The Appellate Division of the Supreme Court of NY, first department recently heard an appeal in the case of Warburg v. GeoResources. The case involved what effect a contract’s “notwithstanding” clause would have if it operated to eliminate (or in the court’s words ‘render inoperative’) a detailed formula in a clause of the contract. The court ruled that it does so operate, however that the case would still proceed forward because there may have been errors, discoverable via discovery, that would entitle the plaintiffs to contract reformation.
Background of the Case
Plaintiff and defendant entered into an agreement for the commencement of certain financial transactions between them. According to the purchase agreement, plaintiff purchased some 400,000 shares of defendant’s stock, and warrants to purchase about 200,000 additional shares on top of the shares already purchased. A warrant is somewhat like an option contract. It is a contractual agreement that lets the holder buy a specific amount of stock at a specific price over a fixed and agreed upon period of time. Co-plaintiffs also purchased warrants in defendant’s stock that were in essence, identical.
The warrants fixed a price of $32.43 per share, and the warrant period ran from six months after the purchase date (of the 400,000 shares, presumably) to June 9, 2013. The warrants also contained an antidilution provision. Dilution is the phenomenon whereby a purchaser buys a certain amount of shares, with the goal or benefit of obtaining a certain amount of voting control in the company, only to have the company, after the purchase, create more shares, reducing or diluting the percent stake the purchaser actually has in the company. Big purchasers of stock, as in the this case, often negotiate an agreement that the seller will not dilute its total pool of stock.
Sections 8(f) and 8(h) were the key antidilution clauses at issue in this case. 8(f) contained a formula that would adjust the Exercise price (of the plaintiffs’ warrants) if certain dilution measures happened. Section 8(h) contains the ‘notwithstanding’ clause:
"Notwithstanding any other provisions of Section 8(f) to the contrary, no adjustment provided for in Section 8(f) shall result in a reduction of the Exercise Price to an amount less than $32.43 per Warrant Share (as appropriately adjusted for the occurrence of any events listed in [other anti-dilution clauses of Section 8])."
Section 8(f) and 8(h), very peculiarly, seem to contradict each other. 8(f) provided a formula to reduce the price that could never actually take effect because it was blocked by the floor price set by 8(h) which puzzling was equal to the original exercise price.
Defendant then took action that amounted to dilution and triggered section 8(f)… which was then blocked by section 8(h). Plaintiff sued for breach of contract.
Analysis
The issue seems to turn on the actual floor price. Plaintiffs alleged that the agreed upon floor price was $28.07, but that the defendants basically altered the contract unilaterally, to $32.43, after it was agreed to but before the plaintiffs received paper copies to sign.
The court first stated the applicable law. “Notwithstanding” is viewed as trumping language that overrides (or trumps) contrary language. Thus 8(h) operates to trump 8(f). Plaintiff, as a sophisticated investment corporation, is held to the contract that they signed, the thinking is that they should have actually read it!
However, all was not lost for plaintiff. The court refused to dismiss the complaint, because they did allege that a mistake was made (i.e. the switching of the prices by the defendant). Thus, during discovery, the plaintiff can attempt to find evidence that the parties actually agreed to the lower price in section 8(h).
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