Wulfing v. Kansas City Southern Industries, Inc.

• Decision Date: 03 November 1992
• Docket Number: No. WD,WD
• Parties: Charles WULFING, Respondent, v. KANSAS CITY SOUTHERN INDUSTRIES, INC., Appellant. 45284.
• Court: Missouri Court of Appeals

Page 133

842 S.W.2d 133

Charles WULFING, Respondent, v. KANSAS CITY SOUTHERN INDUSTRIES, INC., Appellant.

No. WD 45284.

Missouri Court of Appeals,

Western District.

Nov. 3, 1992.

Motion for Rehearing and/or Transfer to

Supreme Court Denied

Dec. 22, 1992.

William T. Smith, III, John K. Power, Melody L. Nashan of Watson, Ess, Marshall & Enggas, Kansas City, for appellant.

Craig S. O'Dear, Gretchen Hunter, Phillip G. Greenfield, of Bryan Cave, Kansas City, for respondent.

Before SHANGLER, P.J., and KENNEDY and SMART, JJ.

SHANGLER, Presiding Judge.

This is an action for breach of contract brought by Charles Wulfing against Kansas City Southern Industries, Inc. [KCSI]. Wulfing claimed that KCSI breached the put ¹ agreement of June 21, 1985, by not causing LDX Group to file "as expeditiously as possible" a registration statement with the SEC so as to permit public sale of Wulfing's LDX Group shares. A jury found the issue in favor of Wulfing and awarded $261,920 in damages. The trial court entered judgment on the jury verdict and for $17,575.35 in costs and, thereafter, $74,647.20 for prejudgment interest. The judgment for Wulfing as finally rendered was for $354,142.55. This appeal by KCSI followed.

Wulfing and KCSI, along with several other principals later introduced, were shareholders in a corporation known as LDX Group, Inc. [LDX Group]. Some explanation of the history of LDX Group, the actors and the incidents of the dispute is needed to understand how this case came about.

History of LDX Group, Inc.

In the early 1980s the Federal Communications Commission decided to deregulate the telecommunications industry. Up until then AT & T enjoyed a monopoly in long distance telephone service. The effect of deregulation was to allow competition. James D. Barnard saw the opportunity and decided to become a competitor, and in 1982 formed LDX, Inc. ² Barnard had become an expert in telecommunications through his ownership of Telcom Engineering, Inc., a business that provided services to telecommunications businesses. Barnard brought in Charles Wulfing, a friend with knowledge of investment banking as chief financial officer to help finance the new company.

LDX, Inc. became a long distance reseller. It leased Watts line service from AT & T on a volume basis for a volume discount and resold the service to the public. AT & T nevertheless continued to own the transmission facilities.

In 1983, Landon Rowland, president of KCSI, proposed to Barnard that KCSI combine its telecommunication interests with Barnard's companies to form a new holding company, LDX Group, with Barnard as manager. ³ Barnard accepted and operated LDX Group as a company completely separate from KCSI with its own set of directors. Following formation, the approximate In early 1984 a new technology appeared in the field of telecommunications, fiber optics. In that technology light waves replaced electronic impulses as the means of voice and data transmission. This allowed a practically infinite volume of telephone and data traffic compared to the limited capacity of the existing microwave technology. To LDX this meant that it would no longer have to depend upon the AT & T lines. However, to install a fiber optics network for long distance transmission would entail a very heavy capital investment. A plan to build a fiber optics cable network from Missouri through Oklahoma into Texas and Louisiana, for the most part on the Kansas City Southern Railway right of way, was presented to the board of directors. The board of directors, including KCSI chairman Deramus, president Rowland and director Hawkinson, gave it unanimous approval.

                distribution of LDX Group stock was 74% to KCSI, 12.4% to Barnard, and 8.99% to other Telcom and LDX employees [including Charles Wulfing]. 4  The original board of directors of LDX Group was comprised of KCSI president Landon Rowland, KCSI director John Hawkinson, KCSI chairman William Deramus, and three minority shareholders, Barnard, Wulfing and Snider.  KCSI's ownership in LDX Group increased from 74% in 1983 to 80% in 1985 to 93% in 1990
                

In order to meet the intensive need for capital the new investment would require, and to avoid distractions to management, LDX Group sold off its subsidiary operations for cash, except for LDX, Inc. LDX, Inc. then merged with Lexitel, another long distance company, and Lexitel, as the result of another merger, became ALC Corporation.

In 1984, KCSI formed LDX Net as a subsidiary of LDX Group to construct and operate the fiber optic communications network. ⁵ From inception, LDX Net incurred substantial planned operating losses which were the result of investment in the construction of the fiber optic network and the start-up costs necessary to build the business. The company was on plan for achieving profitability in 1987. However, rock was encountered in the construction of the underground network and the revenues were not as projected so that the estimated cost of 35 to 40 million dollars for the project was greatly overrun. The construction of the network was completed in 1986.

As a result, during 1984, 1985 and 1986 LDX Net used up large amounts of cash. In 1985, a $100,000,000 line of credit was negotiated. Its purpose was to pay off a $40,000,000 bank loan, to provide $50,000,000 to complete the network, and for $10,000,000 to fund the transition to a cash break-even operation. Even after the new loan, and construction still not completed, another $50,000,000 was needed, but LDX Group could not find a bank lender. In order to meet its obligations, beginning in 1986 LDX Group began borrowing large amounts from KCSI. By the end of 1986, LDX Group's debt was $143,000,000 [90 million dollars from banks and 53 million dollars from KCSI]. In 1987, LDX Group risked default under the terms of their bank loans if it incurred further debt, even subordinated debt to KCSI. As a result the next $22,000,000 infused by KCSI was in exchange for preferred stock. By July of 1987, LDX Net's total debt was in excess of $150,000,000.

In 1984 some employees of a LDX Group subsidiary, which had been sold off to finance the LDX Net venture, sold their LDX Group shares to a group of Florida investors represented by Dick Williams [the Florida/Williams Group]. Williams began making demands for access to LDX Group/Net proprietary information. KCSI refused these demands, and the Florida- On June 25, 1985, at the instance of KCSI a proposed Letter Agreement was sent to all LDX Group minority shareholders, optionholders and warrantholders. Wulfing signed the Letter Agreement. The purpose of the proposed Letter Agreement, to avoid the sale of any additional LDX Group shares to outsiders, was accomplished by the inclusion of a right of first refusal. That provision gave KCSI a 30 day option to match any third party offer to purchase LDX Group shares. The right of first refusal discouraged offers from third parties and so effectively restricted the marketability of the LDX Group stock. The inducement of the shareholder to the agreement was a put provision whereby KCSI agreed to purchase the shares at fair market value or cause LDX Group to file a registration statement with the SEC so as to permit public sale of the shares upon written notice by the shareholder to KCSI. ⁶

/Williams Group threatened litigation. This episode prompted KCSI to take steps to avoid the sale of any additional LDX Group shares to outsiders, such as the Florida/Williams Group.

The obligation of KCSI to act under the put provision and whether KCSI acted in accordance with that obligation are at the center of the dispute between Wulfing and KCSI.

Barnard did not sign the Letter Agreement until September 1987 because he had another agreement, an oral put agreement with KCSI president Rowland. In January of 1985, KCSI paid Barnard $1,689,600, or $100 per share, for his 16,896 shares of LDX Group. With this purchase, KCSI owned over 80% of LDX Group and could consolidate the LDX Group and KCSI tax returns and use the LDX Group losses to offset taxable income and gains of KCSI and its other subsidiaries.

In December of 1985, the Florida/Williams Group exercised their put rights under the Letter Agreement and notified KCSI of their intent to sell their LDX Group shares according to the terms of the agreement. KCSI purchased the LDX Group stock for $145 per share. ⁷ It was the testimony of James Dehner, vice-president of the KCSI holding company and president of LDX Group, that this purchase was made for two reasons. The first was "to get rid of the aggravation of the Florida group." The second was to retain 80% ownership of LDX Group for tax purposes because the LDX Group board had promised key managers and officers that they would be granted options in early 1986.

In early 1986, before completion of the fiber optic network, KCSI board chairman Deramus and president Rowland informed Barnard that KCSI had decided on a change of direction that would affect LDX Group. KCSI wanted to purchase Southern Pacific Railroad and the cost was $1.2 billion. In order to accomplish the acquisition, they asked Barnard to find a merger partner who could fund the LDX Net investment and free KCSI to commit its financial resources to the Southern Pacific purchase.

In early 1987, Barnard began discussions with WilTel, a large telecommunications company owned by The Williams Companies [TWC]. In order to induce the cooperation of the LDX Group management team [who were also LDX Group minority shareholders], Deramus and Rowland assured Barnard that all the minority shareholders would be bought out should the WilTel merger succeed. To accomplish that end, the LDX Group board instructed Barnard to pursue a merger between LDX Group and WilTel with KCSI to retain a 30 to 40% stake in the combined entity. Representatives of the parent companies, KCSI and Wulfing, Barnard and other minority shareholders opposed the business combination at the LDX Net...