Anderson v. Somatogen, Inc.

• Decision Date: 29 November 1996
• Docket Number: No. 95CA1696,95CA1696
• Citation: 940 P.2d 1079
• Parties: Kenneth D. ANDERSON, Paul A. Moore and Stanley S. Smazal, Plaintiffs-Appellants, v. SOMATOGEN, INC., a Delaware Corporation, and its Predecessor Somatogenetics International, Inc., a Colorado Corporation, Defendants-Appellees. . IV
• Court: Colorado Court of Appeals

Page 1079

940 P.2d 1079

Kenneth D. ANDERSON, Paul A. Moore and Stanley S. Smazal, Plaintiffs-Appellants, v. SOMATOGEN, INC., a Delaware Corporation, and its Predecessor

Somatogenetics International, Inc., a Colorado

Corporation, Defendants-Appellees.

No. 95CA1696.

Colorado Court of Appeals,

Div. IV.

Nov. 29, 1996.

Rehearing Denied Dec. 27, 1996.

Certiorari Denied Aug. 4, 1997.

McGeady Sisneros P.C., Larry G. Johnson, Denver, for Plaintiffs-Appellants.

Burns, Figa & Will, P.C., David Richman, Englewood, for Defendants-Appellees.

Opinion by Judge DAVIDSON.

In this contract case involving stock purchase warrants, plaintiffs, Kenneth D. Anderson, Paul A. Moore, and Stanley F. Smazal, appeal from a summary judgment entered by the trial court in favor of defendant, Somatogen, Inc., and its predecessor, Somatogenetics International. Specifically, plaintiffs contend that the trial court incorrectly interpreted their stock purchase warrants as not providing antidilution protection effective against the issuance of additional shares of common stock. Plaintiffs also contend that the trial court incorrectly dismissed their breach of fiduciary duty claim as barred by the statute of limitations. We disagree with these contentions and, therefore, affirm.

In 1987, as part inducement for a loan of $50,000, plaintiffs received from defendant warrants to purchase 50,000 shares of Somatogen common stock at $1.50 per share. In consideration for loan extensions, the warrants were subsequently increased to provide for the purchase of 95,000 shares. At that time, there were about 9 million shares of common stock in the company outstanding.

In need of capital, the company issued and sold two classes of preferred stock to a venture capital group in October 1988. The preferred stock was to be automatically converted into common stock when the company went public.

In 1989, the company implemented a 10 for 1 reverse stock split (also know as a share combination), informing plaintiffs that, according to their terms, the warrants had been adjusted to allow for the purchase of 9,500 shares at $15 per share. Early in 1991, in anticipation of its initial public offering, the company implemented a 4 for 1 reverse stock split, and notified plaintiffs that their warrants had been changed to allow them to acquire 2,375 shares at $60 per share. The company also notified plaintiffs that the warrants contained no provision protecting them from the dilutive effect on their warrants of the issuance of new shares of common stock.

In July 1991, plaintiffs accepted substitute warrants, which allowed them to purchase common stock at the initial public offering price of $19. The substitute warrants also contained language releasing plaintiffs' rights under the old warrants. Later that year, the company issued and sold new shares of common stock in an initial public offering.

The expiration date of plaintiffs' warrants was October 31, 1993 and on October 28, 1993, plaintiffs sought to exercise them. By plaintiffs' interpretation, an antidilution clause preserved their right to purchase--for the same overall consideration originally contemplated (95,000 shares at $1.50 each, or $142,000)--an unchanging percentage (here, about 1%) of the company's common stock. At that time, there were about 10 million shares of common stock outstanding. Accordingly, plaintiffs tendered $142,500 and requested 107,670.6 shares of Somatogen stock. The company refused to sell the stock under those terms and on October 31, 1994, plaintiffs filed suit.

In their complaint, plaintiffs alleged breach of contract and breach of fiduciary duty. In response, defendant filed two motions for summary judgment: One asserting that the statute of limitations had run on both the breach of contract and breach of fiduciary duty claims, and the other claiming that the plaintiffs' rights under the original warrants had been released by their acceptance of substitute warrants.

The trial court first determined that plaintiffs' breach of contract claims had been timely filed. However, the trial court did not reach defendant's argument that plaintiffs' acceptance of substitute warrants released their rights under the original warrants because it found that the original warrants contained no antidilution protection from the issuance of new shares of common stock. Accordingly, the court granted defendant's motion for partial summary judgment on the breach of contract claims.

The court also found, as a matter of law, that plaintiffs' cause of action for breach of fiduciary duty had accrued no later than June 30, 1991. Because the complaint had been filed more than three years after that date, the court entered partial summary judgment against plaintiffs on that claim as well.

All claims having been determined against them, plaintiffs filed this appeal.

I.

Plaintiffs first contend that the trial court erred in granting defendant's motion for summary judgment on the breach of contract claims. Specifically, plaintiffs argue that the trial court misconstrued the language of the warrant. We disagree.

Summary judgment is proper when there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. C.R.C.P. 56(c); Ellerman v. Kite, 625 P.2d 1006 (Colo.1981).

The moving party has the initial burden to show there is no genuine issue of material fact. Once the moving party has met this initial burden, the burden then shifts to the non-moving party to establish that there is a triable issue of fact. Travers v. Rainey, 888 P.2d 372 (Colo.App.1994). In determining whether summary judgment is proper, the non-moving party must receive the benefit of all favorable inferences that may be drawn from the undisputed facts. Merkley v. Pittsburgh Corning Corp., 910 P.2d 58 (Colo.App.1995).

The interpretation of a contract is generally a question of law for the court. Aetna Casualty & Surety Co. v. Canam Steel Corp., 794 P.2d 1077 (Colo.App.1990). Whether a written instrument is ambiguous is also a question of law. Pepcol Manufacturing Co. v. Denver Union Corp., 687 P.2d 1310 (Colo.1984). If there is no ambiguity in the contract, it will be enforced according to its express provisions, with its words accorded their plain and generally accepted meaning. Heller v. Fire Insurance Exchange, 800 P.2d 1006 (Colo.1990).

A stock purchase warrant is purely an option to purchase stock that does not vest in the prospective purchaser an equitable title to, or any interest or right in, the stock. See 6A W. Fletcher, Cyclopedia of the Law of Private Corporations § 2641 (rev. perm. ed. 1989). As such, in the absence of provisions to the contrary, a stock purchase warrant is simply an option to take stock "as it turns out to be when the time for choice arrives." See Parkinson v. West End Street Ry. Co., 173 Mass. 446, 448, 53 N.E. 891, 892 (1899). Thus, the value of such an option is speculative--any number of corporate or collateral events may change its value--and the burden of such risk falls on the holder of the warrant. See Lisman v. Milwaukee L.S. & W. Ry. Co., 161 F. 472 (C.C.E.D.Wis.1908), aff'd, 170 F. 1020 (7th Cir.1909).

As pertinent here, unless the contract provides otherwise, a warrant holder may not complain, for example, when a corporation issues new capital stock, although such issue may lessen or destroy the value of the option. See Parkinson v. West End Street Ry. Co., supra; Lisman v. Milwaukee L.S. & W. Ry. Co., supra. Therefore, whatever rights a stock purchase warrant holder may have to require the obligor corporation to maintain the integrity of the shares are purely contractual. See Helvering v. Southwest Consolidated Corp., 315 U.S. 194, 62 S.Ct. 546, 86 L.Ed. 789 (1942).

Such contractual protection often takes the form of what is termed an "antidilution clause." However, antidilution clauses are written in various ways and vary widely in the particular protections they provide. Among other things, if properly drafted, an antidilution clause can ensure the right to purchase a percentage of a company's common stock or a percentage of any new shares of common stock issued; it can preserve the value of the warrant at merger, consolidation, reorganization, or sale of assets; it can protect the warrant's value at a stock split-up, at the issuance of stock dividends, or at the sale of stock at below the warrant exercise price; and it can adjust the number of shares subject to the warrant, the exercise price of the warrant, or both. See 2 J. Cox, Corporations § 18.15 (1995); Gandal v. Telemundo Group, Inc., 781 F.Supp. 39 (D.D.C.1992), rev'd on other grounds, 997 F.2d 1561 (D.C.Cir.1993); Wright v. Heizer Corp., 560 F.2d 236 (7th Cir.1977), cert. denied, 434 U.S. 1066, 98 S.Ct. 1243, 55 L.Ed.2d 767 (1978); Special Situations Fund III, L.P. v. Versus Technology, Inc., 642 N.Y.S.2d 894 (N.Y.App.Div.1996); American General Corp. v. Continental Airlines Corp., 13 Del. J. Corp. L. 1075, 1988 WL 7393 (Del.Ch.1988), aff'd, 575 A.2d 1160 (Del.1990), cert. dismissed, 498 U.S. 953, 111 S.Ct. 376, 112 L.Ed.2d 390 (1990).

Of course, none of these antidilution protections is automatically part of a stock purchase warrant contract. Rather, the precise antidilution protection afforded to a warrant holder will depend on the express terms of the contract itself. See Helvering v. Southwest Consolidated Corp., supra; cf. Broad v. Rockwell International Corp., 642 F.2d 929 (5th Cir.1981), cert. denied, 454 U.S. 965, 102 S.Ct. 506, 70 L.Ed.2d 380 (1981) (there is no antidilution protection at common law for debenture bonds, and if such protection is desired, appropriate provisions must be included in the contract).

Here, the original warrants provide, in pertinent part:

In the event that all of the outstanding common stock of the company shall be changed into or exchanged for a different number or kind of shares or other...