Appeal by defendants from order filed 1 June 2001 by Judge
Marcus L. Johnson; order filed 28 January 2002 by Judge Timothy S.
Kincaid; order filed 1 March 2002 by Judge Robert P. Johnston;
order filed 18 March 2002 by Judge Clarence E. Horton, Jr,; and
judgment dated 28 March 2002 and orders filed 25 April 2002 and 10
May 2002 by Judge C. Preston Cornelius in Mecklenburg CountySuperior Court. The appeal was heard in this Court on 10 September
2003, and the opinion was filed 17 February 2004.
On 23 March 2004, plaintiff filed a Petition for Rehearing.
The petition was granted by order of this Court entered 4 May 2004,
and the matter was heard on the petition to rehear without
additional briefs or oral argument. We hereby withdraw the opinion
filed 17 February 2004, superceding and replacing it with the
following amended opinion.
Helms Mulliss & Wicker, PLLC, by E. Osborne Ayscue, Jr. and
John H. Cobb, for plaintiff-appellee.
Bishop, Capitano & Abner, P.A., by J. Daniel Bishop and Joseph
W. Moss, Jr., for defendants-appellants.
MARTIN, Chief Judge.
Plaintiff-appellee, R. Bradford Lee (“Lee”) brought this
action against defendants-appellants, John C. Scarborough
(“Scarborough”) and E.B. Comp., Inc. alleging defendants' breach of
a stock option and restriction agreement. Briefly summarized, the
record discloses the following facts relevant to the issues raised
on appeal: Both Lee and Scarborough worked in the insurance
industry. Lee owned a consulting business and Scarborough was the
majority owner and director of E.B. Services, Inc. (“Services”), a
group health benefit plan management business. In mid-1992, Lee
helped Scarborough form a company known as E.B. Comp Services, Inc.
(“Comp Services”). Comp Services engaged in business as a third-
party administrator (“TPA”) of workers compensation insurance
plans. Scarborough was the sole shareholder and sole director ofComp Services. Around the time of Comp Services' formation,
Scarborough signed individually and as president of Comp Services,
a Stock Option and Restriction Agreement (“Agreement”) dated 16
July 1992. The Agreement, effective for five years, included the
following terms:
2. Stock to be Purchased
(a) [Plaintiff] shall have an option to
purchase from Stockholder that number of
shares of stock equal to 50% of all the issued
and outstanding shares of Company, it being
the intent of the parties that should
[plaintiff] fully exercise this option,
[plaintiff] will have a fifty percent (50%)
ownership in Company. . . .
. . . .
5. Restriction on Stockholder's Transfer of
Shares. Stockholder shall not assign,
encumber or dispose of any portion of his
stock interest in the Company, by sale or
otherwise, except upon compliance with the
terms and conditions of this Agreement. . . .
6. Sale of Additional Shares by Company.
Company agrees not to issue any stock, by sale
or otherwise, without first obtaining
[plaintiff's] written approval and without
first offering such shares to [plaintiff] . .
. . There shall be no split, reclassification
or other change in the capitalization of
Company without the prior written consent of
[plaintiff].
Effective 1 January 1995, without notice to Lee, Comp Services
merged into Services, which is now defendant E.B.Comp., Inc.
(“Comp”). Lee filed this action alleging breach of the Agreement.
Defendants answered, denying the material allegations of breach and
asserting affirmative defenses. Following discovery, plaintiff and
defendants moved for summary judgment; Lee was granted summary
judgment on the issue of breach. The issue of damages was tried toa jury, which returned a verdict awarding Lee damages in the amount
of $565,901.01. The trial court entered judgment upon the verdict
and awarded prejudgment interest in the amount of $327,695.45.
Defendants appeal.
_________________
I.
In their first two arguments, defendants contend the trial
court erred when it granted partial summary judgment in favor of
plaintiff against defendant Comp and against defendant Scarborough,
individually, on the issue of breach. Summary judgment is proper
where “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 any
party is entitled to a judgment as a matter of law.” N.C. Gen.
Stat. § 1A-1, Rule 56(c) (2003).
The issue of contract
interpretation is a question of law.
Harris v. Ray Johnson Constr.
Co., 139 N.C. App. 827, 534 S.E.2d 653 (2000). While both option
contracts and restrictions on the alienation of property interests
are strictly construed, the clear intent of the parties as
expressed on the face of the contract controls.
See Lagies v.
Myers, 142 N.C. App. 239, 247-248, 542 S.E.2d 336, 341-342,
disc.
review denied, 353 N.C. 526, 549 S.E.2d 218 (2001);
Bryan-Barber
Realty, Inc. v. Fryar, 120 N.C. App. 178, 181-182, 461 S.E.2d 29,
31-32 (1995).
[1] We first address the issue of Comp's breach of the
Agreement. The Agreement expressly restricted Comp Services from,
inter alia, splitting, reclassifying, or making any other changesin the capitalization of the company without the prior written
consent of plaintiff. While this restriction was still in effect,
Comp Services approved the merger of itself into Services pursuant
to §§ 55-11-01-11-10
of the North Carolina General Statutes.
Restrictions on the alienation or transfer of property are not
favored and therefore, must be strictly construed.
See Duncan v.
Duncan, 147 N.C. App. 152, 156, 553 S.E.2d 925, 928 (2001),
disc.
review denied, 355 N.C. 211, 559 S.E.2d 800 (2002). Whether a
company's approval of a merger pursuant to §§ 55-11-01-11-10
is
clearly prohibited by a restriction in an agreement prohibiting a
change in the capitalization of a company
is an issue of first
impression in North Carolina.
Capitalization is defined by Black's Law Dictionary as “[t]he
total amount of long-term financing used by a business, including
stocks, bonds, retained earnings, and other funds.” Black's Law
Dictionary 202 (7th ed. 1999). When a merger takes effect, the
merging corporation ceases to exist; all assets and liabilities of
the merging corporation are vested in the surviving corporation,
and the shares of the merging corporation are thereupon converted
into “shares, obligations, or other securities of the surviving .
. . corporation or into the right to receive cash or other property
. . . .” N.C. Gen. Stat. § 55-11-06 (a)(1), (2), (6) (2003).
Consolidation of two companies' assets, liabilities, and
stocks pursuant to a merger necessarily involves a change in the
amount and character of “stocks, bonds, retained earnings, and
other funds,” Black's Law Dictionary 202 (7
th ed. 1999), possessed
by the businesses participating in the merger.
Cf. N.C. Gen. Stat.§ 55-14A-01(a)(5) (2003) (financial reorganization of a company
pursuant to bankruptcy or insolvency may include participating in
a merger). We hold, therefore, that merger pursuant to §§ 55-11-
01-11-10
clearly effects a change in the capitalization of a
company and thus, Comp Services breached its obligation in the
Agreement not to change the capitalization of the company by
approving a merger of the company without the prior written consent
of plaintiff.
[2] Moreover, Scarborough, individually, also breached the
stock option and restriction agreement by voluntarily participating
in a merger he knew would extinguish the plaintiff's stock options
under the agreement. Principles of contract law are generally
applied to the interpretation of options.
Lagies v. Myers, 142
N.C. App. 239, 247, 542 S.E.2d 336, 341 (2001). “[B]ecause the
other party is not bound to perform, and is under no obligation to
buy,” options are construed strictly in favor of the maker.
Id. at
248, 542 S.E.2d at 342. However, “[i]f the option terms are clear
and unambiguous, 'it must be enforced as it is written, and the
court may not disregard the plainly expressed meaning of its
language.'”
Id. at 247, 542 S.E.2d at 342. (citation omitted).
In this case, Scarborough, as the sole shareholder of Comp
Services, had a contractual obligation to plaintiff to hold open an
option to purchase shares of Comp Services for a period of five
years. It is undisputed that before the five year period expired,
Scarborough, in his capacity as the sole shareholder and the sole
director of Comp Services, decided to merge the company into
Services, of which he was a 90% owner.
See N.C. Gen. Stat. § 55-11-01(a) (2003) (“One or more corporations may merge into another
corporation if the board of directors of each corporation adopts
and its shareholders . . . approve a plan of merger.”). When a
merger takes place, the merging company, as well as its shares,
cease to exist. N.C. Gen. Stat. § 55-11-06(a)(1), (6) (2003).
Thus, there is no question that the merger extinguished the
plaintiff's option to buy shares of Comp Services. A breach of the
agreement by Comp Services imposes liability therefor upon the
surviving corporation, defendant Comp. N.C. Gen. Stat. § 55-11-
06(a)(3)(“[s]urviving corporation has all liabilities of each
corporation party to the merger.”).
Nevertheless, defendant Scarborough argues that even though
the merger extinguished plaintiff's options, he was not liable for
breach of contract since a merger is essentially a corporate act,
not a shareholder act. It is true that conversion of shares
pursuant to a merger is initiated by corporate act and accomplished
by operation of law, and not through any transfer or conveyance by
a shareholder.
See N.C. Gen. Stat. §§ 55-11-01, 55-11-06 (2003).
The official comment to N.C. Gen. Stat. § 55-11-06 (2003), listing
the effects of merger, states:
A merger is not a conveyance or transfer, and
does not give rise to claims of reverter or
impairment of title based on a prohibited
conveyance or transfer. (emphasis added).
Based on this principle, other jurisdictions have found that
restriction agreements which prohibit the voluntary transfer of
shares by a shareholder are not violated when parties to the
agreement vote their shares in favor of a merger.
See Seven
Springs Farm, Inc. v. Croker, 801 A.2d 1212, 1216 (Pa. 2002);
Shields v. Shields, 498 A.2d 161, 167 (Del. Ch. 1985);
But see
Bruns v. Rennebohm Drug Stores, Inc., 442 N.W.2d 591, 595 (Wis. Ct.
App. 1989)(holding that substance must control over form when
interpreting stock restriction agreements).
However, this case is distinguishable on several grounds.
First, this case involves a contractual promise by Scarborough to
hold open an option to purchase his shares in the company for a
specified period of time. In contrast, the cases in the other
jurisdictions merely involved restrictions on a shareholder's
ability to transfer or convey his or her shares without prior
approval. Second, the corporate act of merger in this case could
not have been accomplished without the solitary actions of
shareholder and director Scarborough. As both the sole shareholder
and sole director of Comp Services, Scarborough was the only person
who could vote for and approve the merger. In contrast, in order
to effectuate the mergers in the other cases, more than one person
was required to vote for and approve the transaction.
See Seven
Springs Farm, 801 A.2d 1212
; and Shields, 498 A.2d 161. Thus, the
line between a corporate act and a shareholder act is virtually
indistinguishable in this case.
The clear intent of the parties as expressed on the face of
the Agreement in this case was to prevent the intentional
extinguishment by Scarborough or Comp Services of plaintiff's
option to purchase shares. This intent is evidenced in an
affidavit submitted by Scarborough, stating that he merged Comp
Services into Services “[i]n order to deal with the problem of
[plaintiff's] perverse incentives under the existing arrangementand to provide flexibility to award [another party] part ownership
of E.B. Comp Services . . . .” Given the fact that only
Scarborough, and no other parties, had the power to enter into the
merger, and the fact that we are bound to effectuate the clear
intent and purpose of binding contractual agreements, we find that
Comp Services breached its obligation under the Agreement to
plaintiff not to change the capitalization of the company when it
approved a merger of itself into Services and that Scarborough
breached his obligation to plaintiff under the Agreement to hold
open shares of Comp Services for a period of five years when he
voted for and approved the merger of the company. Thus, we affirm
the trial court's grant of partial summary judgment in plaintiff's
favor on the issue of both defendants' breach of the stock option
and restriction agreement.
II.
[3]
Defendants next argue the trial court erred in granting
summary judgment in plaintiff's favor because the Agreement was not
supported by consideration. The Agreement states the following:
3. Stockholder acknowledges that Lee, in the
course of formation of the Company, has
provided Stockholder with invaluable
assistance with regard to forming the Company
and employing key personnel. Without this
assistance, Stockholder acknowledges that the
Company would not have been formed;
Stockholder also acknowledges that such
assistance is the consideration for
Stockholder granting to Lee the option and
right of first refusal contained herein.
Stockholder further acknowledges that such
assistance is adequate consideration for the
restrictions on general operations of the
Company contained herein.
. . . .
NOW, THEREFORE, for and in consideration of
the premises and for other good and valuable
considerations, the receipt and sufficiency of
which are hereby acknowledged . . . .
Defendants presented evidence that plaintiff had previously
been compensated $30,000 for his assistance in “establishing a
company to handle Worker's Compensation claims as a TPA . . . .”
Thus, they argue that the recital in the contract was insufficient
to constitute adequate consideration since plaintiff had already
performed and been compensated for these services.
See Penley v.
Penley, 314 N.C. 1, 18-19, 332 S.E.2d 51, 61-62 (1985)(absent
certain circumstances, past services do not constitute adequate
consideration for a new contract).
However, it is well established that parol evidence is not
competent to contradict the terms of a subsequently entered into
contract.
Thompson v. First Citizens Bank & Trust Co., 151 N.C.
App. 704, 708-709, 567 S.E.2d 184, 188 (2002). The recital on the
face of the Agreement in this case specifically recites that the
contract is supported by adequate consideration. Thus, evidence to
the contrary was not competent to contradict this recital with
regard to the validity of the contract.
See id. at 709-710, 567
S.E.2d at 188-89;
Weiss v. Woody, 80 N.C. App. 86, 92, 341 S.E.2d
103, 107 (1986)(“Although it is always competent to contradict the
recital in the deed as to the amount paid . . . it is not competent
to contradict the acknowledgment of a consideration paid in order
to affect the validity of the deed . . . .”). Defendants'
assignment of error is overruled.
III.
[4] Defendants assign error to the exclusion of evidence,
during the trial on the issue of damages, regarding whether
plaintiff was ready, willing, and able to exercise the option at
some time during the period specified in the option contract and to
the trial court's refusal to submit to the jury the issue of
plaintiff's willingness and ability to exercise the option. We
agree.
“An option is not a contract to sell, but it is transformed
into one upon acceptance by the optionee in accordance with its
terms.”
Kidd v. Early, 289 N.C. 343, 352, 222 S.E.2d 392, 399
(1976). Thus, in order to be entitled to more than nominal damages
from the wrongful breach of an option contract, the optionee must
show that he was ready, willing, and able to exercise the option at
some time during the period specified in the option contract.
See
id. at 364, 222 S.E.2d at 407.
During the trial on the issue of damages, defendants attempted
to present evidence showing that plaintiff could not have exercised
the option, due to a state administrative regulation, while he was
still employed as a trustee for NCME, a workers' compensation
insurer. The tendered evidence would have shown that while
plaintiff was not compensated for his services prior to defendant's
breach, plaintiff was paid approximately $75,000 for his services
as trustee for NCME in 1995 and would have had to resign his
position and forego these benefits had he chosen to exercise the
option. Since plaintiff had not attempted to exercise the option
prior to or at the time of defendant's breach, such evidence is
relevant to the issue of whether plaintiff ever intended toexercise the option had it been available to him at some time
during the period specified in the option contract and should have
been submitted to the jury in order to properly determine the issue
of damages.
See N.C. Gen. Stat. § 8C-1, Rules 401, 402. Moreover,
the admission of such evidence would have required the trial court
to submit to the jury the issue of whether plaintiff was ready,
willing, and able to exercise the option.
In re Estate of
Ferguson, 135 N.C. App. 102, 105, 518 S.E.2d 796, 798 (1999) (where
substantial evidence exists in support of an issue, the trial court
is required to submit the issue to the jury, upon request).
If the
jury should determine from such evidence that plaintiff was not
ready, willing, and able to exercise his rights under the option,
he would be entitled to no more than nominal damages for its
breach.
Hocutt v. Western Union Telegraph Co., 147 N.C. 186, 60
S.E. 980 (1908). The exclusion of such evidence and the resulting
failure of the trial court to submit the issue arising therefrom
entitle defendant to a new trial on the issue of damages.
In light of our award of a new trial on the issue of damages,
we need not address the remaining assignments of error brought
forward in defendants' brief relating to the trial and judgment as
they may not recur at retrial. In addition, those assignments of
error not brought forward in defendants' brief are deemed
abandoned. N.C. R. App. P. 28(a).
Affirmed in part, reversed and remanded for a new trial on the
issue of damages.
Judges BRYANT and GEER concur.
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