Scientific Holding Co., Ltd. v. Plessey Inc.

• Decision Date: 20 December 1974
• Docket Number: Nos. 180,368,D,s. 180
• Citation: 510 F.2d 15
• Parties: SCIENTIFIC HOLDING COMPANY, LTD., Plaintiff-Appellant, v. PLESSEY INCORPORATED, Defendant-Appellee. ockets 74--1584, 74--1636.
• Court: U.S. Court of Appeals — Second Circuit

Page 15

510 F.2d 15

SCIENTIFIC HOLDING COMPANY, LTD., Plaintiff-Appellant, v. PLESSEY INCORPORATED, Defendant-Appellee.

Nos. 180, 368, Dockets 74--1584, 74--1636.

United States Court of Appeals Second Circuit.

Argued Nov. 11, 1974.

Decided Dec. 20, 1974.

Francis J. McConnell, Chicago, Ill. (Richard Campbell, Chicago, Ill., and Robert M. Blum, New York City, of counsel), for plaintiff-appellant.

James J. Maloney, New York City (Rogers & Wells, William F. Koegel, and John B. Koegel, New York City, of counsel), for defendant-appellee.

Before FRIENDLY, FEINBERG and GURFEIN, Circuit Judges.

FRIENDLY, Circuit Judge:

I. The Facts

Plaintiff Scientific Holding Company, Ltd. (Scientific), an Illinois corporation, is the successor to International Scientific, Ltd. (ISL), a Barbados company which was organized and owned by a number of United States citizens now Scientific's shareholders. ¹ Employing approximately 500 individuals, ISL was engaged in the manufacture, assembly, and sale of core memory products, cable harness assemblies, and other electronic and electro-mechanical products to the United States computer and peripheral equipment industry. Defendant Plessey Incorporated, a Delaware corporation, is a subsidiary of The Plessey Company Limited, a large multinational corporation with headquarters in England, engaged in the electronics business; for reasons not relevant to this appeal, prior to the closing of the contract hereafter discussed, the parent corporation assigned it to defendant and we shall often refer to the two corporations collectively as Plessey.

During 1967 and 1968, ISL experienced significant operating losses and by August of 1969 it was running short of working capital and was apparently unable to raise funds by issuing either new debt or equity. A sale of the business thus appeared to be the only way for the shareholders to recover even a portion of their investment. At the same time, in mid-1969 English Plessey, which was successfully marketing computer components in Europe, determined that it would be desirable to gain entry into the United States market and it began to explore plans for attainment of that goal. In December 1969, English Plessey learned of the availability of ISL's business and negotiations were begun between the corporations, resulting on February 4, 1970 in an agreement for the sale of all of ISL's assets and business.

A condensed summary of the provisions of the contract, as corrected on February 18, 1970 to conform to the precise language earlier agreed upon, which are important to this appeal, is as follows:

(1) The purchase price consisted of $180,000 payable at the closing, an assumption by Plessey of all ISL's liabilities, except for any obligation evidenced by convertible debentures issued by ISL (other than interest provided therein to the date of the closing), reflected on its December 31, 1969 balance sheet, or incurred thereafter until the closing in the ordinary course of business, and a further payment depending on the amount of profits derived from the use of ISL's assets during the year commencing on the first day of the first calendar month after the closing ('the measuring year'), as described in paragraph (3) below.

(2) In order to allow the assets conveyed by ISL to generate profits during the measuring year, Plessey would make available to the business not less than $600,000 within a week after the closing and continue ISL's business in good faith. It would allow ISL's management to operate the business during the measuring year in accordance with highly complex terms, the details of which are not relevant to this appeal, except that 'if ISL profits commencing with the third calendar month of the messuring year average less than Fifteen Thousand ($15,000) U.S. Dollars per month or if there have been three consecutive months of losses during that measuring year (excluding the first two months thereof)', Plessey would have the right to assume full management responsibilities subject to the obligation to continue the business in good faith during the measuring year.

(3) If during the measuring year the profits from the acquired assets were $360,000 or more, Plessey would pay an additional $1,260,000; if the profits were less than $360,000, Plessey would pay an additional amount which bears the same ratio to $1,260,000 that the amount of profits for the measuring year bears to $360,000.

(4) The closing was to take place at Bridgetown, Barbados, W.I., on March 2, 1970.

(5) ISL agreed to hold a common stockholders meeting prior to the closing 'for the purpose of voting upon the sale of its assets in accordance with this Agreement. . . .'

(6) ISL represented and warranted, among other things, that an unaudited balance sheet as of December 31, 1969, 'to the extent of ISL's knowledge, presents a true and complete statement as of its date of the financial condition and assets and liabilities of ISL', ² and that, with two exceptions not here relevant, there had been no change in its financial condition since December 31, 1969, with the specification that '(o)perating losses not at a rate in excess of Twenty Thousand ($20,000) U.S. Dollars per month for the period from December 31, 1969 to the closing hereof shall not constitute an out of the ordinary change of ISL's condition.' Plessey's obligation to close was conditioned, inter alia, on ISL's representations and warranties being true as of the time of the closing.

(7) Plessey's obligation to close was also conditioned on the receipt of an opinion of ISL's counsel, a well-known Chicago firm, 'dated the closing date' stating in part that:

(ii) The execution, delivery and performance of this Agreement by ISL have been duly authorized and approved by all requisite action of ISL's Board of Directors and stockholders and that this Agreement has been duly executed and delivered by ISL and constitutes the valid and binding obligation of ISL in accordance with its terms;

(8) 'This agreement shall be interpreted under and governed by the laws of the State of New York.'

At the closing ISL was represented by Kovar, its president and chief operating officer, and Julius Lewis, a partner in the Chicago law firm, who had both negotiated the terms of the agreement. Plessey was represented by Milton H. Albert, its comptroller, and Seth H. Dubin, a partner in a New York law firm which had acted for Plessey in drafting the contract of sale. On the day of the closing Albert spent considerable time with Edward Hourihan, ISL's comptroller, reviewing certain financial information relevant to the closing. At that time, based on his work sheets, Hourihan stated that ISL's losses for January and February aggregated $74,000. He did not prepare a precise breakdown or even give an indication whether any of the items comprising the losses possibly were not operating losses for purposes of the loss limitation contained in the contract, see paragraph (6) supra, although ISL claimed at trial that the written financial statement which was provided Plessey after the closing showed that $36,000 of the expenses were for legal and audit fees related to the sale and special bank charges which would not be considered in determining 'operating' losses. ISL's year-end statements which were delivered to Plessey at the closing showed sales of only $1,083,000, a gross profit of only $36,000, and an operating loss of $399,000 ³ in contrast with the November 30 figures, upon which Plessey had relied in signing the February 4 agreement, of $1,081,000, $217,000 and $169,000 for the same items. The December 31 balance sheet also revealed that the excess of ISL's liabilities over its assets was approximately $200,000 more than shown in the November 30 balance sheet.

Albert and Dubin refused to close. When Dubin telephoned Warren J. Sinsheimer, Chairman of the Board and chief executive officer of Plessey Incorporated, and a member of English Plessey's board of directors, in New York and informed him that ISL's business was in substantially worse condition than had been represented in the financial statements in his possession and that February had been a 'disaster,' Sinsheimer's initial reaction was that Plessey should call off the transaction. Later, after a series of conversations with Dubin and Albert, Sinsheimer agreed that Plessey should go forward if ISL agreed to two modifications of the contract. The more important was that the contract clause governing Plessey's right to take over the full management of ISL, see paragraph (2) supra, be amended so that the period in which an 'average' of $15,000 in profits had to be attained was effectively reduced from the third to the second month of the measuring year if the profits of ISL commencing May 1, 1970 (crediting to the month of May the net profits of the 2-month period comprised of March and April, 1970, but not charging any net loss for that period) average less than $15,000 per month, or if there have been three consecutive months of losses during that measuring year (excluding the first two months hereof). . . .

The other modification was that interest should be charged at a rate of 10% per annum on the additional $200,000 which Plessey then expected to be obliged to invest and that this charge should be considered in determining ISL's operating losses.

The ISL board resolution of January 31, 1970 which had approved the sale of all the corporation's assets to Plessey on the basis of a draft agreement stated that 'the proper officers of this Corporation are authorized and directed to make such changes in that agreement as in the opinion of the directors shall be necessary or appropriate . . ..' The summary of the contract contained in the proxy material sent to ISL stockholders prior to the special meeting called to vote on the proposed sale included a reference to the 'third month' provision, see paragraph (2) supra; the record does not contain the text of the resolution voted...