Sligo, Inc. v. Nevois

• Citation: 84 F.3d 1014
• Decision Date: 21 May 1996
• Docket Number: No. 95-2955,95-2955
• Parties: SLIGO, INC., Plaintiff/Appellee, v. Cynthia R. NEVOIS and Michelle A. Vlahek, Trustees of the Raymond H. Cornell Revocable Trust, Defendants/Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

Page 1014

84 F.3d 1014

SLIGO, INC., Plaintiff/Appellee, v. Cynthia R. NEVOIS and Michelle A. Vlahek, Trustees of the Raymond H. Cornell Revocable Trust, Defendants/Appellants.

No. 95-2955.

United States Court of Appeals Eighth Circuit.

Submitted April 12, 1996.

Decided May 21, 1996.

Richard Wunderlich, St. Louis, MO, argued (James W. Herron and Jeana D. McFerror, on the brief), for appellants.

Kenton Knickmeyer, St. Louis, MO, argued (David F. Szewczyk, on the brief), for appellee.

Before WOLLMAN and HANSEN, Circuit Judges, and KYLE, ¹ District Judge.

KYLE, District Judge.

Plaintiff/Appellee Sligo, Inc. ("Sligo"), a closely held corporation, commenced this diversity action against Defendants/Appellants Cynthia Nevois and Michelle Vlahek ("Trustees") seeking a declaration that it properly exercised an option to purchase shares of Sligo stock held by the Trustees, or alternatively, an order of specific performance requiring the Trustees to accept Sligo's tender offer for the shares. The district court found for Sligo and ordered the Trustees to convey the stock certificates. The Trustees appeal, claiming the district court's order is contrary to the express language of Sligo's option and contesting the proper purchase price for the shares. Sligo subsequently filed a motion to dismiss the appeal as moot on the grounds the Trustees complied with the district court Order and conveyed the stock during the pendency of this appeal. For the reasons set forth below, we deny Sligo's motion to dismiss this appeal, and we reverse the decision of the district court.

I. BACKGROUND

The parties dispute the proper method for calculating the purchase price of Sligo stock under the terms of Sligo's option. The Trustees claim the purchase price should be based on the book value of Sligo shares on December 31, 1989. Sligo maintains the purchase price should be based on the book value of the shares on January 31, 1994. The following facts underlying this conflict are undisputed.

A. Acquisition of Sligo and the Restrictive Stock Transfer Agreement

In July, 1988, Raymond H. Cornell ("Cornell"), and J. Richard Hauser ("Hauser") engineered a leveraged buyout of Sligo, a St. Louis-based industrial supply distributor. (J.A. at 4-5, 37, 96-97.) Cornell and Hauser each owned fifty percent of Sligo's outstanding shares under the terms of the acquisition, and each served as an officer and director of Sligo. As a condition of financing this acquisition, Sligo's lenders required it to purchase and maintain life insurance policies in the amount of $1 million on the lives of Cornell and Hauser and required that the life insurance proceeds be applied toward repayment of the financing loans if either Hauser or Cornell died before the loans were repaid. Sligo later purchased additional life insurance policies on the lives of Cornell and Hauser in the amount of $500,000.00 each. Sligo was the beneficiary of these life insurance policies.

In December, 1988, Hauser and Cornell entered into a Restrictive Stock Transfer Agreement ("Agreement") to restrict each owner's ability to transfer his shares of Sligo stock. (J.A. at 969.) This Agreement provided Sligo with an option to purchase an owner's share upon certain events and under certain conditions, as more fully set forth below. After executing the Agreement and pursuant to its terms, Cornell transferred his shares of Sligo stock to an inter vivos revocable trust (the "Trust"), of which he was the sole trustee.

Under the Agreement, Sligo's option was triggered when a specified "transfer" occurred. ² Its option read in pertinent part:

3.4 Purchase Options Upon Death of a Shareholder or Other Involuntary Transfers.

...

(b) First Option of Corporation. Within thirty (30) days of the Corporation's receipt of actual notice of a Transfer ... the Corporation may exercise an option hereby granted to the Corporation to purchase all, but not less than all, of the Shares so Transferred ... for the price and upon the other terms provided in Article V hereof....

(J.A. at 13.) The Agreement treated the death of a shareholder as a "transfer" which accordingly triggered Sligo's option to purchase the deceased shareholder's shares.

The Agreement also established two mechanisms for setting the value of the shares in the event of a transfer. The first was a "fail-safe" provision which read:

5.2 Market Value. Unless otherwise specified in a certificate of agreed value then in effect pursuant to Section 5.3 hereof, the "Market Value" of Shares as used herein shall mean:

...

(b) Death and Insurance. In the case of a sale and purchase of Shares by the Corporation under [the terms of its option] as a result of the death of a Shareholder if the Corporation receives life insurance proceeds upon the death of such Shareholder, the Market Value shall mean the book value of said Shares for the period ending December 31, 1989, and One and one-half (1 1/2) times said book value thereafter. Book value shall conclusively be determined by the accountant or accounting firm then servicing the Corporation.

(Id. at 16 (emphasis added).) As an alternative, the Agreement provided that the shareholders could change the Market Value as determined under Section 5.2(b) by executing a "Certificate of Agreed Market Value." The amount agreed upon in such a certificate superseded the Market Value as set out in Section 5.2(b). Specifically, Section 5.3 of the Agreement provided:

5.3 Certificate of Agreed Market Value. The Shareholders and the Corporation may, at any time and from time to time, determine "Market Value" as used in Section 5.2 hereof by executing and filing with the Corporation a written instrument wherein such determination is set forth, whereupon, for the period of time stated in such instrument, "Market Value" so determined shall supersede "Market Value" as determined in Section 5.2....

(Id. at 16-17.) Cornell and Hauser executed a Certificate of Agreed Market Value effective for the period August 1, 1988 through December 31, 1988. They did not execute a subsequent Certificate of Agreed Market Value.

B. Sligo's Attempt to Exercise its Option

Cornell committed suicide on January 31, 1994, and the Trustees succeeded him as successor co-trustees of the Trust. ³ Under the Agreement, his death constituted a "transfer" which triggered Sligo's option to purchase the shares held in the Trust. On February 18, 1994, Sligo exercised its option and notified the Trustees of its intention to purchase the shares of Sligo stock held in the Trust.

In order to determine the purchase price of these shares, Sligo contacted "the accounting firm then servicing the Corporation," Deloitte & Touche, and requested that it calculate the book value of Sligo as of the date of Cornell's death, January 31, 1994.

That book value was calculated using Sligo's financial statements for 1993 and information obtained from Sligo regarding income for the period January 1-31, 1994. Deloitte & Touche determined the book value of all Sligo shares on January 31, 1994 to be $546,523.00. Cornell's fifty percent interest was $273,261.50, and Sligo tendered one and one-half times this amount, $409,892.25, to the Trustees. ⁴

Although Deloitte & Touche did not calculate the book value of Sligo shares as of December 31, 1989--the date referred to in Section 5.2(b)of the Agreement--the parties do not dispute that the book value on that date was $879,724.00. The book value of Cornell's fifty-percent interest in Sligo at that time was $439,862.00. (J.A. at 724.)

Based on the accountant's calculation of the January 31, 1994 book value, Sligo offered the Trustees $409,892.25 for the Trust's shares of Sligo stock. The Trustees refused the offer, claiming that Sligo had improperly calculated the book value and asserting the following: First, because the shareholders and Sligo never determined "Market Value" under the procedure established in Section 5.3, the "fail safe" provision in Section 5.2(b) applies, and the "Market Value" of the shares was one and one-half times their "book value" as of December 31, 1989, not January 31, 1994. They accordingly assert that Sligo must pay $659,793.00 for the shares--the agreed upon December 31, 1989 book value of $439,862.00 multiplied by 1.5.

Second, and alternatively, if the book value is to be calculated as of the date of Cornell's death, the $1.5 million due to Sligo from Cornell's life insurance policies should have been included in the determination of book value.

Third, and also based on the calculation of book value as of the date of Cornell's death, the accountants "did not make an independent review of the records of Sligo in order to calculate book value" and instead relied on unreviewed information Sligo supplied. (Appellant's Br. at 13.) They accordingly claim the accountants did not "determine" the book value of the shares as required by Section 5.2(b) of the Agreement.

C. District Court Proceedings

The parties submitted their claims to the district court on a stipulated record. In its Findings of Fact, Conclusions of Law and Final Order, the district court concluded Sligo had timely and validly executed its option. It held that the purchase price of the shares to be purchased under Section 5.2(b) should be based on their book value as of January 31, 1994, the date of Cornell's death. The district court further concluded that Deloitte & Touche properly excluded the $1.5 million in life insurance proceeds payable to Sligo from the calculation of the shares' book value as of January 31, 1994. Finally, the district court concluded that Deloitte & Touche complied with the Agreement's term that it "determine" the shares' book value, notwithstanding its failure to independently review financial records, because: (1) the Agreement did not explicitly require the accountants to conduct an audit and (2) the Trustees failed to show the book value was determined in an arbitrary or capricious manner. Based on these...