The opinion of the court was delivered by: LASKER
This suit under § 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), is brought to recover short-swing profits allegedly realized by Ultra-Dynamics Corp. (Ultra), in the sale of stock of Avis Industrial Corp. (Avis). The complaint is brought derivatively by an Avis shareholder. Makofsky alleges, and Ultra does not dispute, that Ultra acquired 49,244 shares of Avis Common Stock for $12. per share on September 30, 1969 and sold them at a substantial profit
on November 13, 1969. Both sides move for summary judgment on the issue of liability.
The material facts are not disputed, but they are complex. In late 1968, Ultra's corporate desires settled on the acquisition of control of Avis, whose shares were traded on the American Stock Exchange. Negotiations between Ultra and Avis resulted, on January 16, 1969, in the execution of two agreements cumulatively providing for the acquisition by Ultra of 51% of Avis' stock. One agreement, with Avis itself, provided for the purchase of 49,744 shares of its treasury stock for $596,928. Simultaneous with the execution of this agreement, Ultra placed two designees on the Avis Board. The second agreement, between Ultra and Warren E. Avis, controlling shareholder of Avis, provided for the purchase in two blocks of his entire holdings of Avis stock (some 261,000 shares) for an aggregate sum of $4,000,000; but without further memberships on the Avis board.
The only money which changed hands at the time the agreements were executed was $100,000. paid by Ultra to Avis on account of the purchase of treasury shares. The balance due Avis was paid some five weeks later. Warren Avis received no money at the time the agreements were executed because Ultra did not then have the cash to pay him. In order to raise the necessary funds, Ultra planned a major public offering of its own stock for the Spring of 1969. Weis, Voisin, Cannon, Inc. (WVC), several of whose officers had substantial investments in Ultra, was to manage the underwriting.
The transaction with Warren Avis was structured to coincide with these plans. By the January 16, 1969 agreement, Ultra agreed to purchase from Warren Avis 211,770 Avis shares for $3,403,072. or $16.06 per share. The closing was to take place on June 30, 1969, to give Ultra time to raise the necessary funds through the sale of its own securities. If the closing of the purchase of the 211,770 shares was completed as agreed, Ultra would have an option to purchase from Warren Avis his remaining 49,744 Avis shares for $596,928, or $12. per share. The option granted by Mr. Avis was exercisable until September 30, 1969, but was conditioned on Ultra's prior payment in full for the 211,770 share block. In the meantime, Mr. Avis' attorney was to hold as security the Avis treasury shares purchased by Ultra from Avis. If Ultra failed to pay the $3,403,072 on June 30th the treasury shares would be forfeited as liquidated damages.
B. Clouds Threaten the Corporate Rendezvous.
As this scenario indicates, Ultra's successful acquisition of control of Avis through the agreements described was heavily contingent on the consummation of Ultra's public offering of its own stock and warrants. Soon after the execution of the Avis agreements, therefore, Ultra and WVC turned their attention to preparation of the offering. They planned, naturally, to file the registration statement in time for it to become effective prior to the scheduled closing with Warren Avis on June 30th.
Almost from the start, however, their intentions were frustrated. Preparation of the registration statement took longer than expected, and the new issue market was so active at the time that the SEC was considerably backlogged. Ultra did not receive the SEC's letter of comment until late June, 1969. To make matters worse, the price of Ultra's stock on the over-the-counter market began to sag in the second quarter of 1969.
The combination of circumstances made a pre-June 30th public offering impossible as a practical matter, and WVC was reluctant to bring Ultra's new issue to market during the traditionally slow and risky summer season in the securities markets. Ultra consequently found itself confronted with two unpalatable choices. First, it could permit Mr. Avis to take as liquidated damages its $596,000 investment in Avis treasury shares. This course would seriously jolt Ultra's already shaky financial position, since at the time Ultra's net worth was only $400,000 and its current assets were composed almost entirely of inventory and accounts receivable. Ultra's second choice, the one it made, was to seek modification of its agreement with Warren Avis.
Mr. Avis was, in the circumstances, in the stronger bargaining position. On July 2nd and July 11th, Ultra and Mr. Avis executed modifications of their original agreement. The modifications provided for payment by Ultra of $750,000 by July 14, 1969 on account of the $3,403,072 which had been due on June 30th, plus interest at 1% per month on the unpaid balance. Additional security arrangements in Mr. Avis' favor provided that on Ultra's further default, he would be entitled to keep the $550,000 payment Ultra made on July 2nd, in addition to the treasury shares already pledged.
With disaster averted for the moment, Ultra again turned its attention to the registration of its public offering rescheduled for September 2, 1969. However, as the scheduled date drew near, WVC again decided the time was not propitious for the offering, and after giving assurances to Ultra that it would ultimately proceed, fixed October 16 for the new effective date. This turn of events naturally required Ultra to return to Mr. Avis, hat-in-hand, to request a further extension of time to perform under the purchase agreement. The only alternative was default with even less appetizing consequences than would have prevailed earlier. By September, 1969, Ultra had over $1,000,000 tied up in Avis stock which would be forfeited under the terms of the agreement as modified in July. Such a loss would almost surely have driven Ultra into bankruptcy.
On September 2nd and September 16th, the agreement between the parties was amended once again. Ultra paid Mr. Avis an additional $250,000, (the proceeds of a personal loan from Ultra's Chairman), and promised an additional $750,000 by October 24, 1969. The closing date for final payment was adjourned to December 2, 1969. Ultra's option to purchase an additional 49,744 shares, which was to have expired September 30th under the original agreement, was modified so that its exercise was conditioned upon the payment of only the $750,000 due on October 24th, rather than the full purchase price. Although Ultra still had to exercise the option by September 30th, it no longer had to tender payment for the option shares at the time of exercise. Instead, payment for these shares, as well as the balance due (after the October 24th payment) of $1,653,072 on the 211,770 share block, and interest on both blocks, was to be made at the December 2, 1969 closing.
On WVC's reassurance that the Ultra public offering would finally go forward as scheduled in mid-October, Ultra exercised its option for the 49,744 block on September 30th. On October 14th, the registration statement was complete, except for the insertion of the "pricing amendment" and other customary last-minute changes. On October 16th, Ultra and its lawyers and accountants assembled at WVC's offices to attend to these details and sign the underwriting agreement. Instead, WVC informed Ultra that several ...