The opinion of the court was delivered by: LEVAL
FINDINGS OF FACT AND CONCLUSIONS OF LAW
George M. Thomas and other members of his family ("plaintiffs" or "the Thomases"), all holders of a junior preferred stock of the defendant, brought this action against Genesco, Inc. ("defendant") alleging breach of contract and violation of the terms of the preferred stock. The plaintiffs contend that Genesco breached its obligation to redeem, and pay dividends on, preferred stock which was issued to the plaintiffs in 1968 in consideration for the transfer to Genesco of the assets of Susan Thomas, Inc. ("Susan Thomas"). The defendant contends that its promise to the plaintiffs was conditioned by provisions in the acquisition agreement and corporate charter which forbid dividend payments and redemptions on junior stock when payments have been suspended or are in arrears on senior stock.
Underlying the dispute are the serious changes in economic conditions that occurred between the time that Genesco agreed to take over Susan Thomas in 1968, in the twilight of the intoxicating "buy now, pay never" conglomerate acquisition markets of the 1960's and the time when the plaintiffs sought unsuccessfully to redeem their Genesco stock, during the sober hangover of the mid-1970's. The parties had expected that the circumstances which fueled Genesco's ambitious acquisition program would continue indefinitely; little attention was paid either in the process of negotiations or in the documents embodying the agreement to what would happen if Genesco's fortunes soured.
Not surprisingly, the parties now profess widely divergent understandings of their respective rights and liabilities under their 1968 agreement. And the documents, structured in optimism, are not particularly helpful as to the consequences of bad times.
The facts, most of which were stipulated by the parties before trial, are as follows.
The plaintiffs are citizens of New Jersey, New York, or Massachusetts. The defendant Genesco is a Tennessee corporation which has its principal place of business in Nashville, and does business in this District.
The plaintiffs own, in the aggregate, 91,650 shares of Subordinated Serial Preferred Stock, Series 2 ("Series 2 preferred") of defendant Genesco, which amounts to 55.4% of the outstanding shares of Series 2 preferred. SF3.
In 1968, plaintiffs George M. Thomas, Reuben Thomas and William B. Thomas were the principal shareholders and chief executive officers of Susan Thomas, Inc., a New York corporation engaged in the manufacture and distribution of women's sportswear and apparel. SF4.
In 1968, the principal business of Genesco and its subsidiaries was the manufacture and sale of apparel. During the period 1962 through 1967, Genesco acquired various manufacturing and retailing concerns in exchange for its stock. Among the companies acquired for Genesco stock during this period were Girltown, Inc., Camp and McInnes, Inc. and Berkshire Apparel Corp. SF5-6.
In February 1968, Leonard Guiler, an officer of Genesco, approached George Thomas and suggested that Genesco might be interested in acquiring Susan Thomas. Trial Transcript ("T") 69. George Thomas testified that he insisted that he deal directly with W. Maxey Jarman, President of Genesco, and a meeting with Jarman was arranged. Id. At the meeting on March 21, Jarman told Thomas that Genesco was interested in acquiring Susan Thomas, and was contemplating a "package" worth approximately $ 20 million. Thomas acknowledged to Jarman the seriousness of the figure Jarman had mentioned, but noted his disappointment that what was offered was not cash. He returned to discuss the matter with his brothers. T 76-77, 81.
Thomas later met with Jarman and other Genesco representatives to negotiate further the terms of Genesco's offer. Thomas again expressed a preference for a cash deal but was told that the tax consequences of a cash purchase would have a negative impact on Genesco's balance sheet. Genesco said it would offer Susan Thomas shareholders a junior preferred stock. T 84. Thomas repeated his desire for assurance that he and his family "would get paid." T 89. The parties finally arrived at a mechanism which appeared to respond both to Thomas's concern for security and to Genesco's interest in a non-cash, "pooling of interests" transaction. Genesco would issue to the selling shareholders of Susan Thomas a subordinated serial preferred stock carrying the following terms: for five years, the stock would be non-callable but it would be redeemed at the rate of at least 20% per year by sinking fund payments during the following five years. In each of the second five years, furthermore, Genesco would have the right to redeem amounts larger than 20% up to 100% of the outstanding shares. The redemption price was to be $ 40 per share in the first year of the redemption period, but was to increase to $ 45 per share in the second year and by an additional $ 2 per share in each succeeding year. The purpose of the latter provision was to give Genesco an incentive to redeem earlier rather than later during the five years allowed for redemption. T 102-03. Whether Genesco's obligation to redeem during the second five year period was absolute, whether it was subject to charter provisions suspending such payments in certain conditions, and if so, in what circumstances, are the central issues in this lawsuit.
On or about May 29, 1968, Genesco and Susan Thomas entered into a written Plan of Reorganization and Agreement (the "Plan") dated May 29, 1968. The Plan provided that Susan Thomas was to transfer to Genesco substantially all of the assets, rights, property and business of Susan Thomas, and Genesco was to deliver to Susan Thomas shares of Genesco's Subordinated Serial Preferred Stock, Series 1 and Series 2, as well as common stock, to be distributed in turn to Susan Thomas shareholders.
The Plan provided that this preferred stock would have redemption provisions as described above. This was embodied in the following provisions of the Plan.
Paragraphs 1.8 and 1.9 of the Plan describe the Series 2 preferred stock (to be delivered in exchange for Susan Thomas shares) as follows:
1.8. Genesco shall cause a meeting of its shareholders to be duly held for the purpose of amending its Charter of Incorporation . . . (ii) to authorize creation of the Genesco Series 1 Preferred Stock and Series 2 Preferred Stock to be delivered hereunder. Said stock shall be subordinate solely to Genesco's $ 4.50 Cumulative Convertible Preferred Stock and Classes A, B and C of its Subordinated Cumulative Convertible Preferred Stock; shall have the distinguishing characteristics and rights, privileges and immunities described in Exhibit C; and shall be preferred as to dividends and liquidation to the remaining authorized but unissued series of preferred stock of Genesco.
"(b) The Series 2 Preferred Stock shall be non-callable until the first day of the month following the fifth anniversary of the Closing after which it shall be redeemable at $ 40 per share at the option of Genesco by not less than 30 or more than 60 days' notice of call, until December 31, 1973, at $ 45 per share until December 31, 1974, and at prices which shall increase thereafter by $ 2.00 per year, until all such stock shall have been redeemed; (ii) shall be entitled to cumulative dividends, payable quarterly, at a rate equal to 6% of the then prevailing redemption price; (iii) shall be entitled to receive the then prevailing redemption price, including accumulated dividend arrears, before distribution to subordinated classes of stock upon the voluntary or involuntary liquidation of Genesco; and (iv) shall be entitled to one vote per share on all matters.
"1.9. The Genesco Charter amendment, substantially in the form attached as Exhibit C, shall require Genesco to create and fund, in cash or United States government obligations, a sinking fund commencing January 1, 1974, which will redeem and retire, pro-rata, 20% of the original outstanding shares of Series 2 Preferred Stock within one year thereafter, and do the same with respect to a like number of shares annually thereafter, until all of the Series 2 Preferred Stock shall have been redeemed, at the respective redemption prices then prevailing. Upon failure to timely effect any such funding or redemption, and during the pendency of any such default, Genesco shall be precluded from purchasing, redeeming, or otherwise acquiring for value or paying any dividends to the holders of its common stock and its other classes of preferred stock subordinate to Series 1 and Series 2 Preferred Stock."
The Creation of the New Issue
Effective July 8, 1968, the Genesco certificate of incorporation was amended so as to authorize the issuance of Subordinated Serial Preferred Stock. The July 8 amendment delegated to Genesco's Board of Directors the power to fix and determine the distinguishing characteristics of each series of Subordinated Serial Preferred Stock. Pursuant to this delegation, the Genesco directors on July 29, 1968 determined the characteristics of Series 2 preferred stock, inserting a new Part C-III in the Fourth Article of the corporate charter. Part C-III reads in pertinent part:
(3) Redemption. The Corporation may, subsequent to October 31, 1973, at the option of the board of Directors, redeem the Series 2 Serial Preferred Stock or, from time to time, any part thereof at the redemption prices hereinafter set forth, plus in every case an amount equal to all accumulated and unpaid dividends accrued to the redemption date on the shares redeemed, whether or not earned or declared. The redemption price for each share of Series 2 Serial Preferred Stock redeemed at the option of the Board of Directors or pursuant to the Sinking Fund shall be $ 40 if ...