PUBLISH
IN THE UNITED STATES COURT OF APPEALS
FILED
FOR THE ELEVENTH CIRCUIT U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
_______________ NOV - 2 2000
THOMAS K. KAHN
CLERK
No. 99-11451
_______________
D. C. Docket No. 95-03193-CV-RWS-1
THERATX, INC.,
Plaintiff-Counterclaim defendant-
Appellee-Cross-Appellant,
versus
JAMES DUNCAN,
TIMOTHY S. SMICK, ET AL.,
Defendants-Counterclaim plaintiffs-
Appellants-Cross-Appellee,
______________________________
Appeals from the United States District Court
for the Northern District of Georgia
______________________________
(November 2, 2000)
Before BIRCH, BARKETT and ALARCON*, Circuit Judges.
_____________
*
Honorable Arthur L. Alarcon, U.S. Circuit Judge for the Ninth Circuit, sitting by designation.
BIRCH, Circuit Judge:
Appellee-cross-appellant TheraTx, Inc. appeals the district court's grant of
summary judgment to the Duncan Group on its breach of contract claim.
Appellants-cross-appellees the Duncan Group1 appeal the district judge's
calculation of their damage award. James and Jean Duncan and Timothy and
Bobbi Smick, members of the Duncan Group, also appeal the district court's
determination that they lacked standing to recover damages for shares of TheraTx
stock that were transferred to their respective charitable trusts and shares that they
received as a gift from James F. McCormick.
I. BACKGROUND
A. The TheraTx Stock
In 1994, TheraTx, a Delaware health care corporation with its principal
place of business in Georgia, began negotiations with the management of
PersonaCare, Inc., a privately held corporation that owned nursing facilities, and
PersonaCare's majority shareholder, Warburg-Pincus. The remaining shares in
1
The Duncan Group consists of the following former PersonaCare shareholders and
trusts created by them: James W. Duncan, Jr.; Jean M. Duncan, as Co-Trustee of the Emanuel
Foundation and the Kyrios Foundation; Timothy S. Smick; Bobbi G. Smick, as Co-Trustee of
the Caleb Fund and the Joshua Fund; James F. McCormick; Arthur W. Trump, Jr., Individually,
and as Trustee of the David S. Hungerford, Grantor Retained Annuity Trust #1, and as Trustee of
the David S. Hungerford, Grantor Retained Annuity Trust #2; Dr. David S. Hungerford; and
Travers C. Nelson.
2
PersonaCare were owned by members of the Duncan Group and other individuals.
Warburg-Pincus did not believe that the management of PersonaCare was capable
of building the company into a serious competitor in the health care business, and
sought out a merger partner. Warburg-Pincus was referred to TheraTx. See R7-
59, Ex. E at 11. TheraTx was attractive to Warburg-Pincus because TheraTx's
management was “looking to more rapidly pursue a consolidation in the industry, .
. . appeared to have a better understanding of where the industry was going, and . .
. were just more likely to be able to build a growing company." Id. The
PersonaCare shareholders, including the Duncan Group, expected TheraTx to
grow.
In May 1994, TheraTx and PersonaCare entered into a merger agreement
(the "Agreement"). See R7-59, Ex. A. Under the Agreement, PersonaCare
shareholders exchanged their stock for restricted, unregistered stock in TheraTx.
Because the parties anticipated that TheraTx would undertake a public offering of
its shares of common stock as soon as practicable following the merger, the
Agreement included a provision that, in the event that TheraTx went public, it
would file a Shelf Registration effective for two years.2 On 24 June 1994, TheraTx
2
Section 6.6 reads as follows:
Warburg Shelf and Demand Registration. (a) Promptly (and in any event within
10 days) following the expiration of any lock-up agreement with the underwriters in connection
with the Initial Public Offering . . . TheraTx shall effect a shelf registration (the "Shelf
3
conducted a successful IPO at $12 per share. On 7 December 1994, TheraTx's
counsel notified the former PersonaCare shareholders that they were free to trade
their TheraTx stock under the Shelf Registration beginning on 12 December 1994.
The letter advised the former PersonaCare shareholders that any transferee of their
shares who wished to sell would have to be listed in the Shelf Registration. The
letter also advised that "it may become necessary to suspend the use of the Shelf
Registration pending [any legally required] amendment." Def. Trial Ex. 6 at 2. On
12 December 1994, TheraTx effected a Shelf Registration covering the TheraTx
common stock distributed to all former PersonaCare shareholders under the
Agreement. That day the shares traded at $19.50. During the next month, the
shares traded between $16.50 and $20.126 per share.
In November 1994, TheraTx began negotiations to purchase the assets of
eight healthcare companies managed by Southern Management Services, Inc.
("SMS"). TheraTx and SMS entered into an agreement for the purchase of the
SMS assets on 13 January 1995. TheraTx discussed the effect of the SMS
Registration") of all shares of TheraTx Common Stock . . . issued to the PersonaCare
Stockholders in connection with the Merger.
...
TheraTx shall cause the Shelf Registration to remain in effect until two years
following the Effective Date.
The PersonaCare Stockholders' rights under this Section 6.6 shall not be
assignable and such rights hereunder shall terminate at such time as such stockholder is entitled
to sell all of the Shares held by such stockholder without registration under the Securities Act.
R7-59, Ex. A at 47.
4
purchase on the Shelf Registration with officials at the SEC and concluded that it
was necessary to suspend trading under the Shelf Registration in order to amend it
to include information regarding the SMS transaction. On 12 January 1995,
TheraTx advised the former PersonaCare shareholders by letter that their ability to
trade under the Shelf Registration would be suspended on 13 January 1995.3 On
13 January 1995, TheraTx publicly announced the SMS transaction and suspended
trading of its shares under the Shelf Registration, and TheraTx stock closed at
$18.750 per share.
On 29 June 1995, TheraTx notified the former PersonaCare shareholders
that the trading suspension would be lifted on June 30.4 During the suspension
3
The letter reads:
As you will recall, by letter dated December 7, 1994, we notified you of the
effective date of the shelf registration statement registering the shares issued to
you in connection with the acquisition of PersonaCare by TheraTx. At that time,
you were informed that TheraTx could find it necessary to suspend the use of the
registration statement from time to time due to events occurring at TheraTx.
The purpose of this letter is to notify you that COMMENCING FRIDAY,
JANUARY 13, 1995, your ability to use the shelf registration statement will be
SUSPENDED until further notice. We will notify you when you may once again
commence selling shares under the shelf registration.
The letter was signed by TheraTx Vice President and General Counsel Jonathan H.
Glenn. R7-59, Ex. L-1.
4
The letter, from Laura M. Brower of Brobeck, Phleger & Harrison, reads in part:
As you were notified in a letter from Jonathan H. Glenn, on January 12,
1995, the shelf registration statement registering the shares issued to you in
connection with the acquisition of PersonaCare by TheraTx was temporarily
5
period, the value of TheraTx stock rose to a high of $23.125 on February 3, and
closed at $13.375 on June 30. TheraTx was bought by Vencor, Inc. on a tender
offer of $17.10 per share in March 1997.
B. The Duncan Shares
During the summer and fall of 1994, Timothy Smick, former PersonaCare
Chairman and Chief Executive Officer, and James Duncan, former PersonaCare
President, met with stock brokers, money managers and a tax attorney regarding
the transfer of their TheraTx stock holdings to charitable remainder trusts in order
to take advantage of the associated tax benefits.
Smick established two trusts on 13 December 1994, and Duncan established
two trusts on 22 December 1994. On 16 December 1994, Smick gifted at total of
150,000 shares of TheraTx stock to his two trusts. Smick also endorsed his
certificate and delivered it to his stockbroker and the trusts' money manager, Alex.
Brown & Sons, Inc. ("Alex. Brown"). On 27 December 1994, Duncan instructed
Alex. Brown to transfer his TheraTx stock into two trust accounts on the date that
suspended. The purpose of this letter is to inform you that the shelf registration
will once again become effective commencing Friday, June 30, 1995 at 12:00
p.m., eastern time. Accordingly, beginning 12:00 p.m., eastern time, June 30th
you will be permitted to once again sell shares pursuant to the shelf registration
under the circumstances and in the manner described in the letter of instructions
sent to you on December 7, 1994 (copy attached).
R7-59, Ex. L-2.
6
the stock hit certain target prices, and, about the same time, delivered the stock
certificate and a written assignment. The stock certificates of Duncan and Smick
stated that their shares were "transferable only on the share register of said
corporation, in person or by duly authorized attorney." R13-98-Exs. R, S. On 12
January 1995, Alex. Brown notified TheraTx's stock transfer agent of the wishes of
Duncan and Smick to transfer their stocks to their respective trusts. In each letter,
Duncan and Smick requested that the shares be transferred without restrictions.
Alex. Brown transferred the shares to the trusts and confirmed the transfers to
Duncan and Smick.
TheraTx's counsel notified TheraTx's stock transfer agent that the transfers
of the "request effective as of January 12, 1995 . . . on behalf of Mr. James W.
Duncan, Jr." and of the "request effective as of January 12, 1995 . . . on behalf of
Mr. Timothy S. Smick" were approved on 13 April 1995 and 23 March 1995,
respectively. R12-96, Exs. F and G; R13-98, Ex. N at 39-41. TheraTx's stock
transfer records show that the transfer from Duncan to his trusts occurred on 18
April 1995, and from Smick to his trusts occurred on 3 April 1995. Smick's federal
income tax return reflected a December 1994 transfer of stock to the trusts.
Duncan's federal income tax return reflected a January 1995 transfer of stock to the
trusts.
7
The Duncans and Smicks filed a complaint for breach of contract as trustees,
and sought damages on behalf of their respective trusts. The district judge
dismissed these claims, holding that the trusts lacked standing because the
registration rights under section 6.6 of the Agreement were not assignable. The
Duncan Group moved for reconsideration, arguing that Duncan and Smick should
be permitted to "assert their breach of contract claims with respect to those shares
of TheraTx stock transferred in April 1995 to their respective charitable remainder
trusts." R12-96-2. The district judge, however, found that no determination of
when Mssrs. Duncan and Smick transferred sizable portions of their TheraTx
holdings to charitable trusts was necessary, because the undisputed evidence
showed that, as to the shares transferred to the trusts, no damages were suffered by
Duncan and Smick as a result of the breach, regardless of the dates of transfer.
Although the Duncan Group, on reconsideration, requested that the district court
determine the date of transfer, the district court denied the request, noting that
"there are no perils of uncertainty with respect to the charitable trust shares that
should be laid at TheraTx's door and, instead, any belief that recovery may be had
for these shares should be laid to rest." R15-113-3-4.
C. The McCormick Shares
8
James McCormick received 150,118 shares of TheraTx stock in the merger.
During the fall of 1994, he transferred 18,700 shares of TheraTx stock to Duncan
and transferred 18,700 shares of TheraTx stock to Smick.5 The district judge also
found that Duncan and Smick had no standing to sue or to recover damages with
respect to these shares because they "received the McCormick shares by transfer
after the merger agreement." R15-114-2-3.
D. Other Duncan Group Members
None of the other Duncan Group Members disposed of their shares until
after the suspension was lifted. After the suspension was lifted, those shares sold
in the range of $13.311 to $18.750 per share until the shares were proffered to
Vencor at $17.10 per share.
E. The Lawsuit
TheraTx filed an action for declaratory judgment, seeking clarification of the
rights, status and legal relations of the parties under the Agreement regarding the
suspension of the Shelf Registration. The Duncan Group counterclaimed that
TheraTx had violated section 10(b) of the 1934 Securities Act, breached the
Agreement, committed common-law fraud, and made a negligent
5
We shall refer to the TheraTx stock transferred by McCormick to Duncan and Smick,
collectively as the McCormick Shares.
9
misrepresentation.6 On the breach of contract claim, the district court found that
the Agreement’s terms requiring the Shelf Registration to remain in effect for two
years was unambiguous and that TheraTx breached the contract when it suspended
trading under the Shelf Registration.
II. DISCUSSION
On appeal, the Duncan Group argues that the district court erred by
concluding that it could not recover damages for the TheraTx stock transferred to
the charitable remainder trusts. They assert that if the transfers of TheraTx stock to
the trusts occurred after the breach, then Duncan and Smick have standing to
recover damages based upon those shares. They also argue that they have standing
to recover damages based upon the shares they received from McCormick, because
TheraTx acknowledged that transfer on its register. The Duncan Group further
contends that the district court erred in its calculation of damages by deducting
from the award the actual amount for which they sold their TheraTx stock once
trading under the Shelf Registration resumed. TheraTx argues that the district
court incorrectly determined that it breached its obligation under Section 6.6 of the
Merger Agreement by suspending trading as required by the SEC.
6
The Duncan Group alleged in district court that TheraTx fraudulently or negligently
failed to disclose its plans for large acquisitions that could result in a suspension of trading under
the Shelf Registration. The district court granted summary judgment for TheraTx on these
claims, and the Duncan Group has not appealed this decision. See R8-79-16-21.
10
We review de novo the district court's order granting summary judgment.
See Williams v. Vitro Services Corp., 144 F.3d 1438, 1441 (11th Cir. 1998). A
motion for summary judgement should be granted when "the pleadings,
depositions, answers to interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any material fact and
that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P.
56(c). There is no genuine issue for trial “[w]here the record taken as a whole
could not lead a rational trier of fact to find for the non-moving party.” Matsushita
Elec. Indus. Co. v. Zenith Radio Corp.,
475 U.S. 574, 587,
106 S. Ct. 1348, 1356
(1986). In making this assessment, we must “view all the evidence and all factual
inferences reasonably drawn from the evidence in the light most favorable to the
nonmoving party,” Stewart v. Happy Herman's Cheshire Bridge, Inc.,
117 F.3d
1278, 1285 (11th Cir. 1997), and “resolve all reasonable doubts about the facts in
favor of the non-movant.” United of Omaha Life Ins. v. Sun Life Ins. Co.,
894 F.2d
1555, 1558 (11th Cir. 1990).
The parties agreed that "[t]he laws of the State of Delaware . . . govern the
validity of [the Agreement], the construction of its terms, and the interpretation and
enforcement of the rights and duties of the parties.” R13-98-Ex. A at 58.
Accordingly, we apply Delaware contract law.
11
A. Breach
In determining that TheraTx breached its contractual duty under section 6.6
of the Agreement, the district judge reasoned that the “core purpose, indeed the
only purpose, of the Shelf Registration Statement was to give PersonaCare
shareholders the right to trade at any time after TheraTx publicly offered its stock”
and that, by promising to maintain the effectiveness of the Shelf Registration,
TheraTx had promised “that action w[ould] be taken to ensure that the [Shelf
Registration] continue[d] to perform its core purpose.” R8-79-14.
On appeal, TheraTx argues that its obligation "to cause the Shelf
Registration to remain in effect for two years" under section 6.6 of the Agreement
must be interpreted by giving the word "effect" its meaning as a term of art in the
context of securities regulations governing the Shelf Registration. According to
this argument, the Shelf Registration remained "in effect" following TheraTx's
merger with SMS despite the suspension of trading that prevented the Duncan
Group from selling its shares of TheraTx stock. TheraTx contends that the Shelf
Registration was still “in effect” when it suspended trading under the Shelf
Registration in order to amend its prospectus, and, given its stated strategy of
growth via acquisitions, it was unreasonable for the PersonaCare shareholders to
12
expect that TheraTx would not complete any acquisitions which might require such
a suspension of trading under the Shelf Registration.
Under Delaware law, courts seeking to resolve contract disputes look first to
the terms of the contract itself. See Continental Insurance Company v. Rutledge
& Company, Inc.,
750 A.2d 1219, 1228 (Del. Ch. 2000). In doing so, we "give the
terms of contracts their plain meaning" and should "not look behind the terms and
provisions of a clear and unambigous contract."
Id. A contract is clear and
unambiguous when its terms "establish the parties' common meaning so that a
reasonable person in the position of either party would have no expectations
inconsistent with the contract language." Eagle Industries, Inc. v. DeVilbiss Health
Care, Inc.,
702 A.2d 1228, 1232 (Del. 1997). Only when a contract provision is
"fairly susceptible of different interpretations" should a court "look beyond the
language of the contract to ascertain the parties' intentions."
Id.
We agree with the district judge that section 6.6 of the Agreement is clear
and unambiguous, and should, therefore, be interpreted according to the plain
meaning of its terms. We also conclude that the rules governing the effective date
of a registration statement and amendments thereto, codified at 15 U.S.C. § 77g, do
not utilize the word "effective" in a unique or distinctive manner, thereby creating
13
a special meaning or making the word a term of art within the arena of securities
law.
While we agree with TheraTx that it seems implausible that the "expert
securities lawyers" representing both parties to the Agreement did not anticipate
the possibility that TheraTx, a company with a stated strategy of growth by
acquisition, would be required by securities regulations to suspend trading under
the Shelf Registration as a result of some future merger or acquisition, see
Amended Brief of Appellee-Cross-Appellant at 50, we conclude that TheraTx was
in the best position to fully appreciate the parameters of its growth strategy and
anticipate the impact this strategy would have upon its commitments under the
Agreement. Therefore, it was incumbent upon TheraTx to appropriately tailor its
contractual obligation under section 6.6 to account for the possibility that it might
engage in a merger which would necessitate the suspension of trading under the
Shelf Registration. The PersonaCare shareholders were entitled to rely on the
contract terms as written. Accordingly, we conclude that TheraTx breached its
contractual obligation under section 6.6 of the Agreement when it suspended
trading under the Shelf Registration following its merger with SMS.
B. Standing
1. Trust Shares
14
The district judge determined that the trustees of the charitable remainder
trusts created by Duncan and Smick did not have standing to collect damages
associated with TheraTx's breach of the Agreement because the rights provided to
the PersonaCare shareholders by section 6.6 of the Agreement were not assignable.
The district judge did not determine the effective date of Duncan and Smick's
transfer of their TheraTx stock to the respective charitable trusts, because he
concluded that Duncan and Smick had not suffered actual monetary damages with
regard to the TheraTx stock transferred to the trusts as a result of the breach. The
district judge reasoned that "[t]he only monetary benefit that Messrs. Duncan and
Smick received from donating TheraTx shares to the charitable trusts was their
ability to claim charitable tax deductions based on the value of the stock at the time
of the transfer.” R14-103-3. He concluded that, because the suspension of trading
had not delayed or affected Duncan and Smick's ability to transfer the stock to the
trusts, TheraTx's breach of contract had not affected the value of the charitable
donations made by Duncan and Smick and the associated tax deductions.
On appeal, the Duncan Group argues that if Duncan and Smick continued to
hold all of their TheraTx stock at the time of TheraTx's breach, and the transfer of
their TheraTx stock to charitable remainder trusts did not become effective until
after the breach, then they have standing to sue for the damage caused by to them
15
by the breach regardless of their subsequent disposition of the stock. The Duncan
Group further argues that Duncan and Smick were damaged by TheraTx's breach
because the suspension of trading caused a reduction in the trust income that they
were entitled to receive annually during their lifetimes by interfering with the
trusts’ ability to sell the shares and reinvest the proceeds elsewhere. We find,
however, that ownership of the shares was transferred prior to the date of the
breach, and as a result, the trusts have no standing to sue for damages.
Delaware law governs our analysis. At the time of the breach, 13 January
1995, § 8-313 of Delaware’s Uniform Commercial Code (“U.C.C.”) set forth the
requirements for when transfer of a security to a purchaser occurs. See DEL. CODE.
ANN. tit. 6, § 8-313 (1995). A recipient by gift is a purchaser under the Delaware
U.C.C. See DEL. CODE. ANN. tit. 6, § 1-201(32) (1995). Section 8-313 lists
several ways that transfer may occur, depending on whether the security being
transferred is certificated or uncertificated. The securities held by Duncan and
Smick were certificated securities because they were represented by instruments
that specified Duncan and Smick as the owners and provided that transfer could be
registered on the books of the corporation. See R13-98-Exs. R,S: see also DEL.
CODE. ANN. tit. 6, § 8-102(1)(a) (1995) (defining a certificated security).
16
According to the U.C.C. provisions then in force, certificated securities were
deemed transferred to a purchaser only:
(a) At the time he or a person designated by him acquires possession of a
certificated security; . . .
(c) At the time his financial intermediary acquires possession of a
certificated security specially endorsed to or issued in the name of the purchaser;
(d) At the time a financial intermediary, not a clearing corporation, sends
him confirmation of the purchase and also by book entry or otherwise identifies
as belonging to the purchaser
(i) a specific certificated security in the financial intermediary’s
possession ;
(ii) a quantity of securities that constitute or are part of a fungible bulk
of certificated securities in the financial intermediary’s possession . . .
DEL. CODE. ANN. tit. 6, § 8-313(1) (1995).
Application of this statute is complicated by the fact that both Duncan and
Smick were trustees of their respective trusts. Certain facts, however, are clear.
Both provided their stock certificates to Alex. Brown with instructions to transfer
ownership to their respective trusts. Alex. Brown issued statements indicating that
it had transferred TheraTx stock from the individual donees to the trust accounts, in
December 1994 for Smick and January 1995 for Duncan.
Alex. Brown was the stockbroker for the trusts. We find that when Duncan
and Smick endorsed their stock certificates and provided them to Alex. Brown with
instructions to transfer the stock to the trusts, Alex. Brown acquired possession of
17
the certificated security on behalf of the trusts, thereby satisfying § 8-313(1)(a). It
is possible that, because Alex. Brown qualifies as a “financial intermediary” as
defined in § 8-313(4), that other subsections of § 8-313 were also satisfied. We
express no opinion as to these other possible methods of transfer as the
requirements of § 8-313(1)(a) were satisfied. We do note, however, that while the
transfers of the shares were not reflected on TheraTx’s books until after the breach,
§ 8-313 imposes no such requirement on the validity of a transfer. Indeed, § 202
of Delaware’s corporations code, which controls over sections of the U.C.C.,
provides that restrictions on the transfers of security “may be enforced against the
holder of the restricted security” or her successor, but do not provide for
enforcement against the corporation. DEL. CODE. ANN. tit. 8, § 202(a) (1995).
Duncan and Smick intended to transfer their shares to charitable remainder trusts,
and the records of Alex. Brown reflect that those intentions were carried out. To
allow Duncan and Smick to enforce trading restrictions against themselves in order
to collect damages thwarts both their original intent to transfer their shares prior to
the date of the breach and the parties’ contractual agreement that contract rights,
including remedies for breach, were not to be transferrable.
2. McCormick Shares
18
The district judge also determined that Smick and Duncan did not have
standing to recover for breach of the Agreement with respect to the McCormick
shares because the rights granted to PersonaCare shareholders in section 6.6 of the
Merger Agreement were not assignable. On appeal, the Duncan Group argues that,
because TheraTx recorded the transfer from McCormick to Duncan and Smick on
its stock register in October 1994 and subsequently reflected the transfer of
ownership from McCormick to Duncan and Smick in the Amended Shelf
Registration under which trading resumed on 30 June 1995, TheraTx
acknowledged the rights of Duncan and Smick to have the McCormick Shares
included in the Shelf Registration and should be estopped from asserting that
Duncan and Smick did not have the right granted by section 6.6 of the Agreement
to have those shares registered. In making this argument, the Duncan Group
attributes TheraTx's failure to include the McCormick shares in the names of
Duncan and Smick, respectively, as an oversight and mistake.
TheraTx counters that it was not obligated to register any shares of TheraTx
stock received by PersonaCare shareholders after the Agreement was executed.
Accordingly, TheraTx was not obligated to include the McCormick shares
acquired by Duncan and Smick in the Shelf Registration. Further, TheraTx asserts
that the crediting of the McCormick shares to Duncan and Smick in the Amended
19
Shelf Registration after the January 1995 breach does not estop it from denying
that Duncan and Smick have contractual rights with regard to the McCormick
Shares.
We have determined that the rights of the PersonaCare stockholders were
not assignable under the clear terms of Section 6.6. Therefore, when McCormick
gifted a portion of his TheraTx stock to Duncan and Smick, McCormick's
contractual right for those shares to be included in the Shelf Registration was not
transferred to Duncan and Smick. Further, Duncan and Smick have failed to
demonstrate any conduct on the part of TheraTx which suggests that Duncan,
Smick, or any other person who received restricted shares of TheraTx stock after
the execution of the Agreement would be entitled to sell that stock under the Shelf
Registration under an estoppel theory. The 7 December 1994 letter from TheraTx's
attorney to PersonaCare stockholders explained that if the PersonaCare
stockholders chose to gift their TheraTx stock to another individual or entity, the
recipient would receive restricted stock and the recipient stockholder would have
to be listed in the Shelf Registration Prospectus in order to be able to sell the gifted
stock. The letter further requested that the PersonaCare stockholders provide
TheraTx a list of any potential gift recipients. The letter, however, did not
undertake any new obligation to include such gift recipients in the Shelf
20
Registration. Indeed, it specifically discussed the possibility that trading under the
Shelf Registration would be suspended. Therefore, the Amended Shelf
Registration's reflection of the gift could not have suggested to Duncan and Smick
that they were entitled to trade the McCormick shares under the initial Shelf
Registration at the time the breach occurred. See Wilson v. American Insurance
Co.,
209 A.2d 902, 903-904 (Del. 1965) (requiring lack of knowledge of truth and
detrimental reliance to establish estoppel). Therefore, we conclude that the district
court correctly determined that Duncan and Smick were not entitled to recover
damages for the breach of contract with regard to the McCormick shares.
C. Calculation of Damages
The district judge purported to calculate the damages of the Duncan Group
using a "modified conversion" analysis. Accordingly, he concluded that the
Duncan Group was entitled to recover the difference between the highest
intermediate value that the TheraTx stock reached during a reasonable time after
trading was suspended and the actual price they were ultimately paid for their
stock. This reasonable time period was the ten days the district judge calculated
that it would have taken the Duncan Group to dispose of their TheraTx stock
without adversely affecting the stock price, according to historical trading volumes.
He determined that the highest value reached by the TheraTx stock during this ten
21
day period was $19.75. The district judge then subtracted the actual price at which
the PersonaCare stockholders sold their TheraTx stock. He reasoned that it was
appropriate to subtract the actual price the PersonaCare shareholders received for
their TheraTx stock, rather than the average stock price during a reasonable period
of time after the suspension of trading under the Shelf Registration was lifted,
because the PersonaCare shareholders ultimately sold their TheraTx stock for a
higher price than that at which they could have sold it during a reasonable period
following the suspension of trading, and they were “‘not entitled to be placed,
because of [the] breach, in a position better than that which [they] would have
occupied had the contract been performed.’” R 16-130 at 5 (quoting Madison
Fund, Inc. v. Charter Co.,
427 F. Supp. 597, 608 (S.D.N.Y. 1977) (applying
Florida law)).
The Duncan Group argues that the district judge’s reasoning was incorrect,
because, although they might have sold during the period that trading was
suspended under the Shelf Registration, they nevertheless took a risk and made a
new investment decision to hold their stock once the trading suspension was lifted.
TheraTx argues that, although Delaware courts have not addressed specifically the
proper method for calculating damages in a case involving breach of a contract by
suspension of trading under a Shelf Registration, the district judge’s analysis was
22
consistent with general principles of Delaware contract law. See American Gen’l
Corp. v. Continental Airlines Corp.,
622 A.2d 1, 8 (Del. Ch. 1992) (finding the
measure of damages is usually that which is necessary to put the claimant in as
good a position as he would have occupied if the contract had been performed);
E.I. DuPont de Nemours and Co. v. Pressman,
679 A.2d 436, 445 (Del. 1996)
(stating contract damages are awarded to compensate the injured party and not to
punish the breaching party).
Our review of Delaware law reveals no binding authority establishing a
specific method for measuring contract damages in circumstances similar to those
presented in this case. Thus, while we do not suggest that the district judge’s
method of computing damages was inconsistent with Delaware law, we conclude
that this case presents an unsettled question of Delaware law. Therefore, because
the method of calculation of damages is dispositive of the claims in this case, and
because it raises an important issue of state law, we certify the following question
to the Supreme Court of Delaware, pursuant to Del. S.Ct. Rule 41:
WHAT IS THE PROPER MEASURE OF DAMAGES WHEN A
DEFENDANT’S CONTRACTUAL OBLIGATION TO CAUSE A SHELF
REGISTRATION, UNDER WHICH PLAINTIFF IS ENTITLED TO
TRADE A RESTRICTED STOCK, TO REMAIN IN EFFECT FOR
A SPECIFIED PERIOD OF TIME IS BREACHED BY DEFENDANT’S
TEMPORARY SUSPENSION OF PLAINTIFFS’ ABILITY TO TRADE
THE RESTRICTED STOCK?
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The phrasing of this certified question is not intended to limit the Delaware
Supreme Court’s consideration of the various issues posed by this case. The entire
record and the briefs of the parties shall be transmitted to the Supreme Court of
Delaware to assist in its determination, should it accept our certification.
III. CONCLUSION
Because we find that TheraTx breached its obligations under Section 6.6 of
the Agreement, and that Duncan and Smick have no standing to sue for damages
for shares received as gift from McCormick or transferred by them to charitable
remainder trusts, we AFFIRM in part and CERTIFY the question of the
appropriate method of calculating damages in this case to the Supreme Court of
Delaware.
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