Georesearch, Inc. v. Morriss (193 F. Supp. 163, 1961)

BEN C. DAWKINS, Jr., Chief Judge,

Brought under the Diversity Statute, these two cases were consolidated for trial with separate judgments to be rendered. The question in both cases turns on the validity and interpretation of two identical written agreements signed by defendants, entitled “Stock Transfer Restriction Agreement,” hereinafter referred to as the Agreement.

The Agreement, restricting defendants’ rights to sell, transfer or otherwise dispose of certain shares of stock in the plaintiff corporation, was executed on November 9, 1955, and was to terminate on September 1, 1957, or upon the happening of any of several events, with which we are not here concerned. On July 13, 1957, further identical agreements were signed by defendants which extended the termination of the Agreement to March 1, 1958. Defendants were discharged on October 22, 1957, from their positions as president and vice-president of the corporation, and these suits were filed on March 17, 1958.

The Agreement provides that upon the “termination of employment” of the defendants, the corporation would have the right to purchase from defendants one half of their shares of stock in the corporation at the option price of $ .07 a share. Termination of employment is defined in the Agreement to be:

“ * * * the cessation of the Officer to be an officer or employee of the Company because of voluntary resignation or retirement, or because of his removal or discharge for cause, except that such term shall not include temporary leave from employment granted by the Board of Directors of the Company by reason of consecutive illness at any one time in excess of six months; provided, however, that if the salary paid to the Officer is so reduced that it is no longer a reasonable salary commensurate with the services the Officer is called upon to perform, taking into account the financial condition of the Company, then the Officer may voluntarily resign and his resignation under such circumstances shall not be deemed to be a ‘termination of employment’ as that term is used herein.”

Each complaint alleges that the respective defendant was discharged for cause, within the meaning of the Agreement, and has refused to accept the tender of $ .07 a share for one half of the total shares owned by him following written notice of the corporation’s exercise of its option. Plaintiff originally prayed for damages on account of defendants’ refusal to comply, and in the alternative that the defendants be required to transfer the shares to the plaintiff. At the trial, however, it was stipulated that if judgment is rendered for plaintiff it should not be for monetary damages but that Morriss and Howard be required to tender 13,505 and 13,497 shares, respectively, at the option price.

Morriss and Howard received college degrees in engineering and, prior to the organization of Georesearch, both were employed by large corporations in various phases of the oil industry. In 1952, these two men conceived a plan whereby they hoped to establish that a small company could explore for oil and gas, with the same proficiency as a major company, through use of a team of geologists and geophysicists employed as a seismic crew. This modus opera/ndi was experimental at that time in the oil industry, but defendants believed they could effectively employ it to find undiscovered reserves in areas such as East Texas and North Louisiana, which had previously been rather thoroughly explored.

Morriss was president and Howard vice-president of the new corporation which was then formed to effectuate their idea. Both defendants owned 500 shares each of Class A voting stock at $1 a share. In addition, Morriss owned 1,134 shares of Class B non-voting stock at $1 a share, and Howard owned 1,133 shares of the same stock. Morriss succeeded in convincing Texas Eastern Transmission Company of the feasibility of their plan, and Georeseareh, Inc., became a subsidiary of Texas Eastern which owned the remaining 5,000 shares of Class A stock. Other employees of Georesearch, Inc., owned the remaining Class B stock, which together with defendants’ stock totaled 4,000 shares.

During the next three years, Georesearch operated under a contract with Texas Eastern surveying the parent company’s rights-of-way in search of oil. Its entire source of income was derived from Texas Eastern, who expended approximately $690,000 for the scientific data compiled by Georesearch. A considerable number of oil prospects were developed during this time, with little or no drilling. The purpose of the company was to develop and turn over to Texas Eastern any favorable oil prospects which then would be drilled by another subsidiary corporation.

When, at the end of the three-year contract (July 31, 1955), Texas Eastern decided to terminate the services of Georeseareh, Morriss and Howard realized that additional capital was needed to finance their operation and to support the cost of drilling and leasing of land. For that purpose Morriss held a brief discussion with John Crichton, a successful independent oil man. After a trip to New York, where he talked to others for the same purpose, Morriss again discussed the matter with Crichton, who attempted to work out some sort of operating agreement between Electric Bond and Share, Oil and Gas Property Management, Inc., of which Crichton was president, Empire Trust Co., of which Crichton was vice-president, and Georesearch. This did not work out so Morriss was again contacted by Crichton with a proposal of recapitalizing Georesearch and merging it with J-0 Oil Co., which was then equally owned by Oil and Gas Property Management, on the one hand, and J. F. Justiss and C. G. Mears, on the other. The basis for this proposed merger was that Georesearch had a large number of oil prospects developed over the three-year contract with Texas Eastern, plus a good staff of technicians, but it needed a sizable income on which to operate. J-0 Oil Co. would benefit from the oil prospects, could use the large technical staff and had a $20,000-a-month income. The plan was for Georeseareh to continue its operations as it had done for Texas Eastern but with the additional purpose of interesting outside venture capital to contribute to the cost of drilling on the prospects that Georesearch had developed, and would develop.

It was also decided that a public offering of stock should be made, and in this connection the New York investment firm of Keith Reed and Company was called in to handle the underwriting.

Mr. George Rooker of Keith Reed was in charge of the underwriting arrangements. After examining Georesearch’s assets, and those of Justiss-Mears and Oil and Gas Property Management, Inc., in the J-0 Oil Co., it was decided that Justiss-Mears and Oil and Gas Property Management would transfer their holdings to Georesearch in exchange for: (1) Oil and Gas receiving $200,000 and 2,000 shares of Class A common stock which Georesearch would reacquire from Texas Eastern; (2) Justiss and Mears each receiving $100,000 and 1,000 shares of Class A common stock to be reacquired from Texas Eastern. It was also agreed that 750,000 shares of $1 par value common stock would be issued. All Class A and Class B common stock would be converted to one class of common stock at the ratio of 20 shares of new $1 par value stock for each share of the Class A stock and 15 shares of the new stock for each share of the Class B stock held in Georesearch. The remaining shares were to be sold to the public.

The result of this transaction, insofar as defendants were concerned, was that they each would receive 10,000 shares of $1 par value common stock in exchange for 500 shares of Class A stock they then owned in Georesearch. In addition, Morriss would receive 17,010 new shares for his 1,134 Class B shares, and Howard would receive 16,995 new shares for his 1,133 Class B shares.

Totally, the defendants received 54,005 shares of stock at par value of $1 a share, in exchange for stock which cost them $3,267. If sold on the open market at that time, the newly-acquired shares would have brought $149,531.95.

Rooker initially raised the question of restricting the stock owned by Morriss and Howard. His first proposal was that one half of the stock to be transferred to defendants would be presented to them outright at the time of reorganization. The other one half would be placed in a voting trust and distributed to defendants at the end of two years or at any time prior thereto, at the option of the trustees. This plan was rejected and the final agreement vested the whole of the allocated stock in defendants with an option granted to the corporation to repurchase one half of it under certain conditions.

As stated, the moving party insofar as the restriction agreement was concerned was the underwriting group. Their first proposal, after agreeing that the whole of the allocated stock would be vested in the defendants, defined “termination of employment” as the cessation of defendants serving as officers because of “death, resignation, retirement, removal, discharge, or for any other reason whatsoever * * Morriss’ attorney counterproposed a draft which defined “termination of employment” to include “just cause” which was further defined to be (a) dishonesty on Morriss’ part, (b) failure of Morriss to exercise reasonable skill and competency in the discharge of his duties, and (c) illness of Morriss requiring his absence from work in excess of-days.

The final draft agreed upon defines “termination of employment” as being, in part, “discharge for cause.”

Rooker’s reason for requesting the Agreement, as stated at the trial, was that:

“When the thing was first mentioned to me, I felt that the amount of promotion stock being issued to Mr. Howard and Mr. Morriss and his group was out of line in respect to the other contribution being made and the price and amount of stock to be offered to the public, and I felt there had been some discussion about an equal arrangement between the J-0 people and the original Geo-research people, and I felt, at least, as a partial protection to the public stockholders that there ought to be an option given to the company to purchase back part of this stock if the information and if the people involved didn’t prove out as expected, since it was very intangible as far as their contribution was concerned.”

Defendants have attempted to counter this testimony with two letters written by Rooker to Morriss, in support of their contention that the Agreement was necessary to insure that the defendants remained with the company and would not unload their stock on the open market. This, they contend, furnished the necessary “window dressing” to the public sale of stock.

The first letter by Rooker, dated July 29, 1955, (Exhibit D-13), which outlined the voting trust arrangement, stated that:

“The following is a recap of our telephone discussion of this morning in regard to the restrictions which we would like to see on the options and stock. As I pointed out to you, it is felt that these concessions on your part are not actually taking anything from you, but will give the deal a better appearance in so far as the public is concerned. Believe me, our only motive in suggesting these restrictions is to improve the appearance of the deal in the public’s eyes. We both recognize, I am sure, that a successful and well accepted public offer is very essential to this deal.”

Further:

“As I pointed out to you so far as we are concerned, it is essential that the above be entirely acceptable to you, and we want you to feel that the deal, as finally negotiated, has been made with the best interests of all concerned in mind. Frankly, we believe that these are not undue requests. Obviously, if the present management continues with the Company for a period of two years, the difference in status of their stock and options will not vary one iota or one share from the original discussions, and yet the public will be given complete assurance of the management’s good faith and intentions by these simple restrictions.”

The second letter, dated August 1, 1955 (Exhibit D-14), stated that:

“The purpose of the stock restric- • tion was the same as with the options, that is to tie the management more securely to the corporation. I meant to say that the % stock to be held in the voting trust would be deliverable to the management at the end of two years if the management were still in the employment of the Corporation.”

Defendants managed Georesearch, Inc., from January, 1956, to October, 1957. During this twenty-two month period the company drilled twelve wells. Seven were wildcats resulting in no production. The other five were field extensions of which two were producers. Only one of the latter wells resulted in a profit to the company. Seven of the twelve wells were on prospects developed’ by Georesearch. Three of these seven were drilled on one prospect. Howard testified that at the time of his discharge he intended to develop seven or eight other “closures” into drilling prospects. The principal technique employed by Georeaearch was to mount seismic equipment