998, in the Court of Common Pleas of Somerset County, Civil Nos. 535, 543 CIVIL 1998 No. 14 WDA 1999, No. 15 WDA 1999.
BEFORE: EAKIN, SCHILLER and BROSKY, JJ.
OPINION
¶ 1 Seven Springs Resort, founded by Adolph and Helen Dupre in 1932, was incorporated in Pennsylvania as Seven Springs Farm, Inc., in 1959. Adolph and Helen Dupre had three children, Philip Dupre, Herman Dupre and Luitgarde Dupre (Sujansky), among whom they distributed all the stock of Seven Springs in equal shares. Descendants of each child of the founders still control one-third of the stock, although there are now 45 different shareholders. Appellant Lynda M. Dupre Croker, one of Philip Dupre's daughters, represents the interests of that family in this litigation.
¶ 2 On July 1, 1959, soon after incorporation, the shareholders entered into a restrictive stock transfer agreement. In 1969, the shareholders signed an "Agreement Affecting the Transfer of the Common and Preferred Stock of Seven Springs Farm, Inc." replacing the 1959 agreement. This "Buy/Sell Agreement" provided in relevant part:
Option to Corporation. Except as provided in paragraph 1, no Stockholder, estate of a Stockholder or transferee who has received any stock in accordance with the provisions of paragraph 1, or any other transferee 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, or certificates of ownership interest representing the same, now owned or hereafter acquired by him, without first 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.
* * *
. . . all the stock of the Stockholders or transferee desiring to make any such disposition shall be offered for sale and shall be subject to an option to purchase or to retire on the part of the Corporation,
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The filing of a voluntary or involuntary petition in bankruptcy by any Stockholder and the occurence [sic] of any insolvency of any Stockholder, the making of an assignment for the benefit of creditors or the entrance into any composition agreement with creditors shall be construed as an offer to sell all of the shares of such Stockholder to the Corporation under the provisions of this agreement.
3. Option to Stockholders. If all of the stock of the Stockholder or transferee desiring to make a disposition thereof is not purchased by the Corporation in accordance with the provisions of paragraph 2, then the stock not so purchased or retired shall be offered for sale and shall be subject to an option on the part of each Stockholder to purchase a proportionate share
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5. Waiver of Restrictions. The transfer, assignment, sale, pledge, hypothecation, mortgage, alienation or other encumbrance or disposition of any shares of stock of the Corporation made under and by virtue of a written consent to such disposition signed by all of the holders of the common capital stock subject to this agreement at the time of such proposed action and filed with the secretary of this Corporation is expressly excepted from the restrictions herein imposed; provided, however, that any such disposition shall be made only upon the terms and conditions and to the person or persons named in such written consent filed with the Corporation.
¶ 3 On December 6, 1997, the Buy/Sell Agreement was amended by unanimous vote of all shareholders, to add the following paragraph:
Further, any sale of any shares of the capital stock of the Corporation which occurs prior to January 1, 1999 in a transaction which imputes to the Corporation a total capitalization of Seventy Million Dollars ($70,000,000) or more and which is approved by the holders of seventy-five percent (75%) of the common capital stock of the Corporation, which approval is expressed in writing and filed with the secretary of this Corporation, is expressly excepted from the restrictions and obligations herein imposed.
All other provisions of the Buy/Sell Agreement were ratified when this amendment was made.
¶ 4 On June 1, 1998, the Board called a shareholders meeting when Booth Creek Ski Holdings, Inc., expressed interest in acquiring Seven Springs. The Herman Dupre and the Luitgarde Dupre Sujansky families voted to pursue the offer, while the Philip Dupre family voted against it. Because two-thirds of the shareholders wished to go forward, Seven Springs entered into a letter of intent to merge with a subsidiary of Booth Creek, Booth Creek Ski Acquisitions, Inc. In compliance with the Pennsylvania Business Corporation Law (BCL), a Merger Agreement and a Plan of Merger were drafted, approved by the Board on August 18, 1998, and prepared for a ratification vote by the shareholders at a meeting scheduled for October 3, 1998. Termed a "cash out merger," the shareholders of Seven Springs would receive cash for their shares, rather than stock in the surviving corporation.
¶ 5 On August 21, 1998, Seven Springs and certain of its directors filed a declaratory judgment complaint, seeking to have the Buy/Sell Agreement held inapplicable to the proposed deal; three days later appellant filed a complaint seeking a declaratory judgment to the contrary. The trial court consolidated the cases, expedited discovery, and the case quickly proceeded to trial. The trial court ultimately determined the proposed merger was not within the scope of the Buy/Sell Agreement. Post-trial motions were denied, and on December 2, 1998, the decree nisi was entered as a final decree. This appeal followed, in which appellant frames the following issues:
Does a shareholder's vote to approve a cash-out merger (which would convert his or her stock into cash) constitute an attempt to "dispose" of that stock so as to trigger a right of first refusal in a Buy/Sell Agreement covering any proposed disposition of stock?
Should a court in equity allow some shareholders to avoid a right of first refusal, applicable to any direct sale or other disposition of stock, by their selling their stock to a third party through a cash-out merger requiring shareholder approval?
May a shareholder's right of first refusal be circumvented by a sale of substantially all of the corporation's assets and should this issue be resolved in the absence of any proposed asset sale?
Although the trial court heard limited evidence regarding an asset sale, and ruled on its applicability, we need not address this question in light of our disposition of the merger issue.
¶ 6 If the terms of the Buy/Sell Agreement encompass this merger, 75% shareholder approval is needed to proceed; if the Agreement is not applicable, the vote would be governed by general corporation law and only majority shareholder approval of the Board's action is needed. 15 Pa.C.S.A. § 1924(a). In practical terms, if the Agreement applies, it allows appellants an opportunity to defeat the merger — if it does not, the merger may proceed.
¶ 7 "The interpretation of a contract is a question of law. In deciding an issue of law, an appellate court need not defer to the conclusions of the trial court ." Banks Engineering Co., Inc., v. Polons, 697 A.2d 1020, 1022 (Pa.Super. 1997) (citations omitted), appeal granted, 706 A.2d 1210 (Pa. 1998). When the language of a contract is unambiguous, we must interpret its meaning solely from the contents within its four corners, Banks, at 1023, consistent with its plainly expressed intent. Hahalyak v. A. Frost, Inc., 664 A.2d 545, 549 (Pa.Super. 1995). We may not consider extrinsic evidence unless the terms are ambiguous. Metzger v. Clifford Realty Corp., 476 A.2d 1, 5 (Pa.Super. 1984). A contract is not ambiguous merely because the parties do not agree on its construction. Id.
¶ 8 Neither the original nor amended versions of the Agreement include the term "merger." That the Agreement does not speak to a merger does not in itself result in an ambiguity; when a contract fails to provide for a specific contingency, it is not ambiguous; it is silent. Banks, at 1023-24. In such circumstances, we will not read into the contract a term, "merger," which clearly it does not contain. "It is not the province of the court to alter a contract by construction or to make a new contract for the parties; its duty is confined to the interpretation of the one which they have made for themselves, without regard to its wisdom or folly." Steuart v. McChesney, 444 A.2d 659, 662 (Pa. 1982) (citations omitted). The most we can say is the parties either intended to exclude mergers, or did not anticipate or consider such an event.
¶ 9 The trial court determined the primary purpose of the Agreement was to restrict the transfer of shares by individual shareholders. Appellant claims a more specific intent, to provide an opportunity for Seven Springs to remain in the Dupre family, and maintains the catch-all phrase "or in any other way dispose of" therefore should be interpreted to encompass events inconsistent with that purpose, including merger; she contends that in voting for a merger, a stockholder is voting to "dispose of" his or her shares within the meaning of the Agreement.
The Agreement merely states as follows:
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.
¶ 10 The trial court found the Agreement to be clear and unambiguous. As such, it disregarded certain extrinsic evidence regarding the intent of the parties and concluded the Agreement was not intended to apply to mergers or other fundamental corporate changes. The trial court also found credible the testimony of James McClure, long-time employee of Seven Springs, and at time of trial President and Chairman of the Board of Directors; he is not a shareholder nor a member of the Dupre family. McClure testified about the merger process and his observations of the Dupre family discord, leading the court to conclude the proposed merger had a legitimate business purpose. In a declaratory judgment action, we may not substitute our judgment for the trial court's factual determinations where they are adequately supported by the record. Fred E. Young, Inc. v. Brush Mountain Sportsman's Association, 697 A.2d 984, 987 (Pa. Super. 1997), appeal denied, 1998 Pa. LEXIS 447 (Pa. March 16, 1998), cert. denied, 1998 U.S. LEXIS 5692 (U.S. 1998).
Appellant relies on letters written by the attorney who drafted the 1969 Agreement to establish the purpose of the amendment. For example, appellant cites an October 8, 1968 memorandum in which Becker stated:
Seven 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 is inadequate.
The trial court admitted the Becker letters, but only to explain the conduct of the parties, not as extrinsic evidence explaining an ambiguity.
¶ 11 Even when strictly construing the Agreement, we must be aware of the context in which the Agreement arose. Steuart, at 661-62. The Supreme Court has observed:
We are not unmindful of the dangers of focusing only upon the words of the writing in interpreting an agreement. A court must be careful not to "retire into that lawyer's Paradise where all words have a fixed, precisely ascertained meaning; where men may express their purposes, not only with accuracy, but with fullness; and where, if the writer has been careful, a lawyer, having a document referred to him, may sit in his chair, inspect the text, and answer all questions without raising his eyes."
Id., at 662 (quoting Estate of Breyer, 379 A.2d 1305, 1309 n. 5 (Pa. 1977)). Still, in construing the Agreement, we cannot assume its language was chosen carelessly. See Steuart, at 662. Viewed in context, we agree with the trial court that the "primary purpose of the Agreement is to restrict the sale or transfer of stock in Seven Springs by individual shareholders." Trial Court Opinion, 10/30/98, at 9 (emphasis added).
¶ 12 The parties are not unsophisticated; they clearly are familiar with corporate formalities and had legal advice in drafting the Buy/Sell Agreement and its amendments. Given this, the silence of the Agreement regarding fundamental corporate acts such as merger is conspicuous. The Agreement expressly speaks to specific stockholder events such as voluntary and involuntary petitions in bankruptcy, and assignments for the benefit of creditors, but not to a single corporate act such as merger. We cannot conclude this distinction was an oversight.
¶ 13 Neither does the fact the stockholders must vote to approve a merger change its nature as an appropriate act of the corporation and its directors, rather than its stockholders. By focusing on the words "dispose of," appellant loses sight of the prefatory words of the Agreement, "no Stockholder shall." Taking the Agreement in its entirety (not just the words "dispose of"), it seems plain it is a stockholder's act that makes it applicable, not a fundamental corporate act such as merger. While paragraph 11 of the Buy/Sell Agreement obligates the corporation to a degree, it is an obligation to cooperate with the aims of the Agreement; we cannot read the provisions to be violated by the merger at hand.
¶ 14 We agree the Agreement is clear and unambiguous; a merger is not an act triggering its application. This is so not only because merger is not an expressly listed event, but also because the language contemplates the act of a stockholder, not the corporation. See Bethlehem Steel Corp. v. MATX, Inc., 703 A.2d 39, 42 (Pa.Super. 1997). ("[A] court may not disregard a provision in a contract if a reasonable meaning may be ascertained therefrom each and every part of it must be taken into consideration and given effect, if possible, and the intention of the parties must be ascertained from the entire instrument." (citation omitted)). As the trial court aptly reasoned:
[T]he restrictions of paragraph two of the agreement include restrictions on the Stockholders' ability to "transfer, assign, sell, pledge, hypothecate, mortgage, alienate or otherwise encumber or dispose of " any part of his or her stock in the Corporation. These terms cover the possible methods by which an individual stockholder may wish to divest himself or herself of the stock. None of the words apply to changes by operation of law undertaken by the Corporation itself. Nowhere in the agreement is Seven Springs, as an entity, prohibited or restricted in any way from engaging in conduct that is fundamental to the existence of the Corporation. The only restriction on the powers of Seven Springs regards the Corporation's role as a shareholder. This restriction is the same as the one imposed on all other individual shareholders.
Trial Court Opinion, 10/30/98, at 14.
¶ 15 Appellant argues the proposed "cash-out" merger is for all intents and purposes a sale, bringing it within the catch-all language of the Agreement. Indeed, the record strongly suggests the proposal was structured as a merger to circumvent the Buy/Sell Agreement. These families are embroiled in bitter infighting, and one may easily conclude from the record that appellees are cloaking a sale in the accouterments of merger to circumvent appellant and the block of shares she represents; however, one may as easily conclude appellant's block is objecting to the merger for obstructive personal reasons as well. Both conclusions may be true, but this is immaterial to our inquiry. We are interpreting a contract, not the reasons for the positions of the parties.
¶ 16 The Supreme Court has recognized the distinction between a "merger" and a "sale" is not easy to determine.
[I]t is no longer helpful to consider an individual transaction in the abstract and solely by reference to the various elements therein determine whether it is a `merger' or a `sale'. Instead, to 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 v. Glen Alden Corp., 143 A.2d 25, 28 (Pa. 1958).
¶ 17 Pennsylvania's BCL does not define merger but describes its effect: the separate existence of all parties to the merger cease, except that of the surviving corporation, which succeeds to the assets and liabilities of merged corporations. 15 Pa.C.S.A. § 1929(a) and (b). Pennsylvania courts historically have viewed merger as an event distinct from a sale. See Commonwealth v. Willson Products, Inc., 194 A.2d 162, 166 (Pa. 1963) (list of cases).
Merger has been defined as the "uniting of two or more corporations by the transfer of property to one of them, which continues in existence, the others being merged into it." 15 Fletcher Cyclopedia Corporations § 7041; 9 P.L.E. Corporations § 471. "In a merger, one or more constituent corporations (each a disappearing corporation) merge into and become part of another constituent corporation that continues to exist after the merger has been consummated." John W. McLamb, Jr. and Wendy C. Shiber, Pennsylvania Corporate Law and Practice § 9.3[b] (1993 Supplement).
The merger of two or more corporations is neither a sale nor a liquidation of corporate property, but a consolidation of properties, powers, and facilities of the constituent companies, forming a new corporate entity. [A] merger of two corporations cannot be considered as a sale of their property by the constituent companies.
Id.; accord, Frandsen v. Jensen-Sundquist Agency, Inc., 802 F.2d 941, 944 (7th Cir. 1986) ("[I]n a merger the shares of the acquired firm are not bought, they are extinguished."); Versyss Inc. v. Coopers and Lybrand, 982 F.2d 653, 655 (1st Cir. 1992) (same).
¶ 18 Appellant's broad construction imputes too much into the catch-all language of the Agreement. In Pennsylvania, such restrictive agreements are disfavored and are to be strictly construed. Rouse Associates v. Delp, 658 A.2d 1383, 1384 (Pa. Super. 1995); In re Trilling Montague, 140 F. Supp. 260, 261 (E.D.Pa. 1956). In Rouse, which also involved a family-held corporation, this Court strictly construed an agreement by which the shareholders "`agreed not to sell, transfer, give, pledge, assign or in any manner encumber or alienate any of the stock' without first offering it to the corporation or to the other stockholders." Id., at 1384. We declined to infer a restriction on the involuntary sale of stock by judicial process because the agreement did not expressly impose such a restriction. Id., at 1385.
¶ 19 Appellant submits Bruns v. Rennebohm Drug Stores, Inc., 442 N.W.2d 591 (Wisc. App. 1989), provides authority for generously interpreting the language of the Buy/Sell Agreement. Bruns involved an agreement granting a right of first refusal to shareholders in a close corporation if any shareholder "determines to sell" their shares. The issue before the court was whether a proposed (cash-for-stock) merger triggered the right of first refusal. The court held "substance controls over form" and that the merger constituted a sale of the stock. Id., at 594-95.
¶ 20 The reasoning in Bruns chafes with Pennsylvania's policy of strictly construing restrictive stock transfer agreements. See Rouse, supra. Moreover, appellant's reliance on In re Estate of Mather, 189 A.2d 586 (Pa. 1963), is of no avail as it stands for the proposition such agreements are valid and enforceable; the court in Mather did not purport to interpret more than the intent underlying the particular agreement in that case. We find Bear v. Stegkamper, 65 Pa. D. C.2d 134 (Mercer Co. 1974), also cited by appellant, distinguishable from the circumstances in this case. Bear involved a sale of assets, not a merger, and the agreement granting a right of first refusal was framed differently than the instant agreement.
¶ 21 Appellees contend Shields v. Shields, 498 A.2d 161 (Del.Ch. 1985), appeal denied, 497 A.2d 791 (Del. 1985), is the more persuasive case regarding a restrictive stock transfer agreement between family members in a closely held corporation. Shields involved a stock-for-stock merger and the agreement provided for a right of first refusal if any shareholder sought to "sell, give, pledge, dispose of by will, gift in trust or in any manner otherwise dispose of his or her stock." Id., at 167. The purpose of the merger in Shields appeared to be solely to avoid the restrictions of the buy/sell agreement, and the shareholders opposing merger argued the merger was a disposition of stock within the terms of the agreement. The Delaware Chancery Court rejected that argument:
A merger between or among Delaware corporations is not a stockholders act of the kind the 1966 Agreement sought to restrict; it is a corporate act, albeit one requiring for its effectuation the approval of a majority of the shareholders of the corporation. When duly effectuated, such a corporate act effects by operation of law a transmutation of the stock interest in a constituent corporation.
At the moment a stock for stock merger is effective, the stock in a constituent corporation (other than the surviving corporation) ceases to exist legally. The subject matter of the stockholders' agreement thus vanishes, so to speak, at that point and its place is taken by a stock interest in another, distinct corporation. The merger accomplishes that result and necessarily legally moots the terms of a restriction on transfer of the stock of a disappearing corporation.
Id., at 167-68. The Delaware court observed the minority shareholders' construction of the agreement would result in an anomaly: the shareholders "would have a right to buy that which has ceased to exist by virtue of the act (i.e., the merger) giving rise to the right." Id., at 168-69. We agree with the learned trial court that Shields is persuasive, as it takes into account the entire agreement, and is consistent with the terms of Pennsylvania's BCL. See 15 Pa.C.S.A. § 1929 (describing the effect of merger).
¶ 22 That the proposed merger would result in receipt of cash for Seven Springs stock does not take it out of the realm of merger. The BCL expressly contemplates such "cash-out" mergers. See 15 Pa.C.S.A. § 1922(a)(3) and (b); see also 12 Summ.Pa.Jur.2d § 10:35. That appellant will receive cash rather than stock in the surviving corporation does not alter the fundamental fact that the stock in Seven Springs will be no more. As the Shields case emphasized, merger is a corporate act that, by operation of law, results in extinction of the constituent corporation's stock. Here, the stock of Seven Springs will cease to exist — it will not be owned by the surviving corporation, or by anyone else.
¶ 23 Appellant also contends equity should bar the merger, as it is an attempt to circumvent the Agreement. Appellant relies principally on a rhetorical question posed by the Supreme Court in Bechtold v. Coleman Realty Co., 79 A.2d 661 (Pa. 1951):
[H]ad she [majority shareholder] endeavored to resell all or any part of the stock so acquired without giving her fellow stockholders the option to first buy it, she could have been restrained. Is a court of equity so blind as to permit her to do by indirection what she may not do directly?
Id., at 664 (emphasis appellant's). Appellant contends that, as in Bechtold, appellees are attempting to do indirectly by merger what they could not do directly under the Buy/Sell Agreement, and argues the trial court's decree elevates form over substance.
¶ 24 Bechtold involves factual circumstances distinguishable from those in this case. In Bechtold, majority shareholders attempted to repeal corporate bylaws granting a right of first refusal to shareholders. The Supreme Court determined the bylaw was a contract "designed to vest property rights inter se among all stockholders." Id., at 663. The Court determined the majority shareholder accepted the shares subject to the restriction, which could not be repealed without the consent of the minority stockholders. Id. We find these distinctions significant, and determine Bechtold does not control.
¶ 25 We believe the Seventh Circuit was correct when it observed how formalities are crucial in corporate law. See Frandsen v. Jensen-Sundquist Agency, Inc., 802 F.2d 941, 947 (7th Cir. 1986). "If the distinction [between a sale of shares and a merger] seems somewhat formalistic, this is an area of law where formalities are important, as they are the method by which sophisticated businessmen make their contractual rights definite and limit the authority of the courts to redo their deal." Id., at 947. It has been said of corporate law that it is not so much what is done, but how it is done. Even though this business has family roots, and the infighting has separated the parties along family lines, the fundamental fact remains this is a corporation, every bit as much as IBM and ATT, and the ability of this corporation to act as such is not diminished by an agreement limiting how shareholders may dispose of their holdings.
¶ 26 The parties chose the applicable formalities and expressed them in the terms of this Agreement, ratified as recently as 1997. In December 1997, the parties were battling, which shows two things. First, whatever the intent of the matriarch and her children who were parties to the 1959 agreement, the parties and their intent were vastly different when the current version of the agreement was modified in 1997. Any 1959 intent to keep things "in the family" had long since transformed, as there was not "one family" by 1997; any intent of these parties was limited to the best interests of "my branch of the family" when the 1997 contract was signed.
¶ 27 Secondly, these parties knew full well in 1997 that they were not in a position to run a family business together; something had to give. Affirming the modified Agreement did nothing to restore the Ozzie and Harriet world that existed four decades ago; to impute the intent of the parties in 1959 to the combatants of 1997 is misplaced. Fully aware of this, and fully aware the corporation was examining its divestiture options, appellant took no steps to draft further protection for her position into the new amended Agreement. We cannot do so for her now.
¶ 28 Order affirmed.
¶ 29 Schiller, J. files a Dissenting Statement.
¶ 1 Despite my agreement with the majority's statement that, "one may easily conclude from the record that appellees are cloaking a sale in the accoutrements of merger to circumvent appellant and the block of shares she represents . . .", I am constrained to dissent because I believe that the proposed merger transaction constitutes a disposition of shares within the parameters of the Buy/Sell Agreement for this closely-held corporation, thereby triggering the notification and right of first refusal provisions of that Agreement.
¶ 2 The majority omits from its analysis the following, material facts: In 1959, when the first restrictive stock agreement was executed, Helen K. Dupre, the sole surviving founder of the Seven Springs resort, owned all of the Seven Springs' stock. In that agreement, Mrs. Dupre expressed her desire to transfer common stock to her children, Philip Dupre (Appellant's father), Herman Dupre, and Luitgarde Dupre (now Sujansky), but also expressly stated her intention to keep the operation and management of the corporation under the control and direction of herself and her immediate family, "so as to prevent interference therein by outsiders." Agreement, dated July 1, 1959 (Exhibit DX-3), at 2.
In determining the meaning of an agreement, we must determine the intention of the parties, which must be ascertained from the entire contract in light of the surrounding circumstances, the situation of the parties when the contract was made, objects they apparently had in view, and the nature of the subject matter. In re Mather's Estate, 410 Pa. 361, 189 A.2d 586 (1963) (construing a stock option agreement for a closely held corporation). Moreover, while parol evidence of prior negotiations, understandings, or agreements may not be used to vary or contradict the terms of the contract, it is admissible for other purposes, such as to ascertain the intent of the parties or to clarify an ambiguous term. American Bank and Trust Company of Pennsylvania v. Lied, 487 Pa. 333, 409 A.2d 377 (1979); De Witt v. Kaiser, 484 A.2d 121 (Pa.Super. 1984).
¶ 3 The agreement, which was signed by Mrs. Dupre and the three children, further stated that the children were "in complete accord with said views of their mother and to put into effect such restricted stock transfer rights" they entered the agreement. Agreement, supra, at 3. Thereafter, Mrs. Dupre gave each of the children 250 shares of Common Stock along with preferred stock; today, the 750 outstanding shares of Common Stock are held equally by various members of the Dupre families. Currently, each of the three Dupre families owns a total of 250 shares. Stipulation 9/28/98, ¶¶ 4-5.
The agreement itself provided that no stockholder could "transfer of encumber" his or her stock without first having made to Seven Springs an offer to sell, as proscribed by the agreement, and such offer having not been accepted. Agreement, 7/1/59, ¶ Second, at 3.
¶ 4 In 1969, on the advice of their corporate counsel, the Seven Springs shareholders entered a new agreement (hereinafter referred to as the "Buy/Sell Agreement"). This Buy/Sell Agreement reinforced the intentions of the shareholders to keep control of the corporation within the family. Among other things, it provided that a stockholder could transfer stock by will or gift to his child, but if the stock were made in trust, then the trustee would have to be "acceptable to the holders of the common stock who are at that time parties to this agreement." Buy/Sell Agreement (Exhibit DX-1), at ¶ 1. A stockholder's filing for bankruptcy or making of an assignment for the benefit of creditors would be construed as an offer to sell his or her shares. Id. at ¶ 2. Additionally, a stockholder desiring to sell his or her shares would first be required to offer them to the corporation; if the corporation declined to buy or retire the shares, the stockholder was then required to give the other shareholders a right of first refusal to purchase them pursuant to the provisions of the agreement. Id. ¶ 3.
The trial court admitted certain letters from this attorney, Ralph E. Becker, Esquire, to explain the conduct of the parties. N.T. 9/30/98, at 179. These letters indicate that Mr. Becker recommended the family execute a new buy/sell agreement in 1969, inter alia, to replace the existing restrictive stock agreement, which he deemed "inadequate" to prevent the shares of the corporation from "[falling] into the hands of outsiders". Exhibit DX-4 at 10, DX-6.
¶ 5 The corporation was also bound by the provisions of the Buy/Sell Agreement, which provided, in relevant part:
11. Agreements by the Corporation. In consideration of the promises of the Stockholders, the Corporation agrees for itself and its successors and assigns that it shall perform every act that may be required of it to effectuate the provisions of [the Buy/Sell 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;
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Id. at ¶ 11. Waiver of the stock restrictions required unanimous shareholder approval. Id. at ¶ 5.
¶ 6 When the family decided to explore the possibility of selling the company in 1997, the Buy/Sell Agreement was amended to lower the shareholder approval of waiver of the stock restrictions from 100% to 75%, for any sale prior to January 1, 1999, with a capitalization greater than $70 million. Amendment, 12/6/97 (Exhibit DX-2). However, as the majority acknowledges, the other provisions of the Buy/Sell Agreement were expressly ratified and confirmed. In a memorandum to the shareholders explaining the significance of the proposed Amendment, the President and Chairman of the Board of Directors, James McClure, 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 dated 12/10/97 (Exhibit DX-24); N.T. 9/30/98, at 139-140.
¶ 7 The Philip Dupre family, under the leadership of Appellant herein, objected to the proposed sale of Seven Springs to Booth Creek at the June 13, 1998 shareholders' meeting. N.T. 9/30/98, at 144. Thereafter, Appellant suggested pursuing alternatives to the proposed sale, including 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. Lynda M. Dupre letter August 10, 1998 (Exhibit DX-118); N.T. 10/1/98, at 2.61-2.62. However, the Board of Directors did not pursue these alternatives, and instead, a majority voted to proceed with the Booth Creek transaction. Thereafter, two thirds of the shareholders voted to adopt the Merger Agreement over the objection of the Philip Dupre family.
¶ 8 It is clear from these facts that the shareholders, at least as of the date of the December, 1997 amendment, intended for the Seven Springs resort to remain a closely held, family run corporation, unless members from all three of the families agreed to lift the stock restrictions. It is also clear that those stock restrictions were intended to apply to any disposition of stock, and not simply to the various types of transfers specified in the Buy/Sell Agreement. That Agreement clearly states, "no 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 first complying with the notice and first refusal provisions of the Agreement]." (emphasis added). In construing a contract, words are to be given their ordinary meaning, Pines Plaza Bowling, Inc., v. Rossview, Inc., 394 Pa. 124, 145 A.2d 672, 676 (1958); the ordinary meaning of "dispose of" is to "transfer to the control of another" or "to get rid of". Merriam Webster's Collegiate Dictionary, Tenth Edition (1996). While the majority focuses on the fine distinction between merger and the sale of stock, I think the better focus is on whether the stock itself will remain in control of the shareholders. Since the shareholders will in fact lose control of the stock in the merger transaction, and the stock itself will be extinguished, the merger will indeed accomplish a disposition of these shares.
¶ 9 Mr. McClure admitted that, from his view, the proposed merger and a direct sale of stock were both share sales; there was no difference between them, except that the lawyers advised him that the merger required a 51% vote and a direct sale required a 75% vote. N.T. 9/30/98, at 164-65. In fact, the merger transaction was no more than legal legerdemain aimed at circumventing the mandates of the stockholders' agreement, and thwarting the efforts of one-third of the stockholders seeking to enforce their rights under that agreement. I would therefore conclude that the merger was contemplated within the Buy/Sell Agreement, and that it is subject to the shareholders' right of first refusal or, alternatively, a 75% vote of shareholders to waive that restriction.
¶ 10 I reject the majority's rationale that the Buy/Sell Agreement was intended to restrict only the individual acts of shareholders. In fact, the Agreement expressly stated that the corporation was bound to effectuate its provisions and not transfer any stock absent compliance with that Agreement. While I agree that the Board of Directors of a closely-held corporation should be able to make business decisions, such decisions may not undercut or bypass the restrictions of the Buy/Sell Agreement, which apply to the corporation. Moreover, a "cash-out" merger is not the act of a corporation independent of the stockholders, but instead requires at least a majority to approve the transaction. 15 Pa.C.S.A. § 1924. In my view, the stockholders' vote to approve the merger transaction here constituted a decision to sell their shares, which in turn triggered the notification and right of first refusal requirements under the Buy/Sell Agreement.
¶ 11 Further, in strictly construing the Buy/Sell Agreement to avoid finding its application in the present case, the majority misses the point that the Buy/Sell Agreement does not prohibit the proposed merger transaction; it simply requires that the selling shareholders comply with the obligations which are attached to their stock certificates by first giving the corporation and then the other shareholders the right of first refusal. If these rights are not exercised, the Agreement itself provides that the restrictions are removed. Buy/Sell Agreement, ¶ 4. Indeed, it may be that the stockholders wishing to sell in this case would have faired better financially if they offered first to the non-selling shareholders, who were willing to better the Booth Creek offer.
The refusal of certain members of the Board of Directors to explore the options suggested by Appellant raises the question of whether these Directors breached their fiduciary duty to all the shareholders and the corporation in failing to ascertain the most advantageous alternative consistent with the intentions of the shareholders, as expressed in the Buy/Sell Agreement. Their approval of a merger transaction which was an obvious attempt to circumvent the Buy/Sell Agreement also raises the question as to whether they can be held personally liable for the corporation's failure to effectuate its provisions.
¶ 12 The prevailing undercurrent in this case is one of family greed and hostility which has pitted two-thirds of the founders' descendants against the remaining third. The hostility is so great that some of the family members appear intent on ensuring that the other family members will not continue to own and run the business under any circumstances. We should not permit legal maneuverings, however, to supercede the longstanding intent of the shareholders that this closely held corporation remain in the ownership and control of those family members who wish to continue as shareholders. In my view, the majority's sanctioning this elaborate ruse will throw into doubt the validity of thousands of such restrictive stock agreements and will wreak havoc in closely held corporations across this Commonwealth. The directors of such corporations will be on notice that they can create a legal fiction to thwart the legitimate purposes of restrictive stock agreements, notwithstanding the potential breach of their legal and ethical duties to the corporation and its stockholders. The result will be that such restrictions will become meaningless and whatever litigation over restrictions currently exists will increase exponentially.
Mr. McClure testified that he heard both of the other families tell Appellant that they would not sell their shares to any ESOP transaction in which her family was involved, no matter what the price. N.T. 9/30/98, at 173.
¶ 13 We should instead refuse in this case to exclude the "cash-out" merger transaction from the provisions of the Buy/Sell Agreement, and give full force and effect to the intent of the stock restrictions as they pertain to this closely-held corporation. I would therefore reverse the order entered on December 2, 1998 in the Court of Common Pleas of Somerset County.