Seven Springs Farm, Inc. v. Croker , 2000 Pa. Super. 72 ( 2000 )

EAKIN, J.:

¶ 1 Seven Springs Resort, founded by Adolph and Helen Dupre in 1932, was incorporated in Pennsylvania as Seven Springs Farm, Inc., in 1959. Adolph and Helen Dupre had three children, Phillip Dupre, Herman Dupre and Luitgarde Dupre (Sujansky), among whom they distributed all the stock of Seven Springs in equal shares. Each child’s descendants still control one-third of the stock, although there are now 45 different shareholders. Appellant Lynda M. Dupre Croker, one of Phillip Dupre’s daughters, represents the interests of that family in this litigation.

¶ 2 On July 1, 1959, soon after incorporation, the shareholders entered into a restrictive stock transfer agreement. In 1969, the shareholders signed an “Agreement Affecting the Transfer of the Common and Preferred Stock of Seven Springs Farm, Inc.” replacing the 1959 agreement. This “Buy/Sell Agreement” provided in relevant part:

2. Option to Corporation. Except as provided in paragraph 1, no Stockholder, estate of a Stockholder or transferee who has received any stock in accordance with the provisions of paragraph 1, or any other transferee shall transfer, assign, sell, pledge, hypothecate, mortgage, alienate or in any other way encumber or dispose of all or any part of his stock in the Corporation, or certificates of ownership interest representing the same, now owned or hereafter acquired by him, without first giving to all other Stockholders and to the Corporation at least 30 days written notice by registered mail or personal delivery with receipt acknowledged in writing of his intention to make a disposition of his stock.

... all the stock of the Stockholders or transferee desiring to make any such disposition shall be offered for sale and shall be subject to an option to purchase or to retire on the part of the Corporation,

The filing of a voluntary or involuntary petition in bankruptcy by any Stockholder and the occurence [sic] of any insolvency of any Stockholder, the making of an assignment for the benefit of creditors or the entrance into any composition agreement with creditors shall be construed as an offer to sell all of the shares of such Stockholder to the Corporation under the provisions of this agreement.

3. Option to Stockholders. If all of the stock of the Stockholder or transferee desiring to make a disposition thereof is not purchased by the Corporation in accordance with the provisions of paragraph 2, then the stock not so purchased or retired shall be offered for sale and shall be subject to an option on the part of each Stockholder to purchase a proportionate share...

5. Waiver of Restrictions. The transfer, assignment, sale, pledge, hypothecation, mortgage, alienation or other encumbrance or disposition of any shares of stock of the Corporation made under and by virtue of a written consent to such disposition signed by all of the holders of the common capital stock subject to this agreement at the time of such proposed action and filed with the secretary of this Corporation is expressly excepted from the restrictions herein imposed; provided, however, that any such disposition shall be made only upon the terms and conditions and to the person or persons named in such written consent filed with the Corporation.

¶ 3 On December 6, 1997, the Buy/Sell Agreement was amended by unanimous vote of all shareholders, to add the following paragraph:

Further, any sale of any shares of the capital stock of the Corporation which occurs prior to January 1, 1999 in a transaction which imputes to the Corporation a total capitalization of Seventy Million Dollars ($70,000,000) or more and which is approved by the holders of seventy-five percent (75%) of the common capital stock of the Corporation, which approval is expressed in writing and filed with the secretary of this Corporation, is expressly excepted from the restrictions and obligations herein imposed.

All other provisions of the Agreement were ratified when this amendment was made.

¶ 4 On June 1, 1998, the Board called a shareholders meeting when Booth Creek Ski Holdings, Inc., expressed interest in acquiring Seven Springs. The Herman Dupre and the Luitgarde Dupre Sujansky families voted to pursue the offer, while the Phillip Dupre family voted against it. Because two-thirds of the shareholders wished to go forward, Seven Springs entered into a letter of intent to merge with a subsidiary of Booth Creek, Booth Creek Ski Acquisitions, Inc. In compliance with the Pennsylvania Business Corporation Law (BCL), a Merger Agreement and a Plan of Merger were drafted, approved by the Board on August 18, 1998, and prepared for a ratification vote by the shareholders at a meeting scheduled for October 3, 1998. Termed a “cash out merger,” the plan called for the shareholders of Seven Springs to receive cash for their shares, rather than stock in the surviving corporation.

¶ 5 On August 21, 1998, Seven Springs and certain of its directors filed a declaratory judgment complaint, seeking a determination the Buy/Sell Agreement was not applicable to the proposed deal; three days later appellant filed a complaint seeking a declaratory judgment to the contrary. The trial court consolidated the cases, expedited discovery, and the case quickly proceeded to trial. The trial court ultimately determined the proposed merger was not within the scope of the Agreement. Post-trial motions were denied, and on December 2, 1998, the decree nisi was entered as a final decree. This appeal followed, in which appellant frames the following issues:

1. Does a shareholder’s vote to approve a cash-out merger (which would convert his or her stock into cash) constitute an attempt to “dispose” of that stock so as to trigger a right of first refusal in a Buy/Sell Agreement covering any proposed disposition of stock? '

2. Should a court in equity allow some shareholders to avoid a right of first refusal, applicable to any direct sale or other disposition of stock, by their selling their stock to a third party through a cash-out merger requiring shareholder approval?

3. May a shareholder’s right of first refusal be circumvented by a sale of substantially all of the corporation’s assets and should this issue be resolved in the absence of any proposed asset sale? ¹

¶ 6 Simply put, if the terms of the Buy/Sell Agreement encompass this merger, 75% shareholder approval is needed to proceed; if the Agreement is not applicable, the vote would be governed by general corporation law and only majority shareholder approval of the Board’s action is needed. 15 Pa.C.S. § 1924(a). In practical terms, if the Agreement applies, it allows appellant’s family an opportunity to defeat the merger - if it does not, the merger may proceed despite their opposition.

¶ 7 “The interpretation of a contract is a question of law. In deciding an issue of law, an appellate court need not defer to the conclusions of the trial court.” Banks Engineering Co., Inc., v. Polons, 697 A.2d 1020, 1022 (Pa.Super.1997) (citations omitted), appeal granted, 550 Pa. 715, 706 A.2d 1210 (1998). When the language of a contract is unambiguous, we must interpret its meaning solely from the contents within its four corners, Id., at 1023, consistent with its plainly expressed intent. Hahalyak v. A Frost, Inc., 444 Pa.Super. 494, 664 A.2d 545, 549 (1995). We may not consider extrinsic evidence unless the terms are ambiguous. Metzger v. Clifford Realty Corp., 327 Pa.Super. 377, 476 A.2d 1, 5 (1984). A contract is not ambiguous merely because the parties do not agree on its construction. Id.

¶ 8 Neither the original nor amended versions of the Agreement include the term “merger.” That the Agreement does not speak to a merger does not in itself result in an ambiguity; when a contract fails to provide for a specific contingency, it is silent, not ambiguous. Banks, at 1023. In such circumstances, we will not read into the contract a term, “merger,” which clearly it does not contain. “It is not the province of the court to alter a contract by construction or to make a new contract for the parties; its duty is confined to the interpretation of the one which they have made for themselves, without regard to its wisdom or folly.” Steuart v. McChesney, 498 Pa. 45, 444 A.2d 659, 662 (1982) (citations omitted). The most we can say is the parties either intended to exclude mergers, or did not anticipate or consider such an event.

¶ 9 The trial court determined the primary purpose of the Agreement was to restrict the transfer of shares by individual shareholders. Appellant claims a more specific intent, to provide an opportunity for Seven Springs to remain in the Dupre family,² and maintains the catch-all phrase “... or in any other way ... dispose of ...” therefore should be interpreted to encompass all events inconsistent with that purpose, including merger; she contends that in voting for a merger, a stockholder is voting to “dispose of’ his or her shares within the meaning of the Agreement.

¶ 10 The trial court found the Agreement to be clear and unambiguous. As such, it disregarded certain extrinsic evidence³ regarding the intent of the parties and concluded the Agreement was not intended to apply to mergers or other fundamental corporate changes. The trial court also found credible the testimony of James McClure, long-time employee of Seven Springs and, at time of trial, the President and Chairman of the Board of Directors; he is not a shareholder nor a member of the Dupre family. McClure testified about the merger process and his observations of the Dupre family discord, leading the court to conclude the proposed merger had a legitimate business purpose. In a declaratory judgment action, we may not substitute our judgment for the trial court’s factual determinations where they are adequately supported by the record. Fred E. Young, Inc. v. Brush Mountain Sportsmen’s Association, 697 A.2d 984, 987 (Pa.Super.1997), appeal denied, 555 Pa. 689, 722 A.2d 1057 (1998), cert. denied, 525 U.S. 876, 119 S.Ct. 178, 142 L.Ed.2d 145 (1998).

¶ 11 Even when strictly construing the Agreement, we must be aware of the context in which the Agreement arose. Steuart, at 661. The Supreme Court has observed:

We are not unmindful of the dangers of focusing only upon the words of the writing in interpreting an agreement. A court must be careful not to “retire into that lawyer’s Paradise where all words have a fixed, precisely ascertained meaning; where men may express their purposes, not only with accuracy, but with fullness; and where, if the writer has been careful, a lawyer, having a document referred to him, may sit in his ehair[,] inspect the text, and answer all questions without raising his eyes.”

Id., at 662 (quoting Estate of Breyer, 475 Pa. 108, 879 A.2d 1305, 1309 n. 5 (1977)). Nevertheless, we cannot assume the language of the Agreement was chosen carelessly. See Steuart, at 662. Viewed in context, we cannot disagree with the trial court’s finding that the “primary purpose of the Agreement is to restrict the sale or transfer of stock in Seven Springs by individual shareholders.” Trial Court Opinion, 10/30/98, at 9 (emphasis added).

¶ 12 The parties are not unsophisticated; they clearly are familiar with corporate formalities and had legal advice in drafting the Buy/Sell Agreement and its amendments. Given this, the silence of the Agreement regarding fundamental corporate acts such as merger is conspicuous. The Agreement expressly speaks to specific stockholder events such as voluntary and involuntary petitions in bankruptcy, and assignments for the benefit of creditors, but not to a single corporate act such as merger. We cannot conclude this distinction was an oversight.

¶ 13 Neither does the fact the stockholders must vote to approve a merger change its nature as an appropriate act of the corporation and its directors, rather than its stockholders. By focusing on the words “dispose of,” appellant loses sight of the prefatory words of the Agreement, “no Stockholder shall_” Taking the Agreement in its entirety (not just the words “dispose of’), it seems plain it is a stockholder’s act that makes it applicable, not a fundamental corporate act such as merger. While paragraph 11 of the Buy/Sell Agreement obligates the corporation to a degree, it is an obligation to cooperate with the aims of the Agreement; we cannot read the provisions to be violated by the merger at hand.

¶ 14 We agree the Agreement is clear and unambiguous; a merger is not an act triggering its application. This is so not only because merger is not an expressly listed event, but also because the language contemplates the act of a stockholder, not the corporation. See Bethlehem Steel Corp. v. MATX, Inc., 703 A.2d 39, 42 (Pa.Super.1997) (“[A] court may not disregard a provision in a contract if a reasonable meaning may be ascertained therefrom ... each and every part of it must be taken into consideration and given effect, if possible, and the intention of the parties must be ascertained from the entire instrument”) (citation omitted). As the trial court aptly reasoned:

[T]he restrictions of paragraph two of the agreement include restrictions on the Stockholders’ ability to “transfer, assign, sell, pledge, hypothecate, mortgage, alienate or otherwise encumber or dispose of ...” any part of his or her stock in the Corporation. These terms cover the possible methods by which an individual stockholder may wish to divest himself or herself of the stock. None of the words apply to changes by operation of law undertaken by the Corporation itself. Nowhere in the agreement is Seven Springs, as an entity, prohibited or restricted in any way from engaging in conduct that is fundamental to the existence of the Corporation. The only restriction on the powers of Seven Springs regards the Corporation’s role as a shareholder. This restriction is the same as the one imposed on all other individual shareholders.

Trial Court Opinion, 10/30/98, at 14.

¶ 15 Appellant argues the proposed “cash-out” merger is for all intents and purposes a sale, bringing it within the catch-all language of the Agreement. Indeed, the record strongly suggests the proposal was structured as a merger to circumvent the Buy/Sell Agreement. These families are embroiled in bitter infighting, and one may easily conclude from the record that appellees are cloaking a sale in the accouterments of merger to circumvent appellant and the block of shares she represents; however, one may as easily conclude appellant’s block is objecting to the merger for obstructive personal reasons as well. Both conclusions may be true, but this is immaterial to our inquiry. We are interpreting a contract, not the reasons for the positions of the parties. The question is the propriety of the merger, not the motivations behind it.

¶ 16 The Supreme Court has recognized the distinction between a “merger” and a “sale” is not easy to determine.

[I]t is no longer helpful to consider an individual transaction in the abstract and solely by reference to the various elements therein determine whether it is a ‘merger’ or a ‘sale’. Instead, to determine properly the nature of a corporate transaction, we must refer not only to all the provisions of the agreement, but also to the consequences of the transaction and to the purposes of the provisions of the corporation law said to be applicable.

Farris v. Glen Alden Corp., 393 Pa. 427, 143 A.2d 25, 28 (1958).

¶ 17 Pennsylvania’s BCL does not define merger ⁴ but describes its effect: the separate existence of all parties to the merger cease, except that of the surviving corporation, which succeeds to the assets and liabilities of merged corporations. 15 Pa.C.S. § 1929(a) and (b). Pennsylvania courts historically have viewed merger as an event distinct from a sale. See Commonwealth v. Willson Products, Inc., 412 Pa. 78, 194 A.2d 162, 166 (1963) (list of cases).

In In re Jones’ Estate, 377 Pa. 473, 105 A.2d 353, on page 477, 105 A.2d 353, on page 355, the Court, quoting from In re Buist’s Estate, 297 Pa. 537, 147 A. 606, said: “ ‘The merger of two or more corporations is neither a sale nor a liquidation of corporate property, but a consolidation of properties, powers, and facilities of the constituent companies, forming a new corporate entity.* * *[a] merger of two corporations cannot be considered as a sale of their property by the constituent companies,* * See to the same effect, Weinroth, Executrix v. Homer B. & L. [Bldg. & Loan] Ass’n, 310 Pa. 265, 269, 165 A. 28; United States v. Seattle-First National Bank, 321 U.S. [583] 383, 64 S.Ct. 713, 88 L.Ed. 944; Rochelle Investment Corporation v. Fontenot, D.C., 34 F.Supp. 118; United States [U.S.] v. Niagara Hudson Power Corporation, D.C., 53 F.Supp. 796; Dodier Realty & Investment Co. v. St. Louis National Baseball Club, 361 Mo. 981, 238 S.W.2d 321, 24 A.L.R.2d 683; Pittsburgh Terminal Coal Corporation v. Potts, 92 Pa.Super. 1; Segal v. Greater Valley Terminal Corporation, 78 N.J.Super. 42, 187 A.2d 374; National Dairy Products Corporation v. Carpenter, Mo., 326 S.W.2d 87.

Id.; accord, Frandsen v. Jensen-Sundquist Agency, Inc., 802 F.2d 941, 944 (7th Cir.1986) (“[I]n a merger the shares of the acquired firm are not bought, they are extinguished.”); Versyss Inc. v. Coopers and Lybrand, 982 F.2d 653, 655 (1st Cir.1992)(same).

¶ 18 Appellant’s broad construction imputes too much into the catch-all language of the Agreement. In Pennsylvania, such restrictive agreements are disfavored and are to be strictly construed. Rouse & Associates v. Delp, 442 Pa.Super. 226, 658 A.2d 1383, 1384 (1995); In re Trilling & Montague, 140 F.Supp. 260, 261 (E.D.Pa.1956). In Rouse, which also involved a family-held corporation, this Court strictly construed an agreement by which the shareholders agreed not to “‘sell, transfer, give, pledge, assign or in any manner encumber or alienate any of the stock’ without first offering it to the corporation or to the other stockholders.” Id., at 1384. We declined to infer a restriction on the involuntary sale of stock by judicial process because the agreement did not expressly impose such a restriction. Id., at 1385.

¶ 19 Appellant submits Bruns v. Rennebohm Drug Stores, Inc., 151 Wis.2d 88, 442 N.W.2d 591 (App.1989), provides authority for generously interpreting the language of the Buy/Sell Agreement. Bruns involved an agreement granting a right of first refusal to shareholders in a close corporation if any shareholder “determines to sell” their shares. The issue before the court was whether a proposed (cash-for-stock) merger triggered the right of first refusal. The court held “substance controls over form” and that the merger constituted a sale of the stock. Id., at 594-95.

¶ 20 The reasoning in Bruns chafes with Pennsylvania’s policy of strictly construing restrictive stock transfer agreements. See Rouse, supra. Moreover, appellant’s reliance on In re Estate of Mather, 410 Pa. 361, 189 A.2d 586 (1963), is of no avail as it stands for the proposition such agreements are valid and enforceable; the court in Mather did not purport to interpret more than the intent underlying that particular agreement. We find Bear v. Stegkamper, 65 Pa. D. & C.2d 134 (Com. Pl. Mercer Co.1974), also cited by appellant, distinguishable from the circumstances in this case. Bear involved a sale of assets, not a merger, and the agreement granting a right of first refusal was framed differently than the instant agreement.

¶ 21 Appellees contend Shields v. Shields, 498 A.2d 161 (Del.Ch.1985), appeal denied, 497 A.2d 791 (Del.1985), is the more persuasive case regarding a restrictive stock transfer agreement between family members in a closely held corporation. Shields involved a stock-for-stock merger and the agreement provided for a right of first refusal if any shareholder sought to “sell, give, pledge, dispose of by will, gift in trust or in any manner otherwise dispose of his or her stock.” Id., at 167. The purpose of the merger in Shields appeared to be solely to avoid the restrictions of a buy/sell agreement, and the shareholders opposing merger argued the merger was a disposition of stock within the terms of the agreement. The Delaware Chancery Court rejected that argument:

A merger between or among Delaware corporations is not a stockholders act of the kind the 1966 Agreement sought to restrict; it is a corporate act, albeit one requiring for its effectuation the approval of a majority of the shareholders of the corporation. When duly effectuated, such a corporate act effects by operation of law a transmutation of the stock interest in a constituent corporation.

At the moment a stock for stock merger is effective, the stock in a constituent corporation (other than the surviving corporation) ceases to exist legally. The subject matter of the stockholders’ agreement thus vanishes, so to speak, at that point and its place is taken by a stock interest in another, distinct corporation. The merger accomplishes that result and necessarily legally moots the terms of a restriction on transfer of the stock of a disappearing corporation.

Id., at 167-68. The Delaware court observed the minority shareholders’ construction of the agreement would result in an anomaly: the shareholders “would have a right to buy that which has ceased to exist by virtue of the act (i.e., the merger) giving rise to the right.” Id., at 168-69. We agree with the learned trial court that Shields is persuasive, as it takes into account the entire agreement, and is consistent with the terms of Pennsylvania’s BCL. See 15 Pa.C.S. § 1929 (describing the effect of merger).

¶22 That the proposed merger would result in receipt of cash for Seven Springs stock does not take it out of the realm of merger. The BCL expressly contemplates such “cash-out” mergers. See 15 Pa.C.S. § 1922(a)(3) and (b); see also 12 Summ. Pa.Jur.2d § 10:35. That appellant will receive cash rather than stock in the surviving corporation does not alter the fundamental fact that the stock in Seven Springs will be no more. As the Shields case emphasized, merger is a corporate act that, by operation of law, results in extinction of the constituent corporation’s stock. Here, the stock of Seven Springs will cease to exist - it will not be owned by the surviving corporation, or by anyone else.

¶ 23 Appellant also contends equity should bar the merger, as it is an attempt to circumvent the Agreement. Appellant relies principally on a rhetorical question posed by the Supreme Court in Bechtold v. Coleman Realty Co., 367 Pa. 208, 79 A.2d 661 (1951):

[H]ad she [majority shareholder] endeavored to resell all or any part of the stock so acquired without giving her fel-. low stockholders the option to first buy it, she could have been restrained. Is a court of equity so blind as to permit her to do by indirection what she may not do directly?

Id., at 664 (emphasis appellant’s). Appellant contends that, as in Bechtold, appel-lees are attempting to do indirectly by merger what they could not do directly under the Buy/Sell Agreement, and argues the trial court’s decree elevates form over substance.

¶24 Bechtold involves factual circumstances distinguishable from those in this case. In Bechtold, majority shareholders attempted to repeal corporate bylaws granting a right of first refusal to shareholders. The Supreme Court determined the bylaw was a contract “designed to vest property rights inter se among all stockholders.” Id., at 663. The Court determined the majority shareholder accepted the shares subject to the restriction, which could not be repealed without the consent of the minority stockholders. Id. We find these distinctions significant, and determine Bechtold does not control.

¶ 25 We believe the Seventh Circuit was correct when it observed how formalities are crucial in corporate law. See Frand-sen, supra. “If the distinction [between a sale of shares and a merger] seems somewhat formalistic, this is an area of law where formalities are important, as they are the method by which sophisticated businessmen make their contractual rights definite and limit the authority of the courts to redo their deal.” Id., at 947. It has been said of corporate law that it is not so much what is done, but how it is done. Even though this business has family roots, and the infighting has separated the parties along family lines, the fundamental fact remains this is a corporation, every bit as much as IBM and AT & T, and the ability of this corporation to act as such is not diminished by an agreement limiting how shareholders may dispose of their holdings.

¶ 26 The parties chose the applicable formalities and expressed them in the terms of this Agreement, ratified as recently as 1997, when the parties were battling, which shows two things. First, whatever the intent of the matriarch and her children, parties to the 1959 agreement, the relevant parties and their intent were vastly different when the current version of the agreement was modified in 1997. Any 1959 intent to keep things “in the family” had long since transformed, as there was not “one family” by 1997; any intent of these parties was limited to the best interests of “my branch of the family” when the 1997 contract was signed.

¶27 Secondly, these parties knew full well in 1997 that they were not in a position to run a family business together; something had to give. Affirming the modified Agreement did nothing to restore the Ozzie and Harriet world that existed four decades ago; to impute the intent of the parties in 1959 to the combatants of 1997 is misplaced. Fully aware of this, and fully aware the corporation was examining its divestiture options, appellant took no steps to draft farther protection for her position into the new amended Agreement. We cannot do so for her now.

¶ 28 Order affirmed.

¶ 29 JOHNSON, J. files a dissenting opinion joined by CAVANAUGH, J. and MUSMANNO, J.

1 . Although the trial court heard limited evidence regarding an asset sale, and ruled on its applicability, we need not address this question in light of our disposition of the merger issue.

2 . The Agreement merely states as follows:

WHEREAS the Stockholders desire to promote their mutual interests and the interests of the Corporation by imposing certain restrictions and obligations on themselves, the Corporation, and the shares of stock of the Corporation.

3 . Appellant relies on letters written by the attorney who drafted the 1969 Agreement to establish the purpose of the amendment. For example, appellant cites an October 8, 1968 memorandum, in which the attorney stated:

Seven Springs is a classic example of a closely held corporation and it is understood that the family does not wish its shares to fall into the hands of outsiders. To accomplish this purpose, it is recommended that the corporation and its shareholders execute a mutual obligation buy-sell agreement covering all common and preferred stock outstanding. The present agreement is inadequate.

The trial court admitted the letters, but only to explain the conduct of the parties, not as extrinsic evidence explaining an ambiguity.

4 . Merger has been defined as the "uniting of two or more corporations by the transfer of property to one of them, which continues in existence, the others being merged into it.” 15 Fletcher Cyclopedia of the Law of Private Corporations § 7041; 9 P.L.E. Corporations § 471. "In a merger, one or more constituent corporations (each a disappearing corporation) merge into and become part of another constituent corporation that continues to exist after the merger has been consummated.” John W. McLamb, Jr. and Wendy C. Shiber, Pennsylvania Corporate Law and Practice § 9.3[b] (1993 Supplement).