The opinion of the court was delivered by: CONNER
On June 12, 1969, plaintiff Madison Fund, Inc., (Madison) and defendant The Charter Company (Charter) consummated a private-placement agreement for the purchase/sale of unregistered Charter common stock. By unhappy irony, the fourth anniversary of that event was immediately followed by Madison's institution of this action for breach of contract and common-law fraud.
The history of the parties' contractual relations, their corporate honeymoon in Nassau, the Bahamas, and the proverbially swift disillusionment that followed, was the subject of a five-day trial without a jury. This Opinion incorporates the Court's findings of fact and conclusions of law pursuant to Rule 52(a) F.R.Civ.P.
A publicly-held, closed-end investment company, Madison is a Delaware corporation with a principal place of business in New York, New York. Charter, organized under the laws of Florida, has its principal place of business in Jacksonville, Florida. In the spring of 1969, Madison was introduced to Charter through the offices of one Henry Barnard, then a New York investment banker and a friend of Raymond Mason, Charter's President [Barnard Deposition (Dep.) at 8, 13]. Prompted by Barnard's apparently forceful advocacy, Bancroft Davis, then a Vice President of Madison, "strongly [recommended]" to Edward Merkle, Madison's President, that Madison purchase, through a private placement, the entirety of a projected $4,500,000 issue of unregistered Charter common stock [Defendant's Exhibit (DX-) A]. Davis, however, failed to inspire equal enthusiasm in Merkle [Merkle Dep. at 18]. Nevertheless, Merkle ultimately agreed to Madison's purchase of 64,500 shares of unregistered Charter common stock, for a total consideration of $3,000,000.
The June 12, 1969 letter agreement that reflected the parties' transaction (the Agreement) was initially drafted by Charter's Jacksonville-based general counsel, Smith, Hulsey, Schwalbe, Spraker & Nichols (Smith, Hulsey). Forwarded for review to Madison's general counsel, the Philadelphia firm of Ballard, Spahr, Andrews & Ingersoll (Ballard, Spahr), the Agreement was there revised to include an allowance to Madison of a primary right of registration. Ballard, Spahr, for its part, was entirely satisfied with the Agreement in its final form [Transcript (Tr.) at 385].
The June 12, 1969 closing was conducted in the casual setting of a Nassau hotel room -- an atmosphere that hardly presaged the tensions that would follow [Tr. at 603-04]. Among those in attendance at the closing was a representative of MAD International Fund, which was, at the same time but via a separate form of agreement, purchasing 21,500 unregistered Charter shares. That transaction, as well as a purchase by F.O.F. Proprietary Fund, Ltd., (FOF) of 32,250 unregistered Charter shares, [DX-B], was referenced in Paragraph (1), Section 4, of the Agreement, in connection with the provision respecting Madison's primary right of registration.
The Agreement's reference to FOF was by implication only; and no FOF representative was present at the June 12, 1969 closing. FOF was nonetheless to figure prominently at the surface of the present case. But it is Paragraph (2), Section 4, of the Agreement that lies at this action's root. That provision reads, in pertinent part, as follows:
"Charter agrees that if at any time Charter shall determine to make application to register any of its securities under the [Securities Act of 1933], it will upon each such determination promptly give written notice of its intention in that regard to [Madison]. Upon a written request from [Madison], given not more than twenty days after receipt of notice from Charter of such proposed application, Charter will at the time of making such application also endeavor to register under the Act any shares then held by [Madison] * * *."
The provision following Paragraph (2) of Section 4 is quoted in full below:
"Charter agrees to use its best efforts to the end that each registration of Shares required to be made by Charter pursuant to paragraphs (1) and (2) hereof shall become effective as promptly as practicable and shall remain effective for a period of not less than nine months. Each registration hereunder shall be at the expense of Charter; provided, however, that Charter shall not be obligated to bear the expense of any underwriting charges, commissions or fees with respect to the Shares."
On the day of the Madison-Charter closing, the National Association of Securities Dealers reported "bid" and "asked" prices for Charter stock in the over-the-counter (OTC) market of $56.50 and $58.50 respectively [Plaintiff's Exhibit (PX-) 141]. Subsequent reports by the National Quotation Bureau served as the unhappy chronicle of a steady and steep decline in the OTC market price of Charter stock from the latter part of 1969 through the end of 1970. Thus, for example, during the fourth quarter of 1969, the highest "bid" price reported was $38.50; during the fourth quarter of 1970, by contrast, the highest "bid" price reported was $17.625 [PX-138, at 16].
While the market price of Charter stock woefully sagged, Merkle, for one, sustained a notably level estimate of Charter: from the outset, and notwithstanding optimistic reports in memoranda from Davis [PX-94, 95], Merkle was dissatisfied with Madison's investment in Charter and distrustful of Charter's management and associates [Merkle Dep. at 52, 62, 152, 207; Tr. at 395]. Indeed, by the beginning of 1970, comments from a disgruntled Merkle had spurred his Madison subordinates to some tentative consideration of a suit against Charter, among others, on the ground of fraud in connection with the June 12, 1969 transaction [PX-96; Tr. at 394; Merkle Dep. at 56-57]. Moreover, Davis -- who had apparently been Charter's staunchest ally in the Madison ranks -- was removed from his post at Madison in September 1970.
On February 3, 1971, FOF, exercising its primary right of registration as provided by contract dated June 23, 1969 [DX-B para. 9(d)], notified Charter that it wished its 32,250
Charter shares to "be registered with the United States Securities and Exchange Commission as promptly as possible." [DX-C]. On or about February 17, 1971, Robert DeVeer -- then a Madison Vice President responsible for oversight of Madison's Charter investment, [Tr. at 339] -- was informally advised by Mason and Lloyd Smith, the latter a senior partner of Smith, Hulsey, that a registration of FOF's Charter shares was contemplated and that Charter "would be pleased" to allow Madison a "piggyback" registration in accordance with the provisions of Paragraph (2), Section 4, of the Agreement [PX-99, 101].
Confirmation of that advice came to Madison by letter of March 26, 1971 [PX-4], which added the cautionary observation that, "You should request registration only if you presently intend to dispose of the registered securities during a proximate period following the effective date of the registration statement." [PX-4, at 2]. Madison responded on April 8, 1971, requesting that Charter include Madison's 64,500 Charter shares in the proposed registration [PX-8].
Of the forty Charter securityholders similarly polled, i.e., other than Madison and FOF, [PX-5], twenty-nine indicated that they wished to exercise their "piggyback" rights. The proposed secondary offering -- an aggregate of 455,482 shares of common stock, 328,572 shares of convertible preferred stock, and warrants to purchase 158,635 shares of common stock -- was accordingly reflected in a June 20, 1971 registration statement proof, prepared by Charter, for a "shelf" registration, i.e., for public sale on a "from-time-to-time" basis. [DX-D].
During the spring of 1971, the possibility of a primary offering in conjunction with the planned secondary had been tentatively explored by Charter through consultation with the New York investment banking firm of Shearson, Hammill & Co. (Shearson) [Tr. at 29-30]. Hence the May 25, 1971 letter of intent sent to Charter by Shearson, in which the latter proposed to lead a firm-commitment underwriting of simultaneous primary and secondary distributions, on the condition that the prospective selling securityholders agree "not to sell or to have offered for sale any of the Company's securities, including its Common Stock, for a period of 120 days following the contemplated public offering without prior written consent of Shearson." [PX-10].
Charter's plan for a primary distribution, although itself fleeting, had effectively imported the notion of an underwriting into Charter's considerations. Indeed, by letter dated June 10, 1971, Edward Mishkin, a partner at Cleary, Gottlieb, Steen & Hamilton (Cleary, Gottlieb), special counsel to Charter, had suggested to Smith, Hulsey that the latter "might wish to raise with Ray Mason the question of a firm underwriting for the secondary distribution even in the absence of a primary offering at this time by the Company." It was Mishkin's independent assessment that "it would not only be in the interest of the Selling Securityholders but, probably, in the interest of the Company as well if a firm underwriting could be arranged to cover the secondary distribution or at least a substantial part of it." That estimate had been reinforced by Mishkin's discussion with counsel for Cerberus Associates, one of the selling securityholders; the latter, according to Mishkin's account, had recommended proceeding through an underwriting, commending its advantages in view of the potential practical and legal problems of distributing the large number of shares projected to be registered. [DX-F].
As noted above, Charter nevertheless proceeded with its preparation of the June 20, 1971 shelf-registration statement proof, copies of which were mailed to the selling securityholders, for their review, on June 22, 1971. By cover letter of that date, the selling securityholders were advised, inter alia, that "Shearson, Hammill & Co. has indicated to [Charter] that they might be interested in * * * an underwriting," and were asked to contact Charter if they wished to participate in such an underwriting [PX-11]. Madison, through its Delaware-based Secretary-Treasurer, John Barry, replied by letter of July 6, 1971, notifying Charter that it "did not wish to join in any underwriting of its Charter shares." [PX-13, 15, 16].
By letters dated July 8, 1971, the selling securityholders were formally canvassed for their interest in a firm-commitment underwriting, Charter urging that the Shearson proposal be given "serious consideration." [PX-21]. FOF and Madison, among others, advised Shearson via form responses supplied by Charter, that they were interested in disposing of their entire holdings in Charter shares through the suggested underwriting [DX-I; PX-23].
The latter response by Madison, on July 13, 1971, and again through the office of John Barry, might well have appeared curious in light of Madison's former communication. However, between July 6 and July 13, 1971, the market price of Charter stock had risen more than six points, from $38 per share to approximately $44 per share. [PX-82]. And, on July 13, 1971, George Kelner -- Madison's in-house counsel, acting on authority from Merkle or DeVeer [Tr. at 147; Merkle Dep. at 111] -- called Shearson to advise that Madison's disposition toward an underwriting was qualified by a $42 "upset" price [PX-24; Tr. at 111-12, 238-39]. Pressed further by Alan Cleland, an associate at Shearson, Kelner allowed that the figure thus cited was not "carved in stone," i.e., that Madison might conceivably join in the underwriting at a lower price [PX-24; Tr. at 156, 238-39].
The substance of his conversation with Kelner was recounted by Cleland to Smith, Hulsey, in a letter dated August 9, 1971 [PX-25]. In that same letter, Cleland observed that both he ...