The opinion of the court was delivered by: HAIGHT
MEMORANDUM OPINION AND ORDER
These actions are brought under the federal securities laws. State statutory and common law claims are also asserted by pendent jurisdiction. In addition, it appears that subject matter jurisdiction derived from diversity of citizenship exists.
The litigation represents, in essence, efforts by competing interests to obtain control of a corporation which owns, or is the exclusive licensee, of patents covering medical diagnostic devices. The case is before the Court on cross-motions for preliminary injunctions. Following extensive discovery and an evidentiary hearing, the Court propounds the following findings of fact and conclusions of law. Rule 65, F.R.Civ.P.
Braintech, Inc. ("Braintech") is a publicly-held Nevada corporation. It owns or holds exclusive licenses to patents covering the technology which is described under Point II, infra.
Nicolet Instrument Corporation ("Nicolet") is a large, publicly-owned Wisconsin corporation whose shares are traded on the New York Stock Exchange. Nicolet manufactures and markets a broad range of technological instrumentation, including biomedical research and diagnostic equipment.
Poseidon Capital Corporation ("Poseidon") is a privately-held New York corporation. James C. Couri is the president of Poseidon.
William Stewart and Barry Kass have been, since the inception of Braintech in 1980 or shortly thereafter, officers of Braintech. They currently serve on the Braintech board of directors.
Keith Brue, Robert Penrod, and Russell B. Cichy are officers or employees of Nicolet who currently serve on the board of directors of Braintech. Together with Stewart and Kass, these three individuals make up the entire five-man board of Braintech.
John B. Krauss is the president of Nicolet.
Mitchell Drobbin is a public shareholder of Braintech, who has intervened in the litigation under circumstances to be related infra.
This litigation is concerned with five patents on a device for scanning the human brain and diagnosing brain dysfunction. The device is known as the Brain Electrical Activity Mapping, or "BEAM," system. The device is the joint invention of Frank H. Duffy, M.D., a physician, and N. David Culver, a computer engineer and consultant. Duffy and Culver formed Braintech in December 1980 for the purpose of manufacturing and marketing the BEAM system. Of the five patents which protect the device, Braintech owns two of them directly, and holds exclusive licenses on the other three. Those three patents are owned by the Boston Children's Hospital. Duffy was affiliated with Children's Hospital at the time he and Culver founded Braintech.
The initial intended use of the BEAM technology was to furnish a more sophisticated diagnostic tool for neurological conditions. As a medical witness explained it, the currently existing electroencephalogram ("EEG") can detect relatively gross brain wave disorders; but an EEG tracing of less marked abnormalities can cause ten neurologists to give ten different diagnoses. The BEAM system, combining electronic and computer technologies, is a superior neurological diagnostic device. There is in addition some medical evidence for the proposition that the technology may be valuable in non-neurological medical fields as well.
Summary of the Litigation
As Judge Kaufman had occasion to write in Norlin Corp. v. Rooney, Pace Inc., 744 F.2d 255, 258 (2d Cir. 1984):
"Contests for corporate control have become ever more frequent phenomena on the American business scene. . . . Skirmishes are fought in company boardrooms, in shareholders' meetings, and, with increasing regularity, in the courts."
The court skirmishes in the cases at bar are fought over control of Braintech and its technology.
Poseidon fired the opening broadside on August 3, 1985 when it filed a complaint in this Court against Nicolet, Braintech, Stewart, Kass, Brue, Krauss, and two individuals who are no longer parties: Lauress V. Ackman and David Granquist, who were at the pertinent times and remain today officers of or affiliated with Nicolet. 85 Civ. 6118. I will summarize the 30-page, 70-paragraph complaint.
Poseidon alleged it is a shareholder of Braintech. It acquired its initial Braintech shares in consequence of a May 31, 1985 written agreement in which Braintech authorized Poseidon to restructure its debt, negotiate a merger, consolidation, or sale of assets and/or to obtain debt or equity financing, and to provide other services. Other shares were acquired in circumstances to be related. Poseidon complained of subsequent dealings between Nicolet and the Braintech board of directors which culminated in a July 31, 1985 written agreement between Braintech and Nicolet. That agreement resulted in the sale of Braintech shares to Nicolet, and contemplated subsequent agreements whereby Braintech would sell assets and license technology to Nicolet.
Poseidon asserted derivative claims on behalf of all Braintech shareholders, as follows:
First claim : Poseidon alleged that Nicolet, Kass, Stewart, Granquist, Krauss and Brue, in their conduct of the Nicolet/Braintech negotiations and transactions, breached fiduciary duties owing to Braintech shareholders.
Second claim : Poseidon alleged against all defendants the inevitable "civil RICO" cause of action, 18 U.S.C. § 1961. The predicate criminal acts are alleged to be violation of a New Jersey bribery statute, and the federal mail and wire fraud statutes.
Third claim : Poseidon alleged that all defendants violated the disclosure requirements of section 13(d)(1) of the Securities Exchange Act of 1934 (the "1934 Act"), 15 U.S.C. § 78m(d).
Poseidon prayed for an order removing Brue, Kass and Stewart from Braintech's board, enjoining the consummation of further transactions between Nicolet and Braintech, and enjoining the issuance by Braintech of any additional shares of common stock, warrants or options.
Braintech and Nicolet responded on August 7, 1985 with a complaint against Couri and Poseidon. 85 Civ. 6151. They filed an amended complaint on September 5. That 66-page, 153-paragraph pleading asserted five claims:
First claim : Violations by Couri and Poseidon of the disclosure requirements of section 14(f) of the 1934 act, 15 U.S.C. § 78n(f), and SEC Rule 14f-1, in connection with Couri's and Poseidon's assumption of control of Braintech in May-July, 1985.
Second claim : Violations by Couri and Poseidon of section 10(b) of the 1934 act and Rule 10b-5 in connection with defendants' relations with Braintech.
Third claim : Violations by Couri and Poseidon of section 13(d) of the 1934 act.
Fourth claim : Civil RICO.
Fifth claim : Violations by Couri and Poseidon of sections 78.210 and 78.270 of the Nevada Revised Statutes (Braintech being a Nevada corporation) in respect of the issuance of 4.5 million shares of Braintech stock to Poseidon on July 14, 1985.
Sixth claim : Breaches by Couri "and his designees" of common law fiduciary duties owing to Braintech's shareholders, including Nicolet, at a time when Couri and his designees were controlling Braintech's affairs.
Seventh claim : Violation by Couri of section 78.140 of the Nevada Revised Statutes in respect of transactions between Braintech and Poseidon which Couri caused the Braintech board to approve.
Eighth claim : Common law fraud in respect of Poseidon's acquisition of Braintech shares.
Ninth claim : In the alternative, breaches by Poseidon and Couri of contracts entered into with Braintech.
Braintech and Nicolet prayed for judgment declaring null and void all issuances of stock and all options, warrants and other rights to acquire stock granted by Braintech to Poseidon and Couri during the relevant periods of time; declaring null and void certain agreements between Braintech and Poseidon; and enjoining Couri and Poseidon from acting in furtherance of those agreements, exercising voting rights in Braintech shares, acquiring additional Braintech shares, transferring those shares, warrants or options which they held, and engaging in proxy solicitation of Braintech shareholders.
On October 3, 1985 Drobbin intervened in 85 Civ. 6188 to assert claims against Nicolet, Kass, Stewart, Brue, Penrod, Cichy and Braintech. Drobbin identified himself as a Braintech shareholder. He styled his intervenor's complaint as a stockholders' derivative action. Drobbin alleged, in respect of events beginning in late July 1985 and extending through September, the breach by Kass and Stewart of fiduciary duties which they owed as Braintech directors to Braintech and its public shareholders. Drobbin also charged Nicolet, as controlling shareholder of Braintech during that period, with violation of its fiduciary duties to Braintech and its public shareholders. Drobbin prayed that the issuance to Nicolet of certain Braintech shares and warrants be declared null and void; that an asset purchase agreement and a license agreement between Nicolet and Braintech also be declared null and void; and that a court-supervised receiver be appointed to manage Braintech's affairs.
Braintech and Nicolet moved to dismiss the derivative action brought by Poseidon. I granted that motion for reasons stated on the record and not repeated here. Couri and Poseidon thereafter filed an amended and supplemental answer and Poseidon filed counterclaims in the action commenced against them by Braintech and Nicolet. The counterclaims are as follows:
First claim : Violations of section 14(f) of the 1934 act in respect of an election of Braintech directors on July 30, 1985.
Second claim : Violation of section 14(f) in respect of a section 14(f) report subsequently filed by Braintech on August 29.
Third claim : Violation of section 13(d) in respect of Nicolet's June 17, 1985 section 13(d) filing, and subsequently.
Fourth claim : Violations of section 10(b) and Rule 10b-5 in respect of Nicolet's acquisitions of Braintech shares.
Fifth claim : Breach by Braintech and its board of section 78.140 of the Nevada Revised Statutes in respect of agreements entered into between Braintech and Nicolet in late July 1985 and thereafter.
Sixth claim : Breach of a consulting agreement dated July 11, 1985 entered into between Poseidon and Braintech.
Seventh claim : Anticipatory breach of a July 22, 1985 agreement entered into between Poseidon and Braintech.
Eighth claim : Tortious interference by Nicolet with a May 31, 1985 agreement entered into between Braintech and Poseidon.
Ninth claim : Fraudulent inducement by Kass and Stewart (who together with Krauss, Brue, Penrod and Cichy had been added as additional counterclaim defendants) of the May 31, 1985 agreement between Poseidon and Braintech.
On its counterclaims, Poseidon prayed to enjoin Nicolet from acquiring or disposing of any assets or voting securities of Braintech, from soliciting proxies from other Braintech shareholders, and from influencing or controlling the management of Braintech. Poseidon further prayed that Nicolet be divested of its purchases of Braintech shares; that proper disclosures be made; and that a stock purchase agreement, a stock option agreement, a license agreement, and an asset purchase agreement entered into between Braintech and Nicolet be declared null and void.
In addition to the injunctive remedies sought by the parties against each other, as summarized supra, the complaints and counterclaims contain demands for money damages.
The case came on for hearing before the Court on cross-motions for preliminary injunctions. Poseidon asked that, within the context of a shareholders' meeting to be held to vote upon the asset purchase agreement between Braintech and Nicolet, Nicolet be denied the right to vote its Braintech shares, or be required to vote them pari passu with the votes cast by public shareholders at the meeting.
Braintech and Nicolet asked that Couri and Poseidon be restrained from transferring any Braintech shares they hold to others.
At the beginning of the hearing on these applications for preliminary injunctions, the Court ordered the trial of the actions on their merits, insofar as they sought equitable relief, to be advanced and consolidated with the hearing of the applications. Rule 65(a)(2), F.R.Civ.P. The hearings extended over three weeks, generating 2,000 pages of transcript and almost 200 exhibits. The summations of counsel and post-hearing memoranda request broad equitable relief. Poseidon now contends that all of Nicolet's Braintech shares should be returned to the Braintech treasury, and all agreements between Braintech and Nicolet be declared null and void. Nicolet and Braintech contend that all of Poseidon's and Couri's Braintech shares should be returned to the Braintech treasury, and all agreements between Braintech, Poseidon and Couri be declared null and void. Intervenor Drobbin makes common cause with Poseidon against Nicolet and Braintech, and prays for the appointment of a receiver over Braintech's affairs.
Many factual aspects of the case are in dispute. Primarily they relate to inferences to be drawn, and characterizations to be made. But many significant facts are undisputed. It is useful to set certain of them forth now, in order to narrow the issues and furnish the background against which the disputes must be resolved.
(A) The Genesis of Braintech
The BEAM inventors, Duffy and Culver, formed Braintech in December 1980. Stewart joined the corporation in December 1982 as a director and vice president in charge of operations. Kass became a director, vice president, and eventually president of Braintech.
While Braintech has certain other assets, it is common ground that the BEAM technology is by far its most valuable. However, Braintech has been singularly unsuccessful in marketing this apparently promising device.
With the assistance of its investment advisor, Muller & Company, Braintech first offered its stock to the public in October 1983. The offering price was $5 per unit, each unit consisting of four shares and a warrant. That offering raised several million dollars. However, by the spring of 1985, Braintech was in extremis. It had spent the funds raised by the 1983 public offering. It had accumulated debts in excess of $1 million. Braintech's work force had shrunk from a previous high of 28 employees to three: Kass, the president; Stewart, the vice president; and Suzette Stewart, Stewart's daughter, who was employed as an administrator, secretary and bookkeeper. Duffy and Culver remained the major shareholders of Braintech, but held no offices in the corporation. None of the three employees had been paid any salary since September of 1984.
During 1983 and 1984, Braintech actively solicited, and proclaimed itself eager to receive, overtures of any feasible kind from other companies. No acceptable offers were received. Some witnesses suggested that Culver, then active in Braintech's affairs, put off potential suitors with an abrasive manner. For whatever reason, it is apparent that Braintech made strenuous efforts to attract the interest (and the funds) of others, to no avail.
To be sure, Nicolet had demonstrated interest in Braintech and the BEAM technology. Nicolet management made overtures to Culver and to the corporation in June 1984 and again in December 1984. But Braintech rejected as unsatisfactory Nicolet's suggestions: that Nicolet's sales force sell the BEAM technology (June 1984 proposal), or that Nicolet acquire all of Braintech's shares (December 1984 proposal). Those in charge of Braintech rejected the purchase price contained in the latter proposal as insufficient in amount.
As of spring 1985, Braintech had placed only eight of its machines "in the field." Even as to these, the corporation was encountering difficulties in realizing revenues from them. Other Braintech machines were in inventory, with no immediate sales prospects at an asking price in excess of $600,000 each. The company was, in a phrase suggested by the Court and adopted by counsel, "brain dead."
These were the circumstances when Couri and his corporation, Poseidon, were introduced to Braintech.
(B) The Advent of Couri and Poseidon
Poseidon was incorporated in October 1984. Couri is the president. Poseidon's principal business is described as "investments and management consultancy." Poseidon has not to date filed a tax return, or prepared a financial statement. It has no payroll or telephone number. Poseidon's mailing address is that of Howard Krantz, an attorney who has represented Couri in unrelated matters, and is a close personal friend.
Poseidon has three shareholders: Krantz; one Tompkins (of whom the evidence reveals nothing else); and CTC Venture, a sole proprietorship owned by Couri's wife Carla, whose general power of attorney Couri holds. At one time pertinent to this litigation, Couri's brother John was a Poseidon shareholder. He is no longer. It is common ground that Couri controls Poseidon; and that (save for certain Braintech shares here at issue) Poseidon has no assets.
It has become equally apparent during discovery and trial that Couri has no personal assets. On the contrary, he has a sizably negative net worth, as the result of an absence of assets and the presence of judgments against him and other indebtedness.
Couri has a checkered past. He has twice pleaded guilty in this Court to charges of fraud. One charge involved securities fraud. The other involved fraudulent statements made to a bank in connection with an art gallery Couri controlled. Couri is the subject of an injunction against securities laws violations obtained by the Securities and Exchange Commission.
In April 1985, Couri formed a casual acquaintance with one Alex Lucas, an employee of Muller & Company. Muller, after taking Braintech public in 1983, had entered into a financial consulting agreement with Braintech. Pursuant to that agreement, Muller was attempting without success to find investors for Braintech. In a series of social meetings, Couri impressed Lucas with his stature and management skills. Whether Couri revealed his past to Lucas, as Couri says, or concealed it and misled Lucas about his present circumstances, as Lucas says, I need not decide for reasons I will discuss infra. But there is no question that Lucas regarded Couri as a potential investor and source of assistance to Braintech. In consequence, on May 4, 1985 Lucas took Couri out to the Braintech offices in South Plainfield, New Jersey for a meeting.
Attending that meeting were Lucas, Couri, Kass, Stewart and one Martin J. Kaplitt, M.D. Dr. Kaplitt, a practicing physician, is also president of Advanced Medical Imaging Corp. ("AMIC"), a company involved in medical technology. Kaplitt was also considering Braintech as a possible investment; his presence at the Braintech offices on the same day as Couri was coincidental. Both Couri and Kaplitt listened to a presentation of the BEAM technology by Dr. Duffy. Kaplitt could understand that presentation better than Couri. Kass and Stewart then described Braintech's current financial condition. Everyone could understand that.
The Braintech people were looking for an investment of some $500,000. Couri stated that in the company's condition, such an amount would simply vanish into the hands of the creditors. Couri added that he was not interested in investing any amount. However, he gave a preliminary description of how Braintech's debt might be restructured and the company restored to financial health. His discourse apparently impressed Kass and Stewart, as well as Dr. Kaplitt, who stated to Couri as they left Braintech that he might be interested in talking to Couri again.
Following that initial meeting, Couri, Kass and Stewart held discussions concerning Couri's suggestion that Poseidon might render investment and management advice to Braintech. These discussions also involved Kenneth M. Socha, an attorney who was secretary and counsel of Braintech. After passing through a draft dated May 28, 1985, these discussions culminated in a letter agreement dated May 31, 1985. This is the first significant document in the case. It involves three parties: Braintech, Poseidon, and AMIC. Kass, Stewart and Socha signed for Braintech; Couri signed for Poseidon; and Kaplitt signed for AMIC.
The May 31, 1985 letter agreement, together with other pertinent documents, have been analyzed, debated, testified to and argued about as if they were among the Dead Sea Scrolls. In point of fact, the salient features are relatively straightforward. In the case of the May 31, 1985 Braintech/Poseidon/AMIC letter agreement (the "May 31 agreement"), they are these:
The purpose of Poseidon's and AMIC's intervention in Braintech's affairs was described as "restructuring its debt, negotiating a potential merger, consolidation, sale of assets, etc. and/or in obtaining additional debt and equity financing . . . ."
During the next 90 days Poseidon was authorized to contact Braintech's creditors and try to work out satisfactory arrangements; to negotiate on Braintech's behalf "any potential merger, acquisition, consolidation, sale of assets, business combination, joint venture or licensing agreement or similar agreement"; and to liquidate Braintech's existing inventory and realize any receivables.
300,000 shares of common stock of Braintech were to be issued to Poseidon for entering into the May 31 agreement, those shares not being contingent "upon Poseidon's performance hereunder or otherwise."
Upon execution of the May 31 agreement, Poseidon and AMIC obtained the right to designate a majority of Braintech's board of directors.
When and if Poseidon and AMIC were satisfied with arrangements Poseidon had made with Braintech's creditors, Poseidon and AMIC could each invest $250,000 in Braintech, in exchange for an additional 1.5 million shares each of Braintech common stock and notes secured by Braintech's assets; in the event AMIC failed to make the investment, Poseidon could fund the entire $500,000 investment in exchange for 3,000,000 shares and notes aggregating $250,000.
Upon the investment of $250,000 and after Poseidon made arrangements with Braintech's creditors, Poseidon would receive an additional 300,000 shares of Braintech common stock.
Poseidon and AMIC each received options to purchase an additional 1,000,000 shares of Braintech common stock (at prices ranging from 15 cents to 30 cents a share), in exchange for a $10,000 loan to enable Braintech to "pay its most pressing obligations" (to be disbursed at the discretion of AMIC and Poseidon).
Upon execution of the May 31 agreement, Poseidon and AMIC designated Krantz and Dr. Kaplitt as two of Braintech's three directors. Coming into the May 31, 1985 meeting of the Braintech board, Kass and Stewart were the only two directors. Kass withdrew. Krantz and Kaplitt joined the board. Stewart remained.
(C) The Coming Again of Nicolet
Although its initial overtures had been rebuffed, Nicolet's interest in Braintech continued. Nicolet got word of the intervention of Poseidon and Couri. That prompted a mailgram on May 29, 1985 from Krauss, the president of Nicolet, to one Raymond Tsao, then a director of Braintech (Tsao resigned as a director the following day). Krauss's mailgram read:
"THIS WILL CONFIRM NICOLET'S INTENT TO NEGOTIATE THE ACQUISITION OF THE OUTSTANDING SHARES OF BRAINTECH INC. AS WE HAVE DISCUSSED. WE WISH TO MEET WITH YOU AT THE EARLIEST MOMENT FOR THIS PURPOSE."
The drama that unfolded from June through August 1985, while involving certain subplots, alarums and excursions, has to do primarily with Nicolet's renewed efforts to get control of Braintech and its technology, the resistance of Poseidon and Couri to those efforts, and the reactions of Kass and Stewart as the tides of battle ebbed and flowed.
(D) The Guns of June through August: Negotiation, Maneuver, Disillusion, Strife, and the Exodus of Poseidon and Couri
I am prepared to accept that in the days immediately following execution of the May 31 agreement, Couri made contact with a number of Braintech's creditors. The value of those services, if any, is hotly debated, and will be addressed infra. For the present, it is sufficient to say that Braintech and Nicolet argue that no significant debts were restructured; Couri contends that no creditors actually filed suit against Braintech during his tenure. Both assertions appear to be correct.
The focus of events fell not so much upon efforts to restructure Braintech's debt as it did upon Nicolet's renewed interest in Braintech. Following up on Nicolet's May 29th mailgram, a Nicolet delegation came to New York to discuss further overtures with Braintech on June 4, 1985. The meeting took place at the offices of Baker & MacKenzie, counsel for Poseidon. Couri headed up the Braintech negotiating team, consistent with the authority conferred upon him by the May 31 agreement.
Duffy and Culver attended that meeting. At that time, Duffy and Culver together owned 8,089,000 shares of Braintech common stock, representing 58.77% of the then outstanding shares of the company. The Nicolet representatives expressed a desire to confer privately with Duffy and Culver. Couri made no objection, and of course there was no basis upon which he could have done so. A conference room at Baker & MacKenzie was made available for the purpose. Ultimately Duffy and Culver granted Nicolet options to purchase all Braintech shares beneficially owned by Duffy and Culver, exercisable until July 19, 1985.
On June 14 the 300,000 Braintech shares beneficially owned by Poseidon upon execution of the May 31 agreement were formally issued to Poseidon.
By June 26, 1985 the Braintech-Nicolet negotiations had advanced to the point where, on that date, those parties executed a non-binding letter of intent. The June 26 letter recites that its purpose:
". . . is to state the intentions of Braintech, Inc. ('Braintech') and Nicolet Instrument Corporation ('Nicolet') with respect to the acquisition by Nicolet of substantially all of the assets and business of Braintech."
Among others, the following steps were contemplated:
Nicolet would exercise the Duffy/Culver options, and then acquire certain of the assets and liabilities of Braintech, including the exclusive right to Braintech's BEAM technology.
Poseidon and AMIC would cancel the options granted to them under the May 31, 1985 agreement, and AMIC and Poseidon would pay $650,000 in cash for 4,500,000 Braintech shares.
Nicolet was to advance $100,000 to Braintech "as a good faith deposit," to be credited to amounts payable by Nicolet to Braintech if the transaction closed, and to be forfeited if it did not.
In respect of Nicolet's purchase of Braintech's assets, the June 26 letter of intent specified the consideration that Nicolet would pay for Braintech's assets and its exclusive license. That consideration included a 5% royalty; prepayments of royalties in the amount of $1,000,000 on closing of the asset purchase agreement, $200,000 on August 1, 1989, and $300,000 on August 1, 1990, all nonrefundable; $445,000 in cash; options to purchase common shares of Nicolet at stated times and prices; and a provision that 2,989,000 Braintech common stock would be contributed to Braintech's treasury, which would leave Nicolet with a total of 5,100,000 shares of Braintech common stock.
This June 26 non-binding letter of intent was signed by Kass as president of Braintech and by Krauss as president of Nicolet.
Nicolet promptly made the $100,000 good faith deposit, forwarding it to Baker & MacKenzie, counsel for Poseidon, at Braintech's instructions, where it was placed into one of several special accounts the law firm maintained for Poseidon/Braintech business.
Braintech convened a special meeting of its board of directors on June 27. Stewart, Krantz, and Kaplitt, the full board, attended. So did Socha, the secretary and counsel to Braintech; Kass, the president; Couri and Benedict Sciortino of Baker & MacKenzie, counsel to Poseidon. The meeting concerned implementation of the June 26 letter of intent with Nicolet. According to the minutes of the meeting, at p. 3, Couri indicated that Poseidon and AMIC "would be willing to make the investment contemplated by paragraph 4(b) of the corporation's Agreement in Principle with Nicolet" on certain terms and conditions. Before considering those terms and conditions, it is well to quote paragraph 4(b) of that agreement in principle in order to have in mind just what was contemplated. It read:
"As a condition to the parties' obligations, on or before the closing date, Braintech will have received documentation cancelling the option and related matters granted to Poseidon and AMIC, cash from them in the amount of $650,000 and in return will have issued 4,800,000 shares to them (plus the 300,000 shares already issued to Poseidon equal 5,100,000 shares)."
The terms and conditions which at the June 27 meeting Couri said were agreeable to Poseidon and AMIC were quite different. Poseidon was to receive an additional 300,000 Braintech shares "immediately . . . in consideration of its services in negotiating the Agreement in Principle with Nicolet." In addition to that 300,000 shares, an aggregate of 4,500,000 shares would be issued by Braintech, 2,400,000 shares to Poseidon and 2,100,000 shares to AMIC. The consideration for those 4,500,000 shares would be the return of options previously issued to Poseidon and AMIC, and delivery of promissory notes (not cash) in the aggregate amount of $325,000 from each of Poseidon and AMIC. At the June 27 meeting, the Braintech board, comprised of Stewart, Krantz and Kaplitt, accepted these conditions, and also resolved to issue warrants to Poseidon covering the right to purchase up to 1,000,000 additional shares of Braintech common stock at 18 cents per share.
At the June 27 meeting the Braintech board also resolved that after the next meeting of the Braintech shareholders, Poseidon and Couri would be retained under a consulting agreement to provide management services to Braintech at the rate of $100,000 per year for a two-year period, plus reimbursement of out-of-pocket expenses.
On July 9 AMIC and its president, Dr. Kaplitt, disappeared from the stage. Kaplitt explained in his testimony that the Braintech situation was simply becoming more complicated and time-consuming than he had anticipated. On July 9 AMIC assigned all its rights under the pertinent agreements to Poseidon; Kaplitt resigned from the Braintech board. Within the context of the June 26 letter of intent between Braintech and Nicolet (as amended by the events of the June 27 Braintech board meeting), this left Poseidon entitled to receive 4.5 million Braintech shares in consideration of a $650,000 promissory note.
About this time it came to Couri's attention that Nevada law (which governed Braintech's affairs) requires that at least the par value of shares be paid for in cash or services rendered at the time of issuance. Nev. Rev. Stat. § 78.210 and § 78.270. The par value of Braintech's shares was one cent. Accordingly, Poseidon was required to pay at least $45,000 in cash or services upon the issuance of the 4.5 million Braintech shares which the Braintech board had authorized at the June 27 meeting.
These circumstances led to a meeting on July 11 at the Baker & MacKenzie offices. Couri and his counsel proposed to reduce the amount of Poseidon's note for the 4.5 million shares from $650,000 to $600,000, and to value Poseidon's "past services rendered" to Braintech at $50,000. In the view of the draftsmen, such alterations would bring the transaction into compliance with Nevada law. However, Stewart refused to accept these changes. He resigned from the Braintech board during an early morning telephone call to Couri on July 13.
On July 13, Krantz appointed Couri as a member of the Braintech board and its chairman. A special meeting was called for July 14 at the offices of Baker & MacKenzie. At that July 14 meeting (which was on a Sunday), Couri and Krantz elected Jerry Leibner as the third Braintech director. Nevada law requires a minimum of three corporate directors. Leibner was affiliated with Krantz in the practice of law.
Leibner did not attend the July 14 meeting. To the extent that he participated, that participation was by telephone.
According to the minutes of the July 14 meeting, the Braintech board (now consisting of Couri, Krantz, and Leibner on the end of a telephone line) valued certain of Poseidon's services to Braintech at $50,000. These were services which, Couri acknowledged, were limited to those rendered to Braintech during the period June 27 through July 14. (Tr. 208.) The board also authorized issuance to Poseidon of 4.5 million Braintech shares, in consideration of Poseidon's $50,000 in services, and:
". . . a $600,000 note of Poseidon Capital Corp., which note is personally guaranteed by James C. Couri and Howard Krantz, Esq. . . ."
That note was fully due upon closing of the Nicolet transaction; or, if that transaction did not close on or before October 1, 1985, the principal became payable in installments of $81,250 on May 1, 1986 and quarterly thereafter.
The resolutions approved at the June 27 Braintech meeting, as reflected in the minutes, had obligated Braintech to deliver the 4.5 million shares to Poseidon and to AMIC in exchange for the promissory notes therein referred to, and:
". . . upon delivery of evidence satisfactory to this Board of Directors that Poseidon and AMIC have sufficient net worth to insure payment in accordance with the terms of said notes or in lieu thereof personal guarantees of timely payment thereof. . . ."
In point of fact, the Braintech board as it was constituted on July 14 accepted a Poseidon note and personal guarantees which are further described infra.
At the July 14 meeting the Braintech board also approved the immediate issuance of warrants to Poseidon to purchase an additional one million shares in Braintech at 18 cents a share, exercisable over a five-year period from the date of issuance.
Meanwhile, no progress was being made in arriving at a firm and binding agreement between Nicolet and Braintech (represented by Poseidon and Couri). The record abounds with cross-recriminations about why this is so. I need not resolve all those issues, least of all within the context of a statement of undisputed facts. It is undisputed, however, that on July 16 Couri resigned from the Braintech board, to be replaced by Kass; and on July 29 Krantz and Leibner resigned, leaving Kass as the sole Braintech director.
Kass at this point reached out to Stewart and asked him to rejoin the Braintech board. It is apparent that by this time, the disenchantment of Kass and Stewart with Couri, germinating for some time, had become total. Kass communicated with Nicolet representatives and asked that direct negotiations be resumed. A Nicolet team, including Keith Brue, flew to Newark Airport on the evening of July 29. Kass and Stewart met them there. By this time, Nicolet owned about 40% of Braintech's common shares, by virtue of having exercised the Duffy and Culver options.
On July 30 Kass and Stewart met with Brue at the law offices of Weil, Gotshal & Manges. Weil, Gotshal represents Nicolet. It was perceived that separate legal representation should be obtained for Braintech. The firm of Baer, Marks & Upham undertook that responsibility.
Negotiations ensued which culminated in yet another letter of intent, accompanied by a stock purchase agreement and a stock option agreement. The parties to each of these agreements were Braintech and Nicolet. Those agreements are dated July 31, 1985. They were approved at the Braintech board of directors meeting on July 30. The minutes of that meeting reflect the election of Stewart and Brue as directors. Brue presented proposals on behalf of Nicolet which were subsequently accepted by Kass and Stewart as the majority of the Braintech board; Brue did not vote on these issues.
Specifically, at that meeting Nicolet purchased 2,450,000 shares of Braintech common stock at 20 cents per share for a total of $490,000, together with an option, for $10,000, which would provide Nicolet with the right to acquire, also at 20 cents per share, an additional 2,000,000 shares. Of that $500,000 total, $348,000 would be paid in cash, with the balance being made up of the $100,000 good faith deposit made under the prior letter of intent between Braintech and Nicolet, and $52,000 of cash advances previously made by Nicolet to Braintech "to pay various bills" (under circumstances which appear infra). The superseding Braintech-Nicolet agreement also contemplated the execution of further documents: an asset purchase agreement and a license agreement. Those documents were in fact agreed to. Their contents will be considered infra.
This newly constituted Braintech board sent Poseidon and Couri a letter formally terminating their services to Braintech.
(E) The Relations between Kass, Stewart, and Nicolet
Before turning to the parties' claims and the resolution of factual disputes, it is appropriate to consider one additional aspect of the case where the facts are not disputed, although the characterizations to be placed upon those facts and the conclusions to be drawn from them most certainly are. This aspect of the case relates to contacts between Kass and Stewart on the one hand, and Nicolet on the other, during the interval between Nicolet's re-entry in the field in late May and the Braintech-Nicolet agreements of July 31.
On June 13, 1985, negotiations were in progress between Braintech and Nicolet. The June 4 meeting between representatives of the two companies had been held; the June 26 non-binding letter of agreement was still in the offing. On June 12 Nicolet sent one David Granquist, an accountant and resident of New Jersey, to the Braintech offices in South Plainfield to conduct an inspection of Braintech's premises and books of account. Kass, Stewart and Couri agreed to this mission, its stated purpose being to put Granquist in a position to advise Nicolet in the negotiations. But Granquist was to play a role other than that of auditor for Nicolet.
Granquist (destined to be a vice president for finance of Braintech after the events of July 31) maintained with his wife a joint personal checking account in a New Jersey bank. A time came when Nicolet loaned monies to Braintech for the ostensible reason of meeting some of Braintech's pressing obligations. Those loans were put in hand by Brue. One of Brue's first actions during this period was to agree that the salary of Suzette Stewart, William Stewart's daughter and one of three Braintech employees at the time (the other two being Kass and Stewart), be increased from $400 a week to $500 a week. Brue agreed to that increase in early June, prior even to the non-binding letter of intent between Braintech and Nicolet of June 26. Brue also undertook to fund payment of the salaries of Kass and Stewart. The vehicle used was the personal checking account of Mr. and Mrs. Granquist, which had been fueled for the purpose by funds from Nicolet.
Specifically, by checks drawn on the Granquist account dated July 17, 1985, salary payments were made to William Stewart, Suzette Stewart, and Kass. A check also dated July 17, 1985 was made payable to the order of Wade Stewart, William Stewart's son, who had done some brief messenger work for Braintech during the summer. Further wage payments were made by Granquist checks to Stewart and Kass on August 1, 1985.
During this period of time, Kass and Stewart also entered into consulting agreements with Nicolet. On June 19 Stewart and Kass both flew to Nicolet's head office in Madison, Wisconsin, at the request of Nicolet representatives. Nicolet stated that they wished to discuss technological aspects with Stewart, and marketing and production aspects of the Braintech business with Kass. While in Madison, both Stewart and Kass signed agreements with Nicolet. Stewart signed a "consulting" agreement, and Kass an "employee" agreement. While Stewart testified at trial, Tr. 1291, that in his understanding the consulting agreement was to come into effect only if and when the Braintech-Nicolet deal closed, the document itself, Ex. 106, dated July 3, 1985, recites that the agreement commences:
". . . on the date of this Agreement and shall terminate two years from that date, unless Nicolet is unable to purchase the assets of Braintech, Inc. and receive an exclusive license to Braintech's patents, in which case this Agreement shall terminate September 30, 1985. . . ."
The consultancy fee specified in the agreement was $100,000 over the term of the agreement.
When Couri learned of these agreements, he was angry, and reproached both Kass and Stewart, applying pressure to Stewart to resign from the Braintech board which, as noted, Stewart did.
As of June 30, 1985, Braintech owed Stewart and Kass just under $48,000 each in unpaid wages. In addition, Stewart and Kass had loaned personal funds to Braintech, receiving the company's notes in return. As of that date, Braintech owed Stewart $9,496.36 on his note. Braintech owed Kass $10,436.12 on his note. Suzette Stewart was owed $3,200 in back wages.
One of the provisions in the Braintech/Nicolet agreements negotiated during the period July 29-31, 1985 was the assumption by Nicolet of certain listed Braintech obligations. The foregoing amounts owing to Kass and the Stewarts were on that list. In consequence, Stewart and Kass knew, at the time they voted as Braintech directors for the Nicolet deal, that in doing so a solvent creditor would be substituted for an insolvent one in respect of these amounts owing to them.
(F) Events of September 1985
Two additional incidents of note occurred after the events of July 29-31, 1985. First, the asset purchase agreement between Braintech and Nicolet contemplated by the July 31, 1985 letter of intent was in fact executed on September 18, 1985. By that time, the Braintech board had been increased from three to five, Penrod and Cichy, employees of Nicolet, having been added. The Braintech board presently consists, therefore, of Brue, Penrod, Cichy, Stewart and Kass. Second, on October 30, 1985, Braintech entered into a new license agreement with Children's Hospital which gives Braintech an exclusive license to the three BEAM technology patents owned by Children's Hospital, in return for payment to Children's of $750,000. The funds for this payment were lent to Braintech by Nicolet, in return for a note from Braintech in the face amount of $750,000 plus twelve percent interest.
To close out this partial recitation of undisputed facts, it is sufficient to say that the asset purchase agreement negotiated between Braintech and Nicolet is subject to the approval of the Braintech shareholders. The meeting of shareholders to consider that matter has been adjourned on the parties' consent pending this Court's rulings on the cross-motions.
Relevant Statutory Provisions
As noted supra, Nicolet and Braintech, and Poseidon accuse one another of having violated various provisions of the Securities Exchange Act of 1934 and SEC administrative regulations. The relevant statutory and administrative provisions are:
(1) Section 14(f) of the 1934 Act, 15 U.S.C. § 78n(f), which states:
" Election or designation of majority of directors of issuer by owner of more than five per centum of class of securities at other than meeting of security holders
"(f) If, pursuant to any arrangement or understanding with the person or persons acquiring securities in a transaction subject to subsection (d) of this section or subsection (d) of section 78m of this title, any persons are to be elected or designated as directors of the issuer, otherwise than at a meeting of security holders, and the persons so elected or designated will constitute a majority of the directors of the issuer, then, prior to the time any such person takes office as a director, and in accordance with rules and regulations prescribed by the Commission, the issuer shall file with the Commission, and transmit to all holders of record of securities of the issuer who would be entitled to vote at a meeting for election of directors, information substantially equivalent to the information which would be required by subsection (a) or (c) of this section to be transmitted if such person or persons were nominees for election as directors at a meeting of such security holders."
(2) SEC Rule 14f-1, 17 C.F.R. § 240.14f-1, which states in pertinent part:
"§ 240.14f-1 Change in majority of directors.
"If, pursuant to any arrangement or understanding with the person or persons acquiring securities in a transaction subject to sections 13(d) or 14(d) of the Act, any persons are to be elected or designated as directors of the issuer, otherwise than at a meeting of security holders, and the persons so elected or designated will constitute a majority of the directors of the issuer, then, not less than 10 days prior to the date any such person take [sic] office as a director, or such shorter period prior to that date as the Commission may authorize upon a showing of good cause therefor, the issuer shall file with the Commission and transmit to all holders of record of securities of the issuer who would be entitled to vote at a meeting for election of directors, information substantially equivalent to the information which would be required . . . to be transmitted if such person or persons were nominees for election as directors at a meeting of such security holders."
(3) Section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b), which states in pertinent part:
"§ 78j. Manipulative and deceptive devices
"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange--
"(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors."
(4) SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, which states:
"§ 240.10b-5 Employment of manipulative and deceptive devices.
"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
"(a) To employ any device, scheme, or artifice to defraud,
"(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
"(c) To engage in any act, practice, or course of business which operates or would operate as a ...