On Appeal from the United States District Court for the Eastern District of Pennsylvania, D.C. Civil No. 86-4344.
Sloviter, Greenberg and Cowen, Circuit Judges.
In this case, STV Engineers, Inc. ("STV") seeks damages for an alleged breach of a provision of a Letter of Intent it signed with defendant Greiner Engineering, Inc. ("Greiner"). The Letter of Intent expressed a preliminary agreement between STV and Greiner that STV would acquire Greiner for a particular price. The provision at issue is a standard "no shop" provision, which barred Greiner or its representatives from soliciting a competing offer.
The district court found that Greiner breached the "no shop" clause when a group of Greiner managers sought financing for a competing management-led offer to purchase Greiner. Because we find that the district court erred when it construed the "no shop" clause to bar Greiner managers from seeking outside financing for a management buy-out proposal, we will reverse the district court's finding that Greiner breached the "no shop" provision. We hold that absent unusual facts not present in this case, a company's managers do not act for the company or as company representatives when they seek outside financing for a management-led buy-out.
In the Spring of 1986, STV and Greiner, two publicly traded companies in the business of providing professional engineering services, were involved in discussions regarding a possible merger. After a period of discussions, the two agreed on the parameters of a transaction in which STV would purchase Greiner's 1.8 million outstanding shares of stock for $18 a share. A Letter of Intent was drafted to incorporate the agreed upon terms, and was approved by STV's Board of Directors on May 6, and Greiner's Board of Directors on May 7.
The Letter of Intent included a provision, at issue in this case, which provided that Greiner would not solicit or encourage a competing acquisition proposal. That provision, included as paragraph seven of the Letter of Intent, reads:
7. Greiner will not, and will not permit its representatives to, solicit or encourage any acquisition proposal; provided, however, that Greiner may furnish information concerning its business, properties or assets in respect to another solicitation if counsel to Greiner advises Greiner's Board of Directors that there would be a significant risk of liability on the part of the members of Greiner's Board of Directors as a result of failure to furnish such information to such other person. If an acquisition proposal is received by Greiner or any such information is so furnished, Greiner will promptly notify STV of such fact. Greiner may terminate this Letter of Intent at any time prior to the execution of the Agreement if it shall receive any acquisition proposal from any other person, which in the judgement of Greiner's Board of Directors is materially more favorable to its shareholders than the merger contemplated by this Letter of Intent. Greiner and STV have agreed that the provisions of this Paragraph 7 shall be legally binding upon them in accordance with the laws of Pennsylvania in consideration of the proposal made by STV and the time and expenses incurred by both STV and Greiner with regard to the proposal.
App. at 1464 (emphasis added).
Although the Letter of Intent was, by its terms, a "non-legally binding Letter of Intent," App. at 1462, its final paragraph noted that "neither party shall have any legally binding obligation to the other (whether under this Letter of Intent or otherwise), except under Paragraph 7." App. at 1464.
After the Letter of Intent was approved by the companies' boards of directors, STV began efforts to meet the conditions precedent to the merger, which included securing financing, negotiating a merger agreement, and conducting a due diligence investigation. While the parties disagree on the progress of those efforts, they apparently agree on the fact that STV was proceeding in good faith to meet the conditions necessary for the merger to succeed. The district court found that "[i]t is fair to say that the proposed merger . . . was on a track at the time of the termination." App. at 1377. The district court also found, however, that "there was much, much more to be done with regard to financing and there was serious doubt that it would ever get off the ground." App. at 1391.
After the Letter of Intent was signed, Greiner executives were informed of the proposed merger.*fn1 A number, apparently, were not enthused, and began organizing to investigate alternatives. The district court found that certain executives organized, collected contributions to pay for legal advice, and began investigating sources for financing a management-led leveraged buy-out. Specifically, two top managers, Sawyer and Militello, were found by the district court to have collected information regarding Greiner finances and sent it to Stewart Kahn, of Westinghouse Finance, whom they had contacted with regard to financing a management led buy-out.
At Sawyer and Militello's request, Kahn sent Frank T. Callahan, President and CEO of Greiner, a letter which indicated that "Westinghouse [was] prepared to make a proposal for the management buy-out of the shareholders . . . at a price of approximately $19 per share." App. at 1517.
On June 9, 1986, Greiner's Board of Directors met to discuss the management buy-out proposal. After speaking with Kahn and verifying Westinghouse's interest in financing the proposal, the board voted to terminate the Letter of Intent so that it would be free to accept the managers' higher offer. Ultimately, the managers were unable to complete their proposed purchase and Greiner asked STV to reinstate its proposal. STV, however, refused, and responded to Greiner's renewed overture with this lawsuit.
After a bench trial on liability and certain damage issues, the district court ruled that Greiner had breached paragraph seven of the Letter of Intent. Specifically, the district court found that Sawyer and Militello had been acting as "representatives" of Greiner, as that term is used in paragraph seven, and that their contact with Westinghouse was a "solicitation" prohibited by the Letter of Intent. In so finding, the court rejected testimony that Sawyer and Militello, and the other managers participating in the management buy-out proposal, were acting as individuals. The district court reasoned that since the managers had little capital of their own, supplied Westinghouse with information about Greiner's ...