You’ve heard of a Shotgun buy-sell agreement? Let me introduce you to the Quick Draw.
I’ve named it after Quick Draw McGraw, one of my favorite, classic Saturday morning TV cartoons, and because it so nicely describes the unusual buy-sell mechanism enforced by Brooklyn Commercial Division Justice David Schmidt in his fascinating decision earlier this month in Mintz v Pazer, Decision and Order, Index No. 502127/13 [Sup Ct, Kings County Mar. 12, 2014].
What’s the difference between a Quick Draw and a Shotgun? With a Shotgun, the offeror names a price at which the offeree has the option either to buy the offeror’s shares or sell the offeree’s shares to the offeror. In most instances, the precise timing of the trigger-pull by the offeror is not critical because the offeree has the choice to buy or sell, which if anything creates a disincentive to be the trigger-pulling offeror.
With a Quick Draw, upon the occurrence of a contractually defined trigger event, either side can give a notice to purchase the other’s shares at a price to be determined subsequently by an appraisal process. Unlike the Shotgun, however, the timing of the trigger-pull is everything. The designation of buyer and seller is determined instantly by whichever side first serves its written notice to purchase. When each side wants to buy out the other, as occurred in Mintz, a difference of minutes in the delivery of the purchase notice will determine which side gets to buy and which side must sell.
If you think that sounds a little meshuggeh, you’re not alone. But that’s the agreement the parties made in Mintz, and that’s what the judge enforced.
The Mintz Case
Mintz involves a New York family-owned real estate business started decades ago by cousins Max and Louis Mintz. Their main venture was the Georgetowne Shopping Center in Brooklyn, owned by their holding company, Astoria Holding Corp., of which Max held 48% of the common shares and Louis 52%. Notwithstanding their unequal stock interests, Max and Louis entered into written agreements giving each other equal voting power and board representation.
Max was President of Astoria and handled the shopping center’s day-to-day management until his death in 2003, at which point his office and responsibilities were taken over by Rochelle “Shelley” Pazer who inherited her father Louis’s shares upon his death in 2002. Max’s shares went into trusts for the lifetime benefit of his wife, Hilda. Upon Hilda’s death in 2011, her son Howard and daughter Susan became the trustees and sole beneficiaries of the trusts.
Relations between Pazer and the Mintzes deteriorated, culminating with Pazer’s commencement in May 2011 of a lawsuit alleging deadlock and seeking judicial dissolution of Astoria and a second realty company with parallel ownership and voting rights called Avenue K Corp. Rather than dissolving, following court-assisted negotiations, in July 2011 the parties settled the case by entering into new, virtually identical Shareholders’ Agreements for Astoria and Avenue K (read here).
The agreements not surprisingly included provisions dealing with the future possibility of renewed deadlock, essentially contemplating either a buy-out of one side by the other or a sale of the properties on the open market if the parties could not resolve their differences through negotiation and mediation.
Deadlock was defined in Section 4.8.1 as the inability to obtain unanimous director consent for any one of a series of defined Major Decisions. Under Section 4.8.2, upon the occurrence of a Deadlock the parties were required to conduct a mediation to be completed within 30 days. Under Section 4.8.3, if the mediation did not resolve the Deadlock, generally speaking, one side could elect to purchase the other’s shares at a price determined by an appraisal process or, if neither side elects, the corporation must proceed to market and sell its assets, wind up its affairs, and dissolve.
The election to purchase procedure is found in Section 8.2 entitled “Right of First Offer” which, in subdivision (a), permits any shareholder at any time for any reason to offer to sell his or her shares to the other shareholders at an appraised price. As regards Deadlock, tucked into the last sentence in Section 8.2(a) is the following, key provision which I’ve dubbed Quick Draw:
In addition, if any Deadlock exists which has not been resolved pursuant to Section 4.8.2 hereof, then either the Mintz Group or the Pazer Group shall have the right to give the other Shareholder Group a Purchase Notice as to all of the Shares owned by the other Shareholder Group within ten (10) business days after such failure to resolve, in which event the Shareholders shall proceed under Section 8.2(b), (c) and (d) below. [Emphasis added.]
The referenced Section 8.2(b) declares that the notice-giver’s election to purchase, and the notice-recipient’s consequent obligation to sell, are “irrevocable.” The provision, cast in terms of “either . . . or,” says nothing about the possibility of both sides giving simultaneous or sequential purchase notices, which, as you might have guessed, became the focus of the subsequent litigation.
The Dueling Purchase Notices
In 2012 new disputes arose between Pazer and the Mintzes concerning both corporations. In May 2012, following declaration of deadlock concerning Avenue K and an unsuccessful mediation, Pazer sent a Section 8.2(a) Purchase Notice to the Mintzes. In response, counsel for the Mintzes initially took the position in an email (read here) that Section 8.2(a) also permits the Mintzes to serve a Purchase Notice to buy Pazer’s shares in Avenue K, and that since the agreement does not address what happens if this occurs, that the fair result would be that the shareholder group offering the highest purchase price buys out the other group or that the company sells its assets on the open market and liquidates. Pazer’s counsel disagreed with this interpretation, but the issue became moot when the Mintzes decided not to purchase Pazer’s Avenue K shares and instead proceeded with the sale of their shares to Pazer.
Meanwhile, a similar scenario played out with Astoria, except this time the parties switched positions and neither side backed down. It started in August 2012 when Pazer sent an email to the Mintzes acknowledging deadlock and suggesting, as an alternative to following the procedure in the Shareholders’ Agreement, that they “expedite the process” by agreeing to sell the shopping center on the open market, but also adding, “[o]f course, if you’re prepared to buy me out let me know and we can retain appraisers and proceed that way.” The Mintzes quickly replied by email purporting to accept Pazer’s offer to sell and forwarding a proposed form of “Waiver and Acknowledgement Agreement” formalizing Pazer’s agreement to sell.
Subsequent exchanges between the parties’ counsel degenerated into a dispute whether there had been a valid offer and acceptance to sell Pazer’s shares. On September 11, 2012, Pazer initiated deadlock mediation pursuant to Section 4.8.2 of the Shareholders’ Agreement, which proceeded under the Mintzes’ protest that there already was an enforceable agreement to purchase Pazer’s shares.
The mediation concluded unsuccessfully on September 27, 2012. At the end of the mediation session, the Mintzes, who obviously came prepared to do so the moment an irreconcilable deadlock was declared, handed to Pazer a written Purchase Notice electing to purchase all of Pazer’s Astoria shares pursuant to Sections 4.8.3 and 8.2(a) (read Purchase Notice here).
On October 4, 2012, which was within the ten-day notice period specified in Section 8.2(a), Pazer sent her own Purchase Notice to the Mintzes purporting to elect to purchase all of the Mintzes’ Astoria shares (read Purchase Notice here).
About six months later, due to the unresolved impasse over which side had the right to buy out the other, the Mintzes filed a new lawsuit, inter alia, seeking a declaration of their priority purchase rights based on the alleged acceptance of Pazer’s offer in the August 2012 email exchange or, alternatively, based on their September 27 Purchase Notice (read the Mintzes’ complaint here). Pazer filed an answer with counterclaims (read here), inter alia, disputing that the August 2012 emails created a binding obligation to sell the Pazer shares, denying that the Mintzes’ September 27 Purchase Notice foreclosed Pazer from serving her own Purchase Notice within the ten-day period, and seeking a declaratory judgment as follows:
that (a) the intention of the parties as reflected in the Shareholder’s Agreement was to give either group the right to buy the other one out, by giving a Purchase Notice within ten business days of a failed mediation, and not to favor either Shareholder group over the other, regardless who acts first; (b) where both Shareholder groups exercise their purchase rights, either (i) the Shareholder group offering the highest purchase price through a bidding process “wins” and gets to buy the other group out, or (ii) neither Shareholder group may exercise their purchase rights and instead the Company must sell its assets on the open market.
Justice Schmidt’s Decision
Both sides moved for partial summary judgment upholding their respective positions on the buy-out. Read here the Mintzes’ memorandum of law in support of their motion, and here Pazer’s memorandum of law in support of her cross motion. Read here the transcript of the oral argument of the motions before Justice Schmidt.
Justice Schmidt’s decision starting at page 19 rejects the Mintzes’ argument based on offer and acceptance stemming from the August 2012 email exchange. Pazer’s initial email indicating her willingness to sell her shares to the Mintzes, Justice Schmidt finds, “indicates a lack of definiteness and certainty that are required of an offer” and, together with the Mintzes’ purported acceptance, constitute nothing more than an unenforceable “agreement to agree.”
The bulk of the decision starting on page 23 is devoted to the enforceability of the dueling, post-mediation Purchase Notices, with Pazer presenting two distinct arguments against giving priority to the Mintzes’ September 27 Purchase Notice.
First, Pazer argued that the term “either” as used in Section 8.2(a) (“either the Mintz Group or the Pazer Group shall have the right to give the other Shareholder Group a Purchase Notice …”) means that both Pazer and the Mintzes had the right to serve a Purchase Notice within ten days after an unsuccessful mediation.
Second, Pazer argued in the alternative that the Mintzes should be estopped from contending that Pazer could not serve a competing Purchase Notice based on the contrary position taken by the Mintzes’ lawyer when Pazer served her Purchase Notice for Avenue K shares.
After reviewing basic principles of contract construction, Justice Schmidt identifies the “primary question [as] whether the Shareholders’ Agreement is ambiguous.” He then finds that Section 8.2(a)’s provision governing delivery of a Purchase Notice after unsuccessful mediation is not ambiguous, citing case law and dictionary meanings of the disjunctive term “or” and the correlative conjunction “either . . . or.” As he explains:
Thus, in examining the plain language of the Shareholders’ Agreement, the court finds that the use of the grammatical construct “either . . . or” and the singular “a Purchase Notice” in the last sentence of section 8.2(a) . . . denotes that only one of the shareholder groups could effectively serve a Purchase Notice for the other’s shares, and thereby, exercise the singular Right of First Offer. . . . If it had been intended that both shareholder groups were permitted to serve Purchase Notices after failed mediation, as contended by Pazer, this section would have had to have provided that both the Mintz Group and the Pazer Group shall have the right to give each other Purchase Notices as to all of the Shares owned by the other shareholder group. Section 8.2(a) of the Shareholders’ Agreement, however, fails to contain this language. [Italics in original.]
In other words, under Section 8.2(a)’s plain language, whoever delivers the first Purchase Notice forecloses the other shareholder from doing the same. Justice Schmidt also notes in his decision numerous instances in the Shareholders’ Agreement where the words “and,” “and/or,” “both . . . and,” and “each of . . . and” are used to refer to both shareholder groups. “Thus,” Justice Schmidt writes,
where the parties intended to refer to “both” or “each” of the shareholder groups, they expressly used such terms, and the absence of these terms and the use of the terms “either” and “or” evince the absence of an intention to permit both or each of the shareholder groups to serve purchase notices following a deadlock.
Justice Schmidt also rejects Pazer’s proposed interpretation of Section 8.2(a), to permit more than one Purchase Notice, because it
would eviscerate the very purpose of the entry into the Shareholders’ Agreement. If both parties could serve a Purchase Notice, this would render this provision without any meaning, force, or effect since it would not resolve which party would be entitled to purchase the shares of the other. While Pazer asserts that a bidding war should be held, the Shareholders’ Agreement does not direct this, and to require this would add to, and rewrite the terms of the Shareholders’ Agreement. The court will not judicially insert a new term, which the parties could have but did not include.
Lastly, starting at page 36 of the decision, Justice Schmidt rejects Pazer’s estoppel argument based on her alleged reliance on the inconsistent interpretation of Section 8.2(a) advocated by the Mintzes’ lawyer after Pazer delivered her Purchase Notice for Avenue K. The argument fails, first, because it impermissibly relies on extrinsic evidence to vary the agreement’s “unambiguous” terms; second, because the Mintzes’ lawyer’s advocacy did not contain any misrepresentation of fact, as required by estoppel doctrine; and third, because Pazer did not rely on this interpretation as evidenced by her own counsel’s explicit rejection of it in his reply correspondence.
In the end, Justice Schmidt grants summary judgment for the Mintzes, requiring Pazer to sell her shares, based on his conclusion that, under the terms of the Shareholders’ Agreement, “only the first Purchase Notice served following the deadlock and unsuccessful mediation was to be valid and effective.”
Some Closing Observations
- I’ve never seen a Quick Draw provision like the one in Mintz nor, frankly, would I ever recommend using it in a buy-sell agreement. The financial and tax consequences are far too great to leave to such an arbitrary mechanism.
- Generally speaking, it’s a good thing to have a buy-sell agreement for 50/50 owners when there’s a deadlock over fundamental issues. If each of two ownership factions wants to preserve its ability to buy out the other, provision for some form of closed auction is an obvious solution. Attention also must be paid in designing the buy-sell agreement to mitigating the potentially substantial gains tax arising from the sale.
- In case you’re curious about the stakes in Mintz, Pazer alleged that the shopping center owned by Astoria was valued at $55 million based on a third-party offer received in 2013.
- The fight between Pazer and the Mintzes is far from over. The decision left unresolved a host of claims and counterclaims alleging breaches of fiduciary duty and of the Shareholders’ Agreement seeking millions in damages against each other. Also, within days after the decision the parties filed notices of appeal and cross-appeal. We’ll just have to wait and see if either side perfects their appeal and if the buy-out is stalled in the meantime.
- Section 4.8.2 of the Shareholders’ Agreement in Mintz specifically designated Justice Schmidt, who helped the parties negotiate the settlement in the 2011 lawsuit, as the mediator in the event of deadlock. Those who have litigated cases before Justice Schmidt know not only of his skill and effectiveness as a mediator, but also of his extraordinary willingness to give freely of his own time meeting with the parties and their counsel.