United States Court of Appeals
For the First Circuit
No. 99-2367
DAVID B. OSTLER,
Plaintiff, Appellant,
v.
CODMAN RESEARCH GROUP, INC. and S. PHILIP CAPER,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
[Hon. Joseph A. DiClerico, Jr., U.S. District Judge]
Before
Torruella, Chief Judge,
Boudin and Lipez, Circuit Judges.
W.E. Whittington with whom Whittington Melendy & Girdwood,
P.C. was on brief for appellant.
Bruce E. Falby with whom Kirsten Nelson Callahan and Hill
& Barlow were on brief for appellees.
March 2, 2001
BOUDIN, Circuit Judge. Plaintiff David Ostler appeals
after a jury verdict against him in a case growing out of his
decision not to exercise stock options he held in Codman
Research Group, Inc. ("Codman"). Codman made software for the
health care industry and Ostler held various positions at the
company from 1985 until 1995, serving as its president from 1989
to 1993. Under Codman's 1988 stock option plan, Ostler received
options to purchase 60,000 common shares of Codman at one cent
per share (adjusted for a stock split subsequent to the initial
grant). The options were to expire in ten years, on July 27 or
28, 1998 (the exact date is disputed but of no consequence).
Ostler left Codman in 1995. To exercise his stock
options, the 1988 plan required Ostler to certify that he had
"fully investigated" and had knowledge of Codman's "current
corporate activities and financial condition." Thus, on
February 19, 1998, Ostler wrote to Codman requesting pertinent
information. What Ostler needed most was information concerning
the valuation of Codman's stock and the chance that Codman would
either "go public" or merge into a public company and create a
market for its shares.
Between March and early June 1998, Codman sent a number
of documents to Ostler. Regarding the disclosure as inadequate,
Ostler brought suit in federal district court against Codman and
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its board on June 8, 1998, seeking preliminary injunctive relief
on breach of contract grounds. In June and early July 1998,
Codman supplied further documents to Ostler and advised him that
if he exercised his options, Codman would require him to tender
(in addition to the $600 exercising the options would cost)
federal income and other taxes on the difference between the
price of the options and the much larger fair market value of
the Codman shares at the time of exercise. The 1988 plan so
provided, and Codman declined to defer the payment obligation or
to loan Ostler the money (as it had apparently done for current
employee option-holders).
On July 24, 1998, Codman gave Ostler a draft report
prepared by outside accountants estimating its per share value
at $16.94, and, on July 27, Codman told Ostler that the taxes
that would be due from Ostler on exercise of his options would
be over $300,000. Later that day, learning that the final
valuation would likely be reduced by a "material amount," Codman
management--without obtaining board approval--told Ostler that
the company would "unilaterally extend" the option exercise
deadline to 48 hours after a final report was delivered. On
July 28, Ostler was given the final report, with a valuation of
$14.53 per share.
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On July 29, 1998, Codman management--again without
board approval--extended Ostler's option exercise deadline to
noon on July 31. On the same day, Codman told Ostler that it
was engaged in preliminary discussions regarding a possible
merger with HealthTech Services Corporation ("HealthTech") (then
known as CareMonitor, Inc.) and provided Ostler some pertinent
documents. Codman had not earlier revealed its discussions with
HealthTech because, it says, the possibility of a merger was
remote until a breakthrough on July 28.
Although both Ostler and Codman valued the stock at
well above its option price, difficulty in marketing the stock
and Codman's financial troubles made exercising the options a
gamble. Ostler debated until the last minute, consulting his
father and his lawyer, but did not exercise his options by noon
on July 31, 1998. Instead, he unsuccessfully sought another
extension. On October 9, 1998, Codman and HealthTech signed a
merger proposal, and the merger was ultimately consummated on
January 27, 1999. If Ostler had exercised his options, he says
that his stock would have been worth millions, at least for a
period after the merger.
In September 1998, Ostler amended his complaint in the
federal action to assert damages claims of securities fraud and
new breach of contract claims based on inadequate and misleading
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disclosure (the original claims, which were dismissed before
trial, were based on differential terms of exercise as between
Ostler and current Codman employees). After discovery, the case
went to trial in late October 1999. On November 3, 1999, the
jury returned a verdict for the defendants, finding specially
that Codman had extended the option exercise date to July 31.
After his post-trial motions were denied, Ostler brought the
present appeal.
Ostler's main claim on appeal is that the extension by
Codman's management of Ostler's option exercise deadline to July
31, 1998, was invalid. If so, Ostler argues, the final
valuation report (assuming the initial expiration date was July
27) and documents alerting Ostler to a possible HealthTech
merger--delivered after the original deadline but before July
31--should not count toward satisfying Codman's disclosure
obligations under the 1988 plan and securities laws. Despite
Codman's claim to the contrary, Ostler preserved this argument
for appeal by, inter alia, asking the district court to withdraw
from jury consideration the question whether Codman had extended
the deadline. See Play Time v. LDDS Metromedia Comms., Inc.,
123 F.3d 23, 29 (1st Cir. 1997).
Codman was a Delaware corporation at the time of the
critical events in July 1998, and the parties agree that
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Delaware law governs the question whether Codman management
could extend Ostler's period for exercising his options without
board approval.1 Section 157 of the Delaware General Corporation
Law provides that the terms of options, including the time for
exercise, shall be determined (if not in the certificate of
incorporation itself) by the board of directors. Del. Code.
Ann. tit. 8, § 157 (1998). Ostler contends that this provision
legally barred the extension to July 31 by Codman management.
Several Delaware cases have read section 157 to require
board approval for fundamental actions such as the creation of
options, Sai Man Jai, Ltd. v. Personal Computer Card Corp., Civ.
A. No. 11579, 1991 WL 110458, at *2 (Del. Ch. June 18, 1991); a
substantial reduction in the exercise price, Liberis v. Europa
Cruises Corp., Civ. A. No. 13103, 1996 WL 73567, at *7-*8 (Del.
Ch. Feb. 8, 1996); or swapping new options for old ones,
Michelson v. Duncan, 407 A.2d 211, 224 (Del. 1979). On the
other hand, a Delaware court recently held that a company was
bound by an executive's promise to an employee contemplating
early retirement that he could exercise his stock options
anytime during the pertinent plan's ten-year term,
1
For reasons that do not matter here, the parties deemed New
Hampshire law to control a related estoppel issue, but New
Hampshire and Delaware law seem to be the same as to estoppel
doctrine so far as pertinent to this case.
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notwithstanding a special ninety-day deadline from date of
termination for early retirees. See Collins v. American Int'l
Group, Inc., Civ. A. No. 14365, 1998 WL 227889, at *6 (Del. Ch.
Apr. 29, 1998).
Collins may suggest that a minor extension of an option
exercise deadline by management is permitted under Delaware law,
but it is hardly conclusive.2 One might think that most boards
would expect management to make minor adjustments to cope with
last-minute emergencies, see 2 Fletcher, Fletcher Cyclopedia of
the Law of Private Corporations § 443 (perm. ed., rev. vol.
1998). Still, corporate law remains fairly fussy about the
actual authority of officers when their actions affect stock
options. Cf. Michelson, 407 A.2d at 223-24.
However, courts have commonly used apparent authority
and estoppel doctrine to protect those who have relied on
corporate officials later found to have lacked actual authority.
See 2 Fletcher, supra, §§ 437, 449. Although in most cases
estoppel is invoked against the company, see id. § 437.100,
there is no obvious reason why the doctrine should not work both
2
It is not clear in Collins whether the 90-day deadline was
part of the option plan or who had authority to alter the
deadline; nor did the court expressly discuss section 157.
Rather, the court adverted only briefly to the company's claim
that shareholder approval was needed. Collins, 1998 WL 227889,
at *1.
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ways, cf. 7A Fletcher, supra, § 3409. It would be ironic if
rules limiting the authority of corporate officers--rules
designed to protect the company and its shareholders--could be
overriden by estoppel doctrine only where this disadvantaged the
company. Here, we think that estoppel doctrine is a ground for
affirmance.
Indeed, the district court did not instruct the jury
that Delaware law freely permitted management to deviate from
the terms of the 1988 option plan as prescribed by the board.
Instead, the court gave a form of estoppel instruction,
providing that a valid extension should be deemed to have
occurred if the jury found that the defendants had proved each
of the following three elements (which we quote):
1. Ostler manifested to Codman that he
had agreed to the proposed extension;
2. Codman reasonably believed that
Ostler agreed to the proposed
extension; and
3. either Ostler received a benefit from
the extension or Codman relied on the
extension to its detriment.
Beyond claiming that such estoppel is barred by section
157, Ostler makes no effort (on this appeal) to show that the
estoppel theory is otherwise improper or that its elements were
misdescribed to the jury. We thus assume arguendo (section 157
aside) that the quoted elements comprised the proper legal test,
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and we direct our attention to the claims that Ostler does make
about the instruction--that the jury was wrongly asked to
determine whether there was an "agreement" to extend the option
period and that the evidence did not support the jury's finding
that the three elements had been established.
The first claim is based on the fact that, as a preface
to its estoppel instruction, the district court told the jury
that it was to decide whether "the deadline was extended by
agreement of the parties." Ostler goes on to argue that the
issue of agreement was an affirmative defense that defendants
had waived by failing to assert it in a timely fashion, Fed. R.
Civ. P. 8(c); that it was introduced "out of the blue" by the
trial court; and that the circumstances do not constitute an
"agreement" under standard contract doctrine.
This argument is a red herring. In context, the
reference to "agreement" was a shorthand way of introducing the
estoppel concept whose elements the district court then
(correctly) specified in the sentences that immediately
followed. See Great Lakes Aircraft Co. v. City of Claremont,
608 A.2d 840, 852-54 (N.H. 1992). In detailed objections made
after the estoppel instruction was given (including a renewal of
the section 157 argument), Ostler's counsel made no objection to
the use of the word "agreement," so the objection is waived but
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for plain error. See Fite v. Digital Equip. Corp., 232 F.3d 3,
7-8 (1st Cir. 2000). Indeed, we would regard it as harmless
error even if the issue had been raised and preserved.
As for the claim that evidence was lacking to support
the jury's finding, the evidence permitted a jury to find that
Codman had told Ostler that it was extending the deadline until
July 31; that Ostler did not disavow the extension but instead
evaluated the proffered documents and pondered seriously whether
to exercise his options up to the last minute; and that this
gave Ostler the benefit of additional time and also made it less
likely that Codman would take other remedial steps (such as
getting formal board approval). Whatever the merits of the
estoppel theory, vis-a-vis section 157, there was no lack of
evidence to support the jury's finding.
Ostler argues that under contract doctrine, mere
silence in the face of an offer cannot be acceptance and so his
failure to disavow was irrelevant. The authority Ostler cites
actually says that silence can constitute consent "where the
offeree silently takes offered benefits." Restatement (Second)
of Contracts § 69 cmt. a (1981). But as we have said, the jury
was instructed as to estoppel, not contract. Estoppel doctrine
clearly permits silence to stand for acquiescence in proper
circumstances. E.g., Hilco Prop. Servs., Inc. v. United States,
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929 F. Supp. 526, 540 (D.N.H. 1996); Concrete Constructors, Inc.
v. Harry Shapiro & Sons, Inc., 436 A.2d 77, 80 (N.H. 1981).
Finally, concerning the extension issue, Ostler says
that the district court erred in excluding three memoranda
prepared for or by Codman which, according to Ostler, tended to
show that "Codman thought it legally impossible and,
financially, prohibitively expensive, to extend the deadline."
Whatever its reasons, the district court's exclusion of these
documents was harmless. See generally Ruiz-Troche v. Pepsi Cola
of P.R. Bottling Co., 161 F.3d 77, 87-88 (1st Cir. 1998).
Codman officials clearly purported to extend the option period
to July 31, and whether or not they privately thought it was
legal to do so, the representation to Ostler was all that was
required for estoppel purposes.
Ostler's second set of claims in this appeal concern
the right under Delaware law of dissenting shareholders in a
merger to be bought out at a figure determined by the court.
See Del. Cod. Ann. tit. 8, § 262 (1998). In such an appraisal,
Ostler says, no discount is applied for minority interest or
lack of marketability. See, e.g., Cavalier Oil Corp. v.
Harnett, 564 A.2d 1137, 1142-44 (Del. 1989). The district
court excluded expert testimony on appraisal rights under
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Delaware law that Ostler sought to offer and it declined to
instruct the jury on the issue.
Ostler says that the expert testimony and instruction
are relevant because they enhanced the importance of disclosure
about any proposed merger with a public company and, in
particular, the prospects for a merger with HealthTech. The
difficulty is that Codman, in objecting to the testimony and
instruction, plausibly proffered that HealthTech would not have
agreed to the merger if more than ten percent of Codman's shares
dissented and, since Ostler's options represented more than ten
percent, there would have been no merger absent a waiver by
Ostler of dissenting rights.
Conceivably, Ostler could have made a proffer to the
contrary and created a jury issue on the point; and if so, the
testimony and instruction Ostler sought as to the rights of
dissenting shareholders could have been "conditionally
relevant," Fed. R. Evid. 104(b), subject to the court's
determination on the disputed issue. However, Ostler made no
such tender, and the district court permissibly concluded that
there was no foundation for the expert evidence or instruction.
Indeed, if there was no prospect of Ostler being able to
exercise the rights of a dissenting shareholder, it would have
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been misleading to allow the evidence or instructions. See Fed.
R. Evid. 403.
Ostler's third and last set of claims center on the
district court's rulings excluding evidence as to exercise or
non-exercise of option rights by three other persons who held
options expiring the same date as Ostler's. Specifically,
Ostler says that he wanted to show that two insiders (the
chairman of the board and another management official) both
chose to exercise their options, while another option-holder who
was an outsider declined to exercise his options. The testimony
would have been useful in suggesting, broadly speaking, that the
insiders enjoyed access to information that the outsiders had
not been given and that this information mattered.
However, Ostler's claims had been narrowed by pretrial
rulings to exclude any breach of contract claims grounded in a
theory of disparate treatment. To make any use of inferences
from what other option-holders knew and did would have created
three mini-trials, exploring just why the other three
individuals acted as they did (e.g., the extent to which
deferred payment of taxes upon exercise affected the decision to
exercise). Weighing the benefit of this secondary evidence
against its potential to delay and mislead is just the kind of
issue on which the district court's latitude is at its zenith.
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Fed. R. Evid. 403; United States v. Shea, 159 F.3d 37, 40 & n.2
(1st Cir. 1998). We see no abuse of discretion.
Whether Ostler was fairly treated by Codman may well
have been a reasonable subject for dispute, but the debate was
resolved by the jury. We have considered but not discussed
other arguments in Ostler's brief, but they are either less
persuasive or inadequately developed.
Affirmed.
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