Burroughs Intern. Co. v. Datronics Engineers, Inc.

• Decision Date: 27 June 1969
• Docket Number: No. 310,310
• Citation: 254 Md. 327,255 A.2d 341
• Parties: BURROUGHS INTERNATIONAL COMPANY v. DATRONICS ENGINEERS, INC.
• Court: Maryland Court of Appeals

Page 327

254 Md. 327

255 A.2d 341

BURROUGHS INTERNATIONAL COMPANY v. DATRONICS ENGINEERS, INC.

No. 310.

Court of Appeals of Maryland.

June 27, 1969.

Edward B. Layne, Jr., Bethesda (McInerney, Latham & Layne, Bethesda, on the brief) and by John L. Vanker, Jr., Detroit, Mich. (Butzel, Eaman, Long, Gust & Kennedy, Detroit, Mich., on the brief), for appellant.

Jules Fink, Silver Spring (Isadore B. Katz, Sylman I. Euzent, Euzent, Katz & Fink, Steven M. Katz and Harry S. Wender, Silver Spring, on the brief), for appellee.

Before HAMMOND, C. J., and MARBURY, BARNES, FINAN, SINGLEY and SMITH, JJ.

SINGLEY, Judge.

This controversy is an entirely typical aftermath of the corporate merger or take-over which has become commonplace in our business community. It brings before us for interpretation that portion of an agreement for the sale of the stock of Strand Engineering Company (Strand) in which the seller, Datronics Engineers, Inc. (Datronics), warranted to the purchaser, Burroughs International Company ¹ (Burroughs), that the liabilities of Strand as of 30 June 1962 would not exceed its assets by more than $220,000 and provided how any such excess would be treated. Unhappily, the resolution of the problem calls for an involuntary excursion into the terra incognito known to accountants as GAAP (generally accepted accounting principles). As Judge Henry J. Friendly wisely observed, '* * * Accounting concepts are a foreign language to some lawyers in almost all cases, and to almost all lawyers in some cases.' ²

Strand, incorporated in Michigan, had outstanding 6,000 shares of common stock, $10 par, all of which were owned by Datronics. Strand's corporate career had been something less than successful: at 30 June 1962, it had an accumulated deficit of some $140,000, even after capitalizing 'Patent Development and Application Costs' of some $311,000 and goodwill at $43,000. Its current liabilities were almost twice its current assets, and operating losses for the month of June, 1962 had been some $27,000. We can only judge that it was being kept alive by liberal infusions of cash, which appear to have amounted to more than $200,000, from Datronics, its parent.

Into this desperate situation came Burroughs. After what we can only assume to be protracted negotiations, on 13 August 1962, Burroughs and Datronics entered into an agreement (the Agreement) under which Burroughs agreed to purchase and Datronics agreed to sell the 6,000 shares of Strand stock owned by Datronics for $183,600 in cash and 3,410 shares of the common stock of Burroughs Corporation. ³ As will be later explained, the stock was given an 'agreed' value of $40 per share and was to be placed in escrow to secure the performance by Datronics of the representations, warranties and covenants contained in the Agreement.

The Agreement is a typical example of the sophisticated draftsmanship customarily encountered in such transactions. Its provisions are unremarkable, except that it provided for closing at 3 P.M. on the day it was executed, thus denying Burroughs any opportunity to make an independent inquiry into Strand's affairs prior to the closing date. This is a possible reason for the escrow arrangement.

The provisions of the Agreement which are relevant to the present controversy are these:

'1. Seller represents and warrants that:

'(e) The unaudited Balance Sheet of Strand as at June 30, 1962, the unaudited Profit and Loss Statement of Strand for the month of June, 1962, and the four months ended June 30, 1962, the unaudited Balance Sheet of Seller as at June 30, 1962, and Seller's unaudited Profit and Loss Statement for the five months ended June 30, 1962, copies of all of which have heretofore been furnished by Seller to Purchaser and are attached hereto as Exhibits 1, 2, 3 and 4, respectively, and made a part hereof, are correct and truly and fairly present the results of the operations of Strand and Seller for the respective periods covered thereby, and their financial condition as of the ends of such period, except that Seller makes no representation or warranty as to the value, if any, of the assets designated 'Other Assets' ⁴ on Strand's Balance Sheet as at June 30, 1962. Said Profit and Loss Statements and Balance Sheets were prepared in accordance with generally accepted principles of accounting, consistently maintained by Strand and Seller throughout the periods stated.

'Since June 30, 1962, there have been no changes in the assets, liabilities or condition, financial or otherwise, of Strand or Seller, except as consented to in writing by Purchaser and except changes arising from transactions in the ordinary course of business and none of such changes have been materially adverse. Since June 30, 1962, neither the business nor any of the properties of Strand or Seller have been substantially and adversely affected in any way by any cause whatsoever, including, but in nowise limited to, act of God, fire, explosion, earthquake, accident, strike, lockout, combination of workmen, flood, drought, embargo, riot, condemnation, confiscation, activities of Armed Forces or order of the United States of America, any of the several States, or municipalities thereof, or any department, agency, or commission of any of them. The Seller further expressly represents, warrants and covenants that to the extent the total liabilities of Strand, actual and contingent, exceed the total assets of Strand (excluding 'Other Assets' of $354,670.16) as of June 30, 1962, by an amount greater than Two Hundred Twenty Thousand Dollars ($220,000.00), as determined by generally accepted principles of accounting, the Purchaser may, without limiting its other remedies, charge any such excess against the Escrow hereinafter provided.'

'(n) Strand is the owner of all of the outstanding capital stock of Automatic Controls Corporation, a Michigan corporation, which corporation is solvent and has a net worth of not less than $3,000.00; and Strand will deliver to Purchaser as an enclosure to the Letter a true and correct Balance Sheet of said corporation as at July 31, 1962; and Seller warrants that the assets and liabilities shown on said Balance Sheet will not be adversely affected prior to Closing.'

'11. All of the covenants, representations and warranties of the parties hereunder shall survive the Closing Date subject to performance under this Agreement.'

Attached to the Agreement as Exhibit 1 was the unaudited balance sheet of Strand as at 30 June 1962. This showed that Strand's assets, after deducting 'other assets' of $354,670.16 referred to in paragraph 1(e) of the Agreement, were $266,856.12 and that its liabilities were $485,723.45. Liabilities therefore exceeded assets by $218,867.33 but this excess was $1,132.67 less than the representation that liabilities at 30 June 1962 would not exceed liabilities as at that date, 'determined by generally accepted principles of accounting' by an amount greater than $220,000.

There is no doubt that the seller of shares of corporate stock may warrant that the financial condition of the corporation is that represented by financial statements, or guarantee that the corporation has no indebtedness or that the indebtedness does not exceed a certain amount. 12 A Fletcher, Private Corporations § 5615 (1957) at 247, 252. Agreements containing warranties substantially similar to those of the Agreement have been before the courts in Collings v. Bush Mfg. Co., 256 F.2d 573 (2d Cir. 1958); Automatic Canteen Co. of America v. Butler, 177 So.2d 712 (D.Ct.App. Fla., 1965); Adzigian v. W O R L Broadcasting Corp., 348 Mass. 777, 202 N.E.2d 915 (1964); Carolet Corp. v. Garfield, 339 Mass. 75, 157 N.E.2d 876 (1959); Consolidated Freightways Corp. v. Wilhelm, 238 Or. 518, 395 P.2d 555 (1964); In re Carter, 390 Pa. 365, 134 A.2d 908 (1957).

It will be remembered that the Agreement provided that 3,410 shares of Burroughs Corporation stock were to be placed in escrow. The escrow agreement, executed at the closing, provided, in part:

'5. (Burroughs) and Datronics agree that:

(a) They shall jointly order the Escrow Agent to deliver to (Burroughs) such stock (including dividends paid thereon), at an agreed value of Forty Dollars ($40.00) per share, as is necessary to hold (Burroughs) harmless from Datronics' breach of any of the representations, warranties, covenants, terms or provisions of said Agreement of Sale dated August 13, 1962; and

(b) Except as provided in paragraph 5(a) hereof, (Burroughs) and Datronics agree that they shall jointly order the Escrow Agent to deliver said stock to Datronics as follows:

(i) One Thousand (1,000) Shares on September 15, 1962);

(ii) Five Hundred (500) Shares on October 15, 1962;

(iii) Five Hundred (500) Shares on November 15, 1962;

(iv) Five Hundred (500) Shares on December 15, 1962; and

(v) Nine Hundred Ten (910) Shares on December 15, 1963;

Provided, however, that if at any time in the good faith opinion of (Burroughs) it appears that Datronics has breached or threatens to breach any of the representations, warranties, covenants, terms or provisions of said Agreement of Sale dated August 13, 1962, (Burroughs) may refuse to execute such joint order to the Escrow Agent with regard to such shares not then delivered to Datronics which are deemed by (Burroughs) necessary to secure itself against loss resulting from said breach or threatened breach.

(c) In the event either (Burroughs) or Datronics shall refuse to execute such joint order directing said Escrow Agent to deliver said stock to (Burroughs) or Datronics, the Escrow Agent shall continue to hold such stock not previously delivered pursuant hereto, until such joint order is obtained or until otherwise directed by court order.

(d) Dividends on all Burroughs Corporation Common Stock held by the Escrow Agent shall be delivered to said Escrow Agent to be held and delivered by it to (Burroughs) or Datronics under the same conditions and at the same time as the...