Filed: Oct. 02, 2008
Latest Update: Mar. 02, 2020
Summary: 07-0050-cv Vacold LLC v. Cerami 1 UNITED STATES COURT OF APPEALS 2 FOR THE SECOND CIRCUIT 3 4 August Term 2007 5 6 7 (Argued: March 14, 2008 Decided: October 2, 2008) 8 9 Docket No. 07-0050-cv 10 11 _ 12 13 VACOLD LLC, IMMUNOTHERAPY, INC., 14 Plaintiffs-Appellants, 15 16 -v.- 17 18 ANTHONY CERAMI, CARLA CERAMI, VLN LLC 19 and CERAMI CONSULTING CORPORATION, 20 Defendants-Appellees. 21 _ 22 23 Before: B.D. PARKER, LIVINGSTON, Circuit Judges, and 24 HALL, District Judge.* 25 26 Former 50% sharehold
Summary: 07-0050-cv Vacold LLC v. Cerami 1 UNITED STATES COURT OF APPEALS 2 FOR THE SECOND CIRCUIT 3 4 August Term 2007 5 6 7 (Argued: March 14, 2008 Decided: October 2, 2008) 8 9 Docket No. 07-0050-cv 10 11 _ 12 13 VACOLD LLC, IMMUNOTHERAPY, INC., 14 Plaintiffs-Appellants, 15 16 -v.- 17 18 ANTHONY CERAMI, CARLA CERAMI, VLN LLC 19 and CERAMI CONSULTING CORPORATION, 20 Defendants-Appellees. 21 _ 22 23 Before: B.D. PARKER, LIVINGSTON, Circuit Judges, and 24 HALL, District Judge.* 25 26 Former 50% shareholde..
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07-0050-cv
Vacold LLC v. Cerami
1 UNITED STATES COURT OF APPEALS
2 FOR THE SECOND CIRCUIT
3
4 August Term 2007
5
6
7 (Argued: March 14, 2008 Decided: October 2, 2008)
8
9 Docket No. 07-0050-cv
10
11 _____________________________________
12
13 VACOLD LLC, IMMUNOTHERAPY, INC.,
14 Plaintiffs-Appellants,
15
16 -v.-
17
18 ANTHONY CERAMI, CARLA CERAMI, VLN LLC
19 and CERAMI CONSULTING CORPORATION,
20 Defendants-Appellees.
21 _____________________________________
22
23 Before: B.D. PARKER, LIVINGSTON, Circuit Judges, and
24 HALL, District Judge.*
25
26 Former 50% shareholder of Applied Vaccine Technologies, Inc. sued the
27 other 50% shareholder and its principals for securities fraud after the latter
28 purchased the former’s stock, allegedly omitting material facts in connection
29 with the purchase. The United States District Court for the Southern District
30 of New York, Richard M. Berman, J., granted partial summary judgment in
31 favor of the defendants, holding that the omission did not become material until
*
The Honorable Janet C. Hall, District Judge, United States District Court for the
District of Connecticut, sitting by designation.
1 after the parties had entered into an agreement committing them to the
2 purchase and sale, thereby terminating their disclose-or-abstain duty under
3 Rule 10b-5 of the Securities Exchange Act of 1934. The remaining claims were
4 resolved at trial. Plaintiffs appeal the grant of partial summary judgment, and
5 we affirm. Judge Hall dissents in a separate opinion.
6 FRANKLIN B. VELIE, Sullivan & Worcester LLP, New York,
7 NY (Eric J. Grannis, Law Offices of Eric J. Grannis, New
8 York, NY, on the brief), for Plaintiffs-Appellants.
9
10 MARK J. HYLAND (Jeffrey M. Dine, Ellen E. Lafferty, on the
11 brief), Seward & Kissel LLP, New York, NY, for Defendants-
12 Appellees.
13
14 LIVINGSTON, Circuit Judge:
15 Immunotherapy, Inc. and its successor in interest, Vacold LLC (together,
16 “Immunotherapy”), appeal from a judgment of the United States District Court
17 for the Southern District of New York (Richard M. Berman, J.) in favor of
18 Immunotherapy’s former business partner, Cerami Consulting Corporation
19 (“CCC”) and its affiliates, Anthony Cerami, Carla Cerami, and VLN LLC
20 (“VLN”), on claims of securities fraud and related state law causes of action.
21 Because we conclude that the parties’ agreement of April 9, 1999, constituted a
22 definitive agreement to buy and sell the stock described in that agreement, the
23 defendants were under no duty of disclosure after that date. See Radiation
24 Dynamics, Inc. v. Goldmuntz, 464 F.2d 876, 890-91 (2d Cir. 1972). We therefore
2
1 affirm.
2
3 BACKGROUND
4 In November 1997, CCC and Immunotherapy agreed to collaborate on
5 three biomedical research projects. One of the projects was the development of
6 a virtual lymph node — “a tiny tubular capsule . . . inserted under a patient’s
7 skin in order to trigger certain reactions in the patient’s immune system.”
8 Vacold LLC v. Cerami, No. 00 Civ. 4024 (AGS), 2001 WL 167704, at *1 n.1
9 (S.D.N.Y. Feb. 16. 2001). Their efforts proved fruitful. By October 1998, officers
10 of CCC and Immunotherapy had filed a patent application relating to virtual
11 lymph node technology, and CCC and Immunotherapy had formed a new entity,
12 later renamed Applied Vaccine Technologies, Inc. (“AVT”), to commercialize their
13 developments. CCC and Immunotherapy each received 50% of AVT’s 100,000
14 shares of stock. Mr. Cerami and Immunotherapy’s Chief Executive Officer, C.
15 Leonard Gordon, became co-chief executives of AVT, and Ms. Cerami became a
16 vice president of AVT.
17 Immunotherapy was a thinly capitalized startup that did not have enough
18 cash to survive as a going concern much past the end of 1998. While AVT was
19 trying to obtain financing or a development partner so it could independently
20 fund its operations and bring its product to market, Immunotherapy began to
3
1 think about how to wind up its operations and distribute its assets, including its
2 50,000 shares of AVT.
3 On October 16, 1998 — only eight days after AVT was capitalized —
4 Gordon wrote to Mr. Cerami that Immunotherapy was running out of money and
5 intended to liquidate by the end of 1998, inviting a discussion about how AVT
6 might assist Immunotherapy in its windup. Apparently dissatisfied with their
7 relationship, CCC did not wish to pursue joint development of the virtual lymph
8 node with Immunotherapy. Discussions between Immunotherapy and CCC over
9 the following two months therefore centered around the structure of what Ms.
10 Cerami referred to as the “divorce settlement” between Immunotherapy and
11 CCC. They discussed three “settlement” possibilities: (1) Immunotherapy might
12 purchase CCC’s AVT stock; (2) CCC might purchase Immunotherapy’s AVT
13 stock; and (3) some third party might acquire AVT. After the new year, they
14 began to pursue the second of these options in earnest.
15 On January 19, 1999, CCC sent to David Dove, Immunotherapy’s Chief
16 Operating Officer, a two-page letter labeled a “confidential summary of discus-
17 sions.” According to the letter, the parties contemplated that, by April 16, 1999,
18 a not-yet-in-existence subsidiary of CCC — referred to in the parties’ correspon-
19 dence as NewCo, which ultimately became defendant VLN — would purchase
20 Immunotherapy’s AVT stock for $1 million plus an ongoing royalty based on the
4
1 proceeds from sales of virtual lymph node products and license fees derived from
2 the virtual lymph node technology. The proposal was expressly conditioned upon
3 CCC’s obtaining financing at terms acceptable to CCC. Additionally, the parties
4 stated their expectation that they would prepare, negotiate, and execute a
5 definitive purchase agreement reflecting the above terms and also containing
6 “customary” representations, warranties, conditions, and covenants. The letter
7 concluded with the following statement, printed in boldfaced text:
8 The understandings contained herein do not constitute
9 a binding agreement among the parties hereto but
10 merely express a confidential summary of the current
11 discussions with respect to the Transaction, and the
12 understandings contained herein shall only become
13 binding when definitive agreements are executed.
14 Over the next few weeks, CCC, Immunotherapy, and their attorneys
15 exchanged less-than-cordial letters regarding the January 19 proposal.
16 Immunotherapy objected principally to the financing condition, which, in its
17 view, gave CCC too much optionality in that its obligation to purchase was
18 conditioned on its ability to obtain financing that it deemed suitable, with no
19 consequences to flow from its failure to go forward. A new draft of the divorce
20 settlement, which emerged on February 3, attempted to address this concern.
21 This draft, a three-page letter described as setting forth “on a confidential basis
22 . . . the terms which [CCC] and [Immunotherapy] ha[d] been discussing,”
23 provided for the same purchase price of $1 million plus ongoing royalties. It
5
1 added a minimum annual royalty of $50,000. It also stated that if CCC were
2 unable to obtain financing for the purchase price by May 1, the parties “agree[d]
3 to divide each area of use of the [virtual lymph node] technology between them
4 in a fair and equitable manner.” The letter concluded with the same boldface
5 disclaimer of the letter’s nonbinding nature as appeared in the January 19 draft.
6 Finally, the letter bore a signature block in which Immunotherapy could — but
7 did not — indicate its acceptance and agreement.
8 The parties again exchanged comments, this time more congenially,
9 principally regarding the minimum royalty obligation and the division of the
10 virtual lymph node technology should CCC be unable to obtain financing. In
11 particular, Dove asked for greater specificity in the procedure by which CCC and
12 Immunotherapy would divide the use of the technology should CCC fail to
13 purchase Immunotherapy’s AVT stock. Dove’s letter insisted that the division
14 of the technology “be decided upon now as part of this agreement,” “become
15 effective upon expiration” of CCC’s deadline for obtaining financing, and “be
16 binding as to [CCC’s] making efforts to finance, and as to . . . the plan [for
17 dividing the technology] if [CCC] fails to purchase [the] AVT interests.”
18 A more elaborate draft followed on March 16. This one, four pages in
19 length and again styled a “confidential summary of discussions,” set forth a
20 mechanism through which CCC and Immunotherapy would divide the market
6
1 if CCC could not finance its purchase: with Immunotherapy picking first, the
2 parties would alternate choosing from eight enumerated market segments until
3 each claimed three, and each party would agree not to compete in the other’s
4 three segments but could enter any other segment. This draft also altered the
5 date by which CCC had to obtain financing, specifying that if CCC were unable
6 to obtain financing for the purchase price by April 1 — a deadline that would be
7 extended to May 1 if an investor promised CCC by April 1 that it would provide
8 financing — “then the parties . . . agree[d] to divide each area of use as provided
9 in th[e] letter.” The draft did not contain the boldfaced disclaimer language that
10 the previous drafts contained, but like the February 3 draft, it bore a signature
11 block that was left unsigned.
12 The negotiations began to pick up speed. CCC and Immunotherapy
13 exchanged fourth and fifth drafts — each after only brief comments — on March
14 22 and March 31, respectively. Each was again labeled a “confidential summary
15 of discussions,” each again bore a signature block, and as before, Immunotherapy
16 did not sign either one. These drafts also made clear that the arrangement by
17 which CCC and Immunotherapy would divide the market for the virtual lymph
18 node would not be triggered if the parties’ failure to consummate the transaction
19 was occasioned by Immunotherapy’s “refusal to comply with the provisions” of
20 the agreement. After the fifth draft, Dove sent back what he referred to as “only
7
1 a few minor changes,” including an instruction to change the opening paragraph
2 of the letter so that it was styled a “letter agreement” rather than a “summary
3 of discussions.” On April 9, CCC sent back a new draft, which had grown to six
4 pages, that included this change. Gordon signed this letter agreement, which
5 we reprint as an appendix to this opinion, on behalf of Immunotherapy. He
6 dated it April 9, and he sent two copies to CCC’s attorney with a request that he
7 have both copies fully executed.
8 Paragraph 3 of the April 9 agreement stated, in accord with the previous
9 drafts, that the transaction was expressly conditioned upon CCC’s obtaining
10 financing. It expressly forbade CCC from securing this financing from Coulter
11 Pharmaceutical Corporation, with which Immunotherapy had prior dealings.
12 Aside from this prohibition, however, the agreement imposed no restriction on
13 the potential sources to which CCC might turn for financing, nor did it require
14 that CCC identify the nature or source of any financing it secured.
15 Paragraph 4 of the April 9 agreement stated, as had all the previous
16 drafts, that CCC and Immunotherapy planned to prepare, negotiate, and
17 execute, “in connection with the acquisition of the shares,” a “standard” stock
18 purchase agreement containing various representations, warranties, and closing
19 conditions, and obtain two related legal opinions. These documents were
20 prepared between April 9 and June 1. The parties executed the stock purchase
8
1 agreement, exactly as contemplated by paragraph 4 of the April 9 agreement, on
2 June 1 — the day the stock transfer occurred. In the stock purchase agreement,
3 Immunotherapy made the following representations, all of which were qualified
4 by its knowledge, with respect to AVT: (1) its AVT shares were validly issued
5 and free of encumbrances; (2) AVT had no outstanding equity interests other
6 than its 100,000 shares of stock; (3) AVT did not have undisclosed liabilities that
7 would have a material adverse effect, as defined in the agreement; (4) AVT had
8 not suffered a material adverse effect; (5) AVT’s business was not being
9 conducted in violation of law to any material extent; and (6) AVT had clear title
10 to its patent application and was not infringing or allegedly infringing any third-
11 party proprietary rights. For its part, CCC represented to Immunotherapy that,
12 to its knowledge, AVT did not have any undisclosed liabilities that would have
13 a material adverse effect and had not otherwise suffered a material adverse
14 effect. CCC made no other representations with respect to AVT.1
15 Paragraph 5 of the April 9 agreement further provided that a document
1
The June 1 agreement thus did not include a so-called “full disclosure representation”
or “10b-5 representation,” according to which the parties represented to each other — on pain
of post-closing indemnification for breach — that neither of them had made any misstatement
or omission of material fact in connection with the stock purchase, with respect to AVT’s
business, or otherwise. Also absent was the obverse, a so-called “nonreliance clause,” accord-
ing to which the parties disclaimed reliance on any information not explicitly represented in
or incorporated into the purchase agreement. See generally Mark Betzen & Richard Meamber,
Rule 10b-5 and Related Considerations in Acquisition Agreements, Metropolitan Corp. Couns.,
Aug. 2004, at 10, available at http://www.metrocorpcounsel.com/pdf/2004/August/10.pdf (dis-
cussing 10b-5 representations, nonreliance clauses, and other aspects of the interplay between
acquisition agreements and Rule 10b-5).
9
1 would be “prepared, negotiated and executed” at closing, specifying arrange-
2 ments for the transfer of technology between Immunotherapy and NewCo, the
3 not-yet-in-existence CCC subsidiary that came to be known as VLN. This
4 closing document was to contain specific provisions requiring, in substance, that
5 Immunotherapy transfer the virtual lymph node technology to NewCo, Immuno-
6 therapy’s principal employees consult for NewCo, and NewCo and Immuno-
7 therapy keep each other’s proprietary information in confidence and not solicit
8 each other’s employees. In exchange, NewCo was to pay the agreed-upon royalty
9 to Immunotherapy: 1.5% of the net sales of all virtual lymph node products plus
10 8.5% of the net proceeds of any license, joint venture, or similar arrangement
11 concerning the virtual lymph node, subject to a minimum annual royalty of
12 $50,000 for ten years. On June 1, the parties executed this agreement — again,
13 exactly as contemplated in the April 9 agreement.
14 This dispute began the year following the purchase and sale of the AVT
15 stock. Pursuant to the arrangement the parties had made for ongoing royalty
16 payments, Immunotherapy had the right to inspect VLN’s records to ensure that
17 VLN complied with its obligation to pay royalties. Immunotherapy exercised its
18 inspection right in early 2000 and did not like what it found. It learned that on
19 June 1, 1999, AVT had entered into a development, licensing, and financing
20 agreement with a subsidiary of leading pharmaceutical company Johnson &
10
1 Johnson. Pursuant to this agreement, VLN and AVT immediately received $3
2 million in fees, $1 million of which was used to fund CCC’s purchase of
3 Immunotherapy’s AVT stock. The agreement also provided that VLN and AVT
4 would receive $2 million in research funding over the following two years, up to
5 $13 million in payments for achieving certain product development milestones,
6 and the potential for large royalties based upon the future sales of virtual lymph
7 node products.
8 Perhaps regretting that it had sold its stock for only $1 million, Immuno-
9 therapy sued CCC, VLN, and the Ceramis in the United States District Court
10 for the Southern District of New York for securities fraud. The gravamen of
11 Immunotherapy’s claim was that the defendants violated section 10(b) of the
12 Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78j(b), and
13 Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, by purchasing AVT
14 stock from Immunotherapy on June 1 without disclosing the deal with Johnson
15 & Johnson’s subsidiary. Immunotherapy also alleged that essentially the same
16 conduct gave rise to liability on theories of common law fraud, negligent
17 misrepresentation, breach of fiduciary duty, unjust enrichment, prima facie tort,
18 and controlling person liability under section 20(a) of the Exchange Act, 15
19 U.S.C. § 78t(a).
20 In its initial pleading, Immunotherapy expressly affirmed that the parties
11
1 “reached an agreement, memorialized in a letter dated April 9, 1999,” that a
2 subsidiary of CCC would acquire Immunotherapy’s AVT stock for “$1 million
3 plus ongoing royalties of 1.5% on the sale of Virtual Lymph Node products and
4 8.5% of net proceeds from any licensee, sublicensee or joint venture for the
5 Virtual Lymph Node Technology.” (Compl. ¶ 23.) The late Judge Schwartz, who
6 presided over the case until his death in 2003, granted the defendants’ motion
7 to dismiss without prejudice, holding that the April 9 letter agreement bound the
8 parties to purchase and sell the AVT stock, thereby precluding a Rule 10b-5
9 claim based on a failure to disclose material information allegedly occurring
10 after April 9. Vacold LLC v. Cerami, No. 00 Civ. 4024 (AGS), 2002 WL 193157
11 (S.D.N.Y. Feb. 7, 2002); see also Vacold LLC v. Cerami, No. 00 Civ. 4024 (AGS),
12
2002 WL 442240 (S.D.N.Y. Mar. 5, 2002) (amending the order of dismissal).
13 Immunotherapy then amended its complaint to allege violations of section
14 10(b) and Rule 10b-5 in connection with both the April 9 letter agreement and
15 the June 1 stock purchase agreement. First, it alleged that the defendants
16 omitted a material fact in connection with their purchase on April 9 by failing
17 to disclose the substance and progress of their negotiations with Johnson &
18 Johnson occurring before April 9. Second, it alleged for the first time that the
19 April 9 agreement did not bind the parties to purchase and sell the stock, so that
20 the defendants were obliged to disclose material facts arising thereafter. The
12
1 amended complaint alleged that the defendants omitted a material fact in
2 connection with their purchase, which closed on or after June 1, by failing to
3 disclose the deal with Johnson & Johnson’s subsidiary, as well as all other
4 material facts concerning the Johnson & Johnson deal arising before the
5 purchase closed.
6 The parties cross-moved for summary judgment. Judge Berman, to whom
7 the case had by then been transferred, granted summary judgment to the
8 defendants on the claims alleging securities fraud in connection with the June
9 1 stock purchase agreement. Specifically, he concluded that Judge Schwartz’s
10 prior order, which was binding in accordance with the law-of-the-case doctrine,
11 had decided that because the April 9 agreement bound the parties to purchase
12 and sell the AVT stock, the defendants were liable either in connection with the
13 April 9 agreement or not at all. With respect to the April 9 agreement, however,
14 he found a triable issue, namely, whether the defendants’ failure to disclose the
15 state of negotiations with Johnson & Johnson prior to April 9, when the parties
16 entered into the agreement, was a material omission. The parties tried the
17 surviving claims before a jury, which found for the defendants. Immunotherapy
18 now appeals, seeking reversal of the district court’s decision that the April 9
19 letter agreement was a binding preliminary agreement that obligated the parties
20 to purchase and sell the AVT stock.
13
1
2 DISCUSSION
3 We review a grant of summary judgment de novo, construing the evidence
4 in the light most favorable to the nonmovant and drawing all reasonable factual
5 inferences in the nonmovant’s favor. Summary judgment is appropriate only if
6 there is no genuine issue of material fact and the moving party is entitled to a
7 judgment as a matter of law. Allianz Ins. Co. v. Lerner, 416 F.3d 109, 113 (2d
8 Cir. 2005).
9 Section 10(b) of the Exchange Act makes unlawful the “use or
10 employ[ment], in connection with the purchase or sale of any security . . . , any
11 manipulative or deceptive device or contrivance in contravention of such rules
12 and regulations as the [SEC] may prescribe as necessary or appropriate.” 15
13 U.S.C. § 78j(b). Rule 10b-5, which implements section 10(b), provides as follows:
14 It shall be unlawful for any person, directly or indi-
15 rectly, by the use of any means or instrumentality of
16 interstate commerce, or of the mails or of any facility of
17 any national securities exchange,
18 (a) To employ any device, scheme, or artifice to defraud,
19 (b) To make any untrue statement of a material fact or
20 to omit to state a material fact necessary in order to
21 make the statements made, in the light of the
22 circumstances under which they were made, not
23 misleading, or
24 (c) To engage in any act, practice, or course of business
25 which operates or would operate as a fraud or deceit
14
1 upon any person,
2 in connection with the purchase or sale of any security.
3 17 C.F.R. § 240.10b-5.
4 To prevail in a Rule 10b-5 action based on subsection (b), a plaintiff must
5 prove that “in connection with the purchase or sale of securities, the defendant,
6 acting with scienter, made a false material representation or omitted to disclose
7 material information and that plaintiff’s reliance on defendant’s action caused
8 [plaintiff] injury.” Press v. Chem. Inv. Servs. Corp., 166 F.3d 529, 534 (2d Cir.
9 1999) (alteration in original) (quoting ZVI Trading Corp. Employees’ Money
10 Purchase Pension Plan & Trust v. Ross (In re Time Warner Inc. Sec. Litig.), 9
11 F.3d 259, 264 (2d Cir. 1993)).
12 However, one who buys securities is not required to disclose material
13 information “merely because a reasonable [seller] would very much like to know
14 [it].” ZVI
Trading, 9 F.3d at 267. “Rather, an omission is actionable under the
15 securities laws only when the [buyer] is subject to a duty to disclose the omitted
16 facts.”
Id. This duty is known as the disclose-or-abstain duty because it refers
17 to the rule that “one with a fiduciary or similar duty to hold material nonpublic
18 information in confidence must either ‘disclose or abstain’ with regard to
19 trading.” United States v. Teicher,
987 F.2d 112, 120 (2d Cir. 1993) (citing
20 Chiarella v. United States,
445 U.S. 222, 227 (1980)); see also SEC v. Tex. Gulf
15
1 Sulphur Co., 401 F.2d 833, 848 (2d Cir. 1968) (en banc) (“[A]nyone in possession
2 of material inside information must either disclose it . . . , or, if he is disabled
3 from disclosing it in order to protect a corporate confidence, or he chooses not to
4 do so, must abstain from trading in . . . the securities concerned while such
5 inside information remains undisclosed.”). The issue raised in this appeal is
6 whether the Ceramis were subject to the disclose-or-abstain duty with respect
7 to events that transpired between April 9, 1999, and June 1, 1999.
8 When an investor in a publicly traded stock places an order to buy or sell
9 stock, the trade is generally executed within moments, leaving no lapse of time
10 between the parties’ commitment and the transaction’s execution. See, e.g.,
11 Radiation
Dynamics, 464 F.2d at 890. But when the parties promise to execute
12 a transaction long before they actually execute it, the question arises: for
13 purposes of Rule 10b-5, did the “purchase or sale” occur when the parties
14 committed to execute the transaction, or did it occur when one party tendered its
15 securities and the other its money? In Radiation Dynamics, we determined that
16 the answer is the former. The “‘purchase or sale’ of securities within the
17 meaning of Rule 10b-5 is to be determined as the time when the parties to the
18 transaction are committed to one another,” even if the exchange of money and
19 shares happens at a later time.
Id. at 891. This rule holds even if the later
20 exchange of money and securities is contingent upon the occurrence of future
16
1 events, such as the satisfaction of a financing condition, at least when the contin-
2 gency is not so unlikely that it renders the stock transaction extremely
3 speculative. See Yoder v. Orthomolecular Nutrition Inst., Inc., 751 F.2d 555, 559
4 & n.4 (2d Cir. 1985).
5 Thus, if the April 9 agreement bound the parties to purchase and sell the
6 AVT stock, then the Ceramis cannot be liable under Rule 10b-5 for having failed
7 to disclose material information on June 1 because they had no disclose-or-
8 abstain duty after April 9 — regardless of whether the ultimate closing of the
9 transaction was subject to a future contingency. If the parties did not become
10 committed to one another until June, however, then CCC and the Ceramis can
11 potentially be held liable on the basis of their failure to disclose material facts
12 that they knew on June 1. Therefore, the dispositive question, to which we now
13 turn, is whether the April 9 agreement created a binding obligation.
14
15 I. Preliminary Matters
16 A. Waiver
17 The Ceramis argue that the following release clause in the June 1 stock
18 purchase agreement bars Immunotherapy from asserting its Rule 10b-5 claim:
19 Subject to the occurrence of the Closing, [Immuno-
20 therapy] hereby waives and discharges any claims it
21 may have against [AVT] or against [CCC or VLN] as of
22 the Closing Date, other than those arising pursuant to
17
1 this Agreement or the [technology transfer agreement]
2 or pursuant to any document contemplated by this
3 Agreement to be delivered by [AVT, CCC, or VLN].
4 We disagree. In at least some contexts, we have given effect to nonreliance
5 clauses that limit the scope of the representations or omissions that can form the
6 basis for a Rule 10b-5 claim. But we do not give effect to contractual language,
7 such as the language here, purporting to be a general waiver or release of Rule
8 10b-5 liability altogether. See Exchange Act § 29(a), 15 U.S.C. § 78cc(a) (“Any
9 condition, stipulation, or provision binding any person to waive compliance with
10 any provision of this chapter or of any rule or regulation thereunder, or of any
11 rule of an exchange required thereby shall be void.”); Harsco Corp. v. Segui, 91
12 F.3d 337, 343-44 (2d Cir. 1996); Citibank, N.A. v. Itochu Int’l Inc., No. 01 Civ.
13 6007 (GBD),
2003 WL 1797847, at *2-3 (S.D.N.Y. Apr. 4, 2003). Accordingly,
14 Immunotherapy has not waived its claim.
15 B. Law Applicable to Contract Interpretation
16 The April 9 agreement lacks a choice-of-law clause. The district court
17 assumed, without objection from the parties, that New York law governed the
18 agreement’s interpretation. We do the same. See Schwimmer v. Allstate Ins.
19 Co.,
176 F.3d 648, 650 (2d Cir. 1999) (finding the choice-of-law issue waived
20 when the defendant “fail[ed] to bring to the attention of the district court the
21 potential applicability of [another jurisdiction’s] law”); cf. Schiavone v. Pearce,
18
1 79 F.3d 248, 252 (2d Cir. 1996) (“A purchase agreement entered into in New
2 York, with closing contemplated in New York, is to be interpreted under New
3 York law.”).
4 C. Appropriateness of Summary Judgment
5 We next turn to the question whether this case presents genuine issues of
6 material fact that would render summary judgment improper. Immunotherapy
7 argues that the April 9 agreement is susceptible of multiple interpretations and
8 that a jury should decide which interpretation the parties intended. We
9 disagree.
10 Under New York law, whether a binding agreement exists is a legal issue,
11 not a factual one. Shann v. Dunk,
84 F.3d 73, 77 (2d Cir. 1996); Ronan Assocs.,
12 Inc. v. Local 94-94A-94B, Int’l Union of Operating Eng’rs,
24 F.3d 447, 449 (2d
13 Cir. 1994). This case does not present disputes about whether particular
14 communications were sent, whether particular words were uttered, or whether
15 the parties entered into prior oral agreements. None of the facts is disputed, and
16 nothing remains for a jury to resolve. The dispute, instead, is about the legal
17 significance of those facts.
18 Immunotherapy cites Crellin Technologies, Inc. v. Equipmentlease Corp.,
19
18 F.3d 1 (1st Cir. 1994), for the proposition that “so long as the evidence does
20 not point unerringly in a single direction but is capable of supporting conflicting
19
1 inferences, the question of whether a contract has been formed . . . is a question
2 of fact.” Id. at 7. Although this proposition is true, it is subject to a qualifica-
3 tion. Specifically, “where ‘the evidentiary foundation for determining the
4 formation of the parties’ contract [is] either undisputed or consist[s] of writings,’
5 contract formation is . . . a question of law.” TLT Constr. Corp. v. RI, Inc., 484
6 F.3d 130, 135 (1st Cir. 2007) (alterations in original) (quoting Lambert v. Kysar,
7
983 F.2d 1110, 1114 n.4 (1st Cir. 1993)). Here, of course, the evidentiary
8 foundation consists entirely of writings. The exception that TLT Construction
9 describes is on all fours with the present case. Summary judgment is therefore
10 appropriate. See Arcadian Phosphates, Inc. v. Arcadian Corp.,
884 F.2d 69, 73
11 (2d Cir. 1989) (“Where ‘a question of intention is determinable by written
12 agreements, the question is one of the law, appropriately decided . . . on a motion
13 for summary judgment.’” (omission in original) (quoting Mallad Constr. Corp.
14 v. County Fed. Sav. & Loan Ass’n,
32 N.Y.2d 285, 291,
298 N.E.2d 96, 100, 344
15 N.Y.S.2d 925, 930 (1973))); cf. TLT
Constr., 484 F.3d at 135-36 (“[W]ith faxes,
16 phone discussions, and multiple draft contracts going back and forth over nearly
17 eight months, it is worth taking a step back to recall that ‘[t]here is no surer way
18 to find out what parties meant, than to see what they have done.’” (second
19 alteration in original) (quoting Pittsfield & N. Adams R.R. Corp. v. Boston &
20 Albany R.R. Co.,
260 Mass. 390, 398,
157 N.E. 611, 614 (1927))).
20
1 II. The April 9 Agreement
2 By its plain terms, the April 9 agreement contemplates the preparation
3 and execution of additional documentation, namely, a stock purchase agreement
4 and a technology transfer agreement. The April 9 agreement therefore belongs
5 to a class of agreements known as “preliminary agreements, which . . . provide
6 for the execution of more formal agreements.” Adjustrite Sys., Inc. v. GAB Bus.
7 Servs., Inc., 145 F.3d 543, 547 (2d Cir. 1998). Under New York law, “[o]rdinar-
8 ily, where the parties contemplate further negotiations and the execution of a
9 formal instrument, a preliminary agreement does not create a binding contract.”
10
Id. at 548; see also
Shann, 84 F.3d at 77 (“Ordinarily, preliminary manifesta-
11 tions of assent that require further negotiation and further contracts do not
12 create binding obligations.”). “In some circumstances, however, preliminary
13 agreements can create binding obligations.”
Adjustrite, 145 F.3d at 548; see also
14
Shann, 84 F.3d at 77 (“[I]f a preliminary agreement clearly manifests such
15 intention, it can create binding obligations.”). The questions for us, then, are: (1)
16 whether the April 9 agreement created binding obligations; and (2) if so, whether
17 those obligations included a commitment to buy and sell the AVT stock, thereby
18 terminating CCC’s disclose-or-abstain duty on April 9. We conclude, for the
19 reasons set forth below, that the answer to both questions is “yes.”
21
1 A. Was the April 9 Agreement Legally Binding?
2 “[B]inding preliminary agreements fall into one of two categories.”
3 Adjustrite, 145 F.3d at 548. Agreements within the first category are type I
4 preliminary agreements — “fully binding preliminary agreement[s], which [are]
5 created when the parties agree on all the points that require negotiation
6 (including whether to be bound) but agree to memorialize their agreement in a
7 more formal document.” Id.; see also
Shann, 84 F.3d at 77 (“Type I is where all
8 essential terms have been agreed upon in the preliminary contract, no disputed
9 issues are perceived to remain, and a further contract is envisioned primarily to
10 satisfy formalities.”). Agreements of this type render the parties “fully bound to
11 carry out the terms of the agreement even if the formal instrument is never
12 executed.”
Adjustrite, 145 F.3d at 548. Agreements within the second category
13 are type II preliminary agreements — “‘binding preliminary commitment[s]’”
14 that are “binding only to a certain degree” because “the parties agree on certain
15 major terms, but leave other terms open for further negotiation.” Id.; see also
16
Shann, 84 F.3d at 77 (“Type II is where the parties recognize the existence of
17 open terms, even major ones, but, having agreed on certain important terms,
18 agree to bind themselves to negotiate in good faith to work out the terms
19 remaining open.”). These agreements “do[] not commit the parties to their
20 ultimate contractual objective.”
Adjustrite, 145 F.3d at 548 (quoting Teachers
22
1 Ins. & Annuity Ass’n of Am. v. Tribune Co., 670 F. Supp. 491, 498 (S.D.N.Y.
2 1987) (Leval, J.)) (internal quotation mark omitted). Rather, they bind the
3 parties “to the obligation to negotiate the open issues in good faith in an attempt
4 to reach the . . . objective within the agreed framework.”
Id. (quoting Tribune,
5 670 F. Supp. at 498) (internal quotation mark omitted). If the parties “fail to
6 reach such a final agreement after making a good faith effort to do so, there is
7 no further obligation.”
Id.
8 The April 9 agreement bound the parties to purchase and sell the AVT
9 stock, thus obviating any duty of disclosure on the part of CCC after April 9, if
10 it constituted a type I agreement, but not if it constituted a type II arrangement
11 or was, in the alternative, not binding in any respect. We have identified four
12 factors to analyze when considering whether an agreement is a type I prelimi-
13 nary agreement, and five factors to analyze when considering whether an
14 agreement is a type II preliminary agreement.2 Some of the factors from the two
15 sets are neither relevant nor helpful in the present context. For example, one
2
When considering whether an agreement is a type I preliminary agreement, we
analyze: (i) “whether there is an expressed reservation of the right not to be bound in the
absence of a writing”; (ii) “whether there has been partial performance of the contract”; (iii)
“whether all of the terms of the alleged contract have been agreed upon”; and (iv) “whether the
agreement at issue is the type of contract that is usually committed to writing.” Brown v.
Cara, 420 F.3d 148, 154 (2d Cir. 2005). And when considering whether an agreement is a type
II preliminary agreement, we analyze: (i) “whether the intent to be bound is revealed by the
language of the agreement”; (ii) “the context of the negotiations”; (iii) “the existence of open
terms”; (iv) “partial performance”; and (v) “the necessity of putting the agreement in final
form, as indicated by the customary form of such transactions.” Id. at 157.
23
1 factor common to both sets — whether the parties have partially performed the
2 agreement, evidencing after the fact their intention to be bound at the time of
3 the alleged agreement — needs no extended discussion here because the record
4 clearly shows that both parties fully executed their obligations under the April
5 9 agreement. Similarly, whether the agreement is of the type usually reduced
6 to writing, another factor common to both sets, does not aid our analysis because
7 we cannot discern what is usual in this context. Although a “million-dollar
8 acquisition” involving the purchase of business assets “ordinarily would be
9 committed . . . to a formal contract complete with representations and
10 warranties and the other standard provisions usually found in sophisticated,
11 formal contracts,” Adjustrite, 145 F.3d at 551, this case does not involve the
12 ordinary situation in which an outside investor acquires stock in, or acquires the
13 business of, another entity. Rather, the Ceramis, who were already insiders and
14 affiliates of AVT, acquired the stock of AVT that they did not already own from
15 Immunotherapy, another affiliate, which retained no continuing ownership
16 interest. In this context, and based on the record before us, this factor is of little
17 help.
18 As for the other factors, some duplicate or overlap with each other, and we
19 therefore address both type I and type II agreements in the same discussion. In
20 doing so, we remain mindful that these factors help us identify categories of facts
24
1 that are often useful in resolving disputes of this sort, but they do not provide us
2 with a talismanic scorecard. The ultimate issue, as always, “is the intent of the
3 parties: whether the parties intended to be bound, and if so, to what extent.” Id.
4 at 548-49.
5 1. The Language of the Agreement
6 We begin, as we usually do, with the language of the agreement. In
7 particular, we ask whether the agreement expressly states that the parties will
8 not be bound in the absence of a further, definitive written instrument. See
9 Brown v. Cara,
420 F.3d 148, 154 (2d Cir. 2005);
Adjustrite, 145 F.3d at 549. We
10 find no such reservation here. The April 9 agreement is six pages long and titled
11 a “letter agreement.” It is not a proposal, a draft, an expression of desires, or a
12 memorandum of understanding. Cf.
Brown, 420 F.3d at 154 (two-page
13 “memorandum of understanding” held not to be a type I preliminary agreement);
14
Adjustrite, 145 F.3d at 549 (two-page “proposal” that stated “desires” held
15 nonbinding); Winston v. Mediafare Entm’t Corp.,
777 F.2d 78, 81 (2d Cir. 1985)
16 (“proposed agreement” held nonbinding). Neither did the April 9 agreement
17 speak in “decidedly non-committal” language “suggesting, at most, a promise to
18 ‘work together.’”
Brown, 420 F.3d at 154. Rather, it specified, in considerable
19 detail, the performance that it required of each party. Just as importantly, it
20 specified in equal detail what would become of the virtual lymph node technology
25
1 if CCC were unable to obtain financing by May 1, and thus unable to purchase
2 Immunotherapy’s stock on June 1.
3 Immunotherapy asks us to place great weight on the fact that the
4 agreement reads, “[s]ubject to the terms and conditions hereof, it is presently
5 contemplated that [CCC] would purchase the 50,000 shares . . . for an aggregate
6 purchase price of $1,000,000,” rather than, for example, “it is agreed” that CCC
7 would do so, subject to financing. In Immunotherapy’s view, the words
8 “presently contemplated” clearly manifest the parties’ intent not to be bound.
9 We disagree. To be sure, “a manifestation of intention that a promise shall not
10 affect legal relations may prevent the formation of a contract.” Restatement
11 (Second) of Contracts § 21 (1981). The phrase “presently contemplate,” however,
12 is not such a manifestation. Cf. id. § 21 cmt. b, illus. 3-4 (statements that an
13 instrument “‘constitutes no contract,’” “‘confers no legal right,’” or “is not to be
14 a legal agreement or subject to legal jurisdiction in the law courts” negate
15 binding obligations). Every contract that calls for future performance contem-
16 plates that performance, and every such contract speaks of the parties’ present
17 intentions at the time they enter into it. In this context, it is clear that
18 “contemplate” means “anticipate doing or performing,” “plan on,” and “intend”
19 — not “view mentally with continued thoughtfulness” or “muse or ponder about.”
20 Webster’s Third New International Dictionary 491 (2002).
26
1 Even a brief survey of publicly available transaction agreements confirms
2 the ubiquitous use of phrases such as “transaction contemplated by this Agree-
3 ment” in written instruments of sale and acquisition. See, e.g., Millennium
4 Pharms., Inc., Current Report (Form 8-K) ex. 2.1 (Apr. 10, 2008), available at
5 http://www.sec.gov/Archives/edgar/data/1002637/000104746908004416/a2184
6 684zex-2_1.htm (“transactions contemplated by this Agreement,” “transactions
7 contemplated hereby,” and similar phrases used twenty-two times in Takeda
8 Pharmaceutical’s agreement to acquire Millennium Pharmaceuticals); Bear
9 Stearns Cos., Current Report (Form 8-K) ex. 2.1 (Mar. 20, 2008), available at
10 http://www.sec.gov/Archives/edgar/data/19617/000089882208000301/mergera
11 greement2.htm (sixty times in JPMorgan Chase’s agreement to acquire Bear
12 Stearns); Int’l Paper Co., Current Report (Form 8-K) ex. 10.1 (Mar. 24, 2008),
13 available at http://www.sec.gov/Archives/edgar/data/51434/000119312508061570
14 /dex101.htm (thirty-one times in International Paper’s agreement to purchase
15 several businesses from Weyerhaeuser Co.); ChoicePoint Inc., Current Report
16 (Form 8-K) ex. 2.1 (Feb. 22, 2008), available at http://www.sec.gov/Archives/edga
17 r/data/1040596/000119312508035585/dex21.htm (sixty-three times in Reed
18 Elsevier Group PLC’s agreement to acquire ChoicePoint); Countrywide Fin.
19 Corp., Current Report (Form 8-K) ex. 2.1 (Jan. 17, 2008), available at
20 http://www.sec.gov/Archives/edgar/data/25191/000089882208000107/exhibit2
27
1 1.htm (sixty-eight times in Bank of America’s agreement to acquire Country-
2 wide). We have no reason to think here that the parties intended to deviate from
3 this established usage.
4 We note, in addition, that courts also have had occasion to use the term
5 “contemplate” to describe the future performance called for under a binding
6 contract. For example, the doctrine of anticipatory breach allows a contracting
7 party to sue before performance is due if the other party repudiates its
8 contractual duties. N.Y. U.C.C. § 2-610; Norcon Power Partners, L.P. v. Niagara
9 Mohawk Power Corp., 92 N.Y.2d 458, 462-63,
705 N.E.2d 656, 659,
682 N.Y.S.2d
10 664, 667 (1998). New York courts have described this doctrine as “applicable to
11 bilateral contracts which contemplate some future performance.” Am. List Corp.
12 v. U.S. News & World Report, Inc.,
75 N.Y.2d 38, 44,
549 N.E.2d 1161, 1164, 550
13 N.Y.S.2d 590, 593 (1989) (emphasis added); accord Gardiner Int’l, Inc. v. J.W.
14 Townsend & Assocs., Inc.,
13 A.D.3d 246, 247,
788 N.Y.S.2d 312, 314 (2004)
15 (emphasis added). If “contemplate” were a magic word that signaled the lack of
16 a binding obligation, then a party could not invoke the doctrine of anticipatory
17 breach on the basis of contemplated performance. One cannot sue based on a
18 repudiation of performance that is not, in fact, required.
19 Our conclusion draws considerable support from the April 9 agreement’s
20 drafting history, which we are both permitted and required to consider. See
28
1 Winston, 777 F.2d at 80-81 (in “determin[ing] whether the parties intended to
2 be bound,” we consider “‘correspondence [and] other preliminary or partially
3 complete writings’” (quoting Restatement (Second) of Contracts § 27 cmt. c));
4 Brown Bros. Elec. Contractors, Inc. v. Beam Constr. Corp.,
41 N.Y.2d 397, 399-
5 400,
361 N.E.2d 999, 1001,
393 N.Y.S.2d 350, 351-52 (1977); Morgan Servs., Inc.
6 v. Abrams,
21 A.D.3d 1284, 1285,
801 N.Y.S.2d 457, 457-58 (2005). The April 9
7 agreement was styled a “letter agreement,” whereas all five previous drafts were
8 styled a “summary of discussions” or the like. The April 9 agreement was signed
9 by Immunotherapy’s chairman, whereas all five previous drafts were not. The
10 April 9 agreement was not followed by any further back-and-forth, whereas all
11 five previous drafts were soon followed by further negotiations. Moreover, the
12 early drafts expressly and conspicuously stated that they were not intended to
13 be binding, but this language is absent from the April 9 agreement. Immuno-
14 therapy asks us to consider the “presently contemplated” language in a vacuum,
15 but this is not how we are to view it. Rather, we look at this language and the
16 April 9 agreement as a whole, in light of the totality of the circumstances, which
17 includes the five prior drafts. See Brown
Bros., 41 N.Y.2d at 399-400,
361
18 N.E.2d at 1001, 393 N.Y.S.2d at 352 (“In determining whether the parties
19 entered into a contractual agreement . . . disproportionate emphasis is not to be
20 put on any single act, phrase or other expression, but, instead, on the totality of
29
1 all of these, given the attendant circumstances . . . .”). Considering all this, we
2 find it inescapable that the parties meant for the April 9 agreement to be not a
3 summary of discussions, but a binding expression of their intent with regard to
4 the transfer of Immunotherapy’s AVT stock.
5 2. Context of the Negotiations
6 The second factor here, the context of the negotiations, is helpful in
7 distinguishing type II agreements from the fully binding commitments that
8 constitute type I arrangements. An agreement is likely to be a type II prelimi-
9 nary agreement, and not a fully binding type I preliminary agreement, when it
10 is “subject to numerous contingencies that ha[ve] the potential to dramatically
11 affect planning, execution, and management” of the ultimate contractual
12 objective. Brown, 420 F.3d at 158; see also
Tribune, 670 F. Supp. at 500-01.
13 Parties enter into type II agreements — committing themselves to good-faith
14 efforts to reach agreement on the remaining terms, but not to the ultimate
15 objective — when they seek to “preserv[e] flexibility in the face of future uncer-
16 tainty” rather than establish “determinative methodologies” that will apply to
17 future contingencies.
Brown, 420 F.3d at 158.
18 Here, this factor favors the conclusion that the April 9 agreement was of
19 the type I variety — a definite agreement to buy and sell the AVT stock, subject
20 to CCC’s ability to secure financing. The parties foresaw that their transaction
30
1 had the potential to be affected by a future contingency, namely, CCC’s failure
2 to obtain the needed financing. They chose to establish a determinate
3 framework, rather than a flexible one, to address that contingency. The April
4 9 agreement thus expressly provided that Immunotherapy and CCC would
5 divide the market for the virtual lymph node technology if CCC was unable to
6 purchase Immunotherapy’s AVT stock. Immunotherapy, moreover, was the
7 party that strongly desired that the provisions related to the division of the
8 technology “be binding as to [CCC’s] making efforts to finance, and as to . . . the
9 plan [for dividing the technology] if [CCC] fails to purchase [the] AVT interests.”
10 Indeed, the parties’ correspondence indicates that Immunotherapy, anxious to
11 wind up its affairs, adamantly insisted that the technology-splitting arrange-
12 ment have legal force upon expiration of CCC’s deadline for obtaining financing,
13 and before the June 1 closing date. The context of the negotiations thus strongly
14 suggests that the parties sought determinateness and certainty in the April 9
15 agreement, not flexibility and optionality subject to the parties’ good-faith efforts
16 to reach agreement as to open issues.
17 3. Open Terms
18 The existence of open terms “is always a factor tending against the
19 conclusion that the parties have reached a binding agreement,” Tribune, 670 F.
20 Supp. at 499, and indeed, there is a “‘strong presumption against finding binding
31
1 obligation[s]’” in an agreement that “‘include[s] open terms . . . and expressly
2 anticipate[s] future preparation and execution of contract documents,’”
3 Arcadian, 884 F.2d at 73 (quoting
Tribune, 670 F. Supp. at 499). At the same
4 time, the parties’ intent is ultimately controlling: if the parties intended to be
5 bound despite the presence of open terms, “courts should not frustrate their
6 achieving that objective or disappoint legitimately bargained contract expecta-
7 tions,”
Tribune, 670 F. Supp. at 499, provided that the agreement is not so
8 “fragmentary” as to be “incapable of sustaining binding legal obligation,”
id. at
9 497.
10 If a preliminary agreement contains “no issues outstanding that were
11 perceived by the parties as requiring negotiation, their agreement should be seen
12 as a[] Type I binding obligation,”
Shann, 84 F.3d at 82, notwithstanding that the
13 parties may intend to memorialize their understanding in more formal
14 documents,
Adjustrite, 145 F.3d at 548. But if, in contrast, the parties enter into
15 a preliminary agreement perceiving that open issues remain to be worked out
16 and intending simply to bind themselves to good-faith efforts at further
17 negotiation, then the preliminary agreement, if an agreement at all, is a type II
18 obligation.
Id.
19 Here, nothing in the record reveals that the parties left anything for
20 further negotiation, nor does the record show that the parties in fact negotiated
32
1 anything between April 9 and June 1. In its Local Civil Rule 56.1 statement of
2 disputed facts opposing the Ceramis’ motion for summary judgment, Immuno-
3 therapy pointed to paragraphs 4 and 5 of the April 9 agreement in contending
4 that it “contained full paragraphs setting forth open terms that had to be
5 negotiated to both parties’ satisfaction, including no fewer than twelve
6 contractual elements to be negotiated.” The record, however, belies the assertion
7 that anything had to be negotiated regarding these elements. To the contrary,
8 the April 9 agreement referred to the undrafted stock purchase agreement, as
9 well as the representations and warranties to be contained therein, as “stan-
10 dard.” And paragraph 5 of the April 9 agreement specifically set forth the
11 substance of the provisions to be included in the technology transfer document
12 to be executed at closing.
13 The April 9 agreement itself thus strongly suggests that “[a]lthough the
14 parties recognized that the final contract would include additional ‘boilerplate,’
15 they foresaw no disputes relating to the boilerplate.” Shann, 84 F.3d at 77. In
16 such a circumstance, the task of formalizing contract documentation does not
17 negate the finding of a type I agreement, so long as the parties “viewed their
18 contract as . . . a binding Type I agreement . . . in which everything had been
19 agreed and all that remained was the need for lawyers’ embellishments.”
Id. at
20 77-78.
33
1 We see nothing in the record to undercut the conclusion that CCC and
2 Immunotherapy so viewed the April 9 agreement. Although the record is replete
3 with drafts, markups, and comments to the document that eventually became
4 the April 9 agreement, it is wholly silent regarding the parties’ interactions after
5 April 9. Immunotherapy has failed to point to evidence that, for example, the
6 parties had ongoing negotiations after April 9 and hence more remained to be
7 done besides adding lawyers’ embellishments. We therefore see no evidence
8 from which we could conclude that the parties left material terms of their
9 agreement open to further negotiation. See Celotex Corp. v. Catrett, 477 U.S.
10 317, 322-23 (1986) (when the burden of proof falls on the nonmoving party,
11 summary judgment is appropriate if there is insufficient evidence to support an
12 element of the claim).
13 B. Did the April 9 Agreement Bind CCC To Buy,
14 and Immunotherapy To Sell, the AVT Stock?
15 Immunotherapy argues that even if the April 9 agreement was binding in
16 some respects, it did not bind the parties to purchase and sell the stock, thus
17 taking the case outside the holding of Radiation Dynamics that Rule 10b-5
18 disclosure duties are extinguished when there is a firm commitment to such an
19 exchange. Immunotherapy points to paragraph 7 of the agreement, which
20 provides in relevant part that “[CCC] and Immuno[therapy] agree to split the
21 use of the Virtual Lymph Node technology in humans in the event and only in
34
1 the event [CCC] or its affiliate does not purchase the AVT shares from
2 Immuno[therapy] as provided in this letter, unless such failure to purchase is
3 caused by Immuno[therapy’s] refusal to comply with the provisions of this
4 letter.” Immunotherapy reads this provision as creating options for both parties.
5 CCC could either tender $1,000,000 or agree to divide the market. Once CCC
6 tendered the money, Immunotherapy could either tender its stock or choose to
7 forgo dividing the market.
8 Immunotherapy’s suggested reading, however, is inconsistent with the
9 language of paragraph 7 itself, which affirms that a decision on Immuno-
10 therapy’s part not to tender its shares would have been a “refusal to comply with
11 the provisions of th[e] letter,” meaning a breach, not a contractually afforded
12 election to forgo dividing the market. Moreover, Immunotherapy’s suggested
13 reading requires us to construe the contract to preclude CCC from compelling
14 Immunotherapy to tender its stock through a specific performance decree.
15 Urging this construction, Immunotherapy invokes the maxim inclusio unius est
16 exclusio alteris to argue that paragraph 7 operates as a limitation of remedies
17 that precludes both a decree of specific performance ordering Immunotherapy
18 to tender and an award of damages. We disagree because the inclusio unius
19 principle does not operate so broadly in this context.
20 New York courts routinely award specific performance in cases involving
35
1 the conveyance of stock in privately held corporations. See, e.g., In re Fontana
2 D’Oro Foods, 65 N.Y.2d 886, 888,
482 N.E.2d 1216, 1217,
493 N.Y.S.2d 300, 301
3 (1985); Waddle v. Cabana,
250 N.Y. 18, 26,
114 N.E. 1054, 1056 (1917);
4 Haymarket LLC v. D.G. Jewellery of Can. Ltd.,
290 A.D.2d 318, 319, 736
5 N.Y.S.2d 356, 358 (2002). They appear willing, at least in some circumstances,
6 to recognize limitations on available remedies, but they do so only when the
7 contract “contains a clause specifically setting forth the remedies available to the
8 buyer if the seller is unable to satisfy a stated condition.” 101123 LLC v. Solis
9 Realty LLC,
23 A.D.3d 107, 108,
801 N.Y.S.2d 31, 31-32 (2005) (emphasis added).
10 For example, the court in 101123 LLC found the following limitation of liability
11 to be sufficiently specific to preclude an award of specific performance absent a
12 willful breach by the seller:
13 In the event that Seller [breaches], the sole liability
14 of Seller will be to instruct the Escrow Agent to return
15 to Purchaser the Contract Deposit . . . ; provided,
16 however, that if Seller wilfully [breaches], Purchaser
17 shall have the right to bring an action for specific
18 performance against Seller and exercise any other
19 remedies at law or in equity.
20
Id. at 108-09, 801 N.Y.S.2d at 32 (internal quotation marks omitted).
21 The April 9 agreement, however, contains no language indicating that
22 paragraph 7 — or any other provision — provides CCC’s sole or exclusive
23 remedy. Instead, the April 9 agreement is far more closely analogous to the
36
1 contract at issue in Papa Gino’s of America, Inc. v. Plaza at Latham Associates,
2 135 A.D.2d 74,
524 N.Y.S.2d 536 (1988). The contract at issue there, a
3 commercial lease, contained the following clause: “Landlord shall not lease to
4 any other store premises whose main business is the sale of pizza. . . . If
5 Landlord leases to a store in violation of this paragraph Tenant shall pay a
6 [specified lower amount of rent] . . . .”
Id. at 76, 542 N.Y.S.2d at 538 (omissions
7 in original) (emphasis omitted). The landlord argued that, as long as it agreed
8 to accept the lower amount of rent, it was free to lease the premises to another
9 pizza shop. The court disagreed, holding that the clause did not prevent the
10 tenant from obtaining specific performance to prevent the landlord from leasing
11 to another pizza shop. As the court held, “[t]he provision in question did not
12 reserve an option for [the landlord’s] unilateral election.”
Id. Rather, the lower
13 amount of rent was a liquidated damages provision; because “[t]here was no
14 language in the lease agreement that [the lower amount] of rent was to be [the
15 tenant’s] only remedy,” the tenant was able to obtain specific performance.
Id.
16 Similarly, to the extent that paragraph 7 of the April 9 agreement has any
17 effect at all on the remedies available to either party, it is no more than a
18 provision that would liquidate damages if Immunotherapy refused to tender its
19 shares. It cannot, however, be a limitation of liability that would preclude
20 specific performance or create a unilateral option for Immunotherapy. Although
37
1 a liquidated damages provision precludes a party from recovering lost profits
2 and other measures of damages, see U.S. Fid. & Guar. Co. v. Braspetro Oil Servs.
3 Co., 369 F.3d 34, 71 (2d Cir. 2004); Sure-Trip, Inc. v. Westinghouse Eng’g, 47
4 F.3d 526, 534-35 (2d Cir. 1995); J.R. Stevenson Corp. v. County of Westchester,
5
113 A.D.2d 918, 921,
493 N.Y.S.2d 819, 823 (1985); Restatement (Second) of
6 Contracts § 347 cmt. a, it does not prevent a party from seeking specific
7 performance, absent an express provision to this effect. See Rubinstein v. Rubin-
8 stein,
23 N.Y.2d 293, 298,
244 N.E.2d 49, 52,
296 N.Y.S.2d 354, 358 (1968) (“For
9 there to be a complete bar to equitable relief there must be something more, such
10 as explicit language in the contract that the liquidated damages provision was
11 to be the sole remedy.”); Papa
Gino’s, 135 A.D.2d at 76, 524 N.Y.S.2d at 538 (“[A]
12 liquidated damages clause does not bar the equitable relief of specific perfor-
13 mance unless there is explicit language that it is to be the sole remedy for a
14 breach.” (citations omitted)); Restatement (Second) of Contracts § 361 (“Specific
15 performance . . . may be granted to enforce a duty even though there is a
16 provision for liquidated damages for breach of that duty.”). Accordingly, nothing
17 would have prevented CCC from suing for specific performance. It follows that
18 the April 9 agreement bound the parties to purchase and sell the AVT stock,
19 thus placing this case within the ambit of Radiation Dynamics.
20
38
1 CONCLUSION
2 Securities transactions involving a long delay between the agreement and
3 the tendering of consideration are commonplace. When a party wants to protect
4 itself against unknown or unforeseen risks between the signing and the closing,
5 it should negotiate for contractual guarantees against these risks. Immuno-
6 therapy did not do so, and it now seeks solace elsewhere. The securities laws do
7 not provide the sort of relief for seller’s remorse that Immunotherapy seeks,
8 however, and we accordingly affirm the judgment of the district court.
39
1 J. H ALL, District Judge, D ISSENTING:
2 There is much in the majority opinion with which I agree. The majority
3 appropriately concludes that we must apply the Radiation Dynamics framework
4 to evaluate the securities issues in this case. It correctly recognizes that CCC’s
5 liability under Rule 10b-5 turns on whether or not CCC became committed to
6 purchase Immunotherapy’s shares in AVT on April 9, 1999, and then decides to
7 apply New York contract law to that question. Finally, the majority properly
8 concludes that, under New York law, the April 9 agreement constituted a
9 “binding” agreement.
10 Where I part ways with the majority is with respect to its conclusion that
11 the April 9 agreement was a binding Type I agreement, rather than a binding
12 Type II agreement. Because the parties had only a Type II agreement, I
13 respectfully dissent.
14 I.
15 To understand why the parties had only a Type II agreement, it is
16 important to review the differences between Type I and Type II agreements.
17 Type I agreements are “fully binding[,] preliminary agreements.” Adjustrite
18 Sys., Inc. v. GAB Bus. Servs., Inc., 145 F.3d 543, 548 (2d Cir. 1998). These
19 agreements are created when the parties have agreed on all points requiring
40
1 negotiation, but have not yet memorialized everything in writing; they agree to
2 do so later in a more formal document. Id. A Type I agreement is preliminary
3 in name only: it is fully enforceable, despite the fact that the parties expect more
4 formalities to occur at a later stage.
Id.
5 By contrast, Type II agreements are binding, but in a different way. These
6 agreements are created “when the parties agree on certain major terms, but
7 leave other terms open for future negotiation.”
Id. Type II agreements do not
8 actually commit the parties to their contractual objectives, but instead merely
9 commit the parties to complete negotiation of the remaining issues in good faith,
10 and within the confines of their preliminary commitment.
Id. Importantly, if
11 a complete contract is not ultimately agreed upon, “the parties may abandon the
12 transaction as long as they have made a good faith effort to close the deal.” 4
Id.
13 It is also possible for an agreement to be a hybrid between a Type I and
14 Type II agreement. Such hybrid contracts are characterized by complete
15 agreement on certain issues, and a lack of agreement on other, independent
16 issues which the parties have agreed to resolve at a later date. Where there is
4
Of course, sometimes a preliminary “agreement” will fit into neither of these
categories. That is, in some cases the manifestation of mutual assent will be so indefinite,
and the number of material terms left open will be so large, that the contract is completely
unenforceable. Tractebel Energy Mktg., Inc. v. AEP Power Mktg., Inc., 487 F.3d 89, 95 (2d
Cir. 2007).
41
1 agreement, these contracts are fully enforceable, and where there is not yet full
2 agreement, these contracts impose an obligation to conduct future negotiations
3 in good faith. See Brown v. Cara, 420 F.3d 148, 156 (2d Cir. 2005).
4 Although there are important analytical differences between Type I and
5 Type II agreements, policing the boundaries between the two is not always a
6 simple task. Part of the problem stems from the fact that courts have developed
7 one multi-factor test for identifying Type I agreements, and a second multi-factor
8 test for identifying Type II agreements. See
Brown, 420 F.3d at 154-58. These
9 tests are helpful for determining when an agreement is not binding at all,
10 because if an agreement fits into neither category, clearly it is a non-binding
11 agreement. When deciding whether there is a Type I or a Type II agreement,
12 however, the multi-factor tests become difficult to apply because they examine
13 several similar factors.5 The key is to identify those factors that help distin
5
To determine if there is a Type I agreement, courts weigh the following factors:
(1) whether there is an expressed reservation of the right not
to be bound in the absence of a writing;
(2) whether there has been partial performance of the contract;
(3) whether all of the terms of the alleged contract have been
agreed upon; and
(4) whether the agreement at issue is the type of contract that
is usually committed to writing.
Brown, 420 F.3d at 454 (citing
Adjustrite, 145 F.3d at 549). By contrast, to determine if
there is a Type II agreement, courts examine:
42
1 guish Type I agreements from Type II agreements, rather than those factors that
2 distinguish Type I and Type II agreements from nonbinding agreements.
3 II.
4 There is a “strong presumption” against finding a Type I agreement
5 when the agreement “include[s] open terms, call[s] for future approvals[,] and
6 expressly anticipate[s] future preparation and execution of contract docu-
7 ments.” Arcadian Phosphates, Inc. v. Arcadian Corp., 884 F.2d 69, 73 (2d Cir.
8 1989); see also
Brown, 420 F.3d at 154. The April 9 agreement easily quali-
9 fies for this strong presumption. It explicitly included open terms and
10 explicitly called for future negotiations. The agreement expressly declared
11 that the parties “expect that” various documents “will be prepared, negotiated
12 and executed,” including the actual stock purchase agreement that would
13 operate to transfer Immunotherapy's AVT shares.
14 The majority declines to apply any presumption against Type I agree-
(1) whether the intent to be bound is revealed by the language
of the agreement;
(2) the context of the negotiations;
(3) the existence of open terms;
(4) partial performance; and
(5) the necessity of putting the agreement in final form, as
indicated by the customary form of such transactions.
Id. at 157 (citing Arcadian Phosphates, Inc. v. Arcadian Corp.,
884 F.2d 69, 72 (2d Cir.
1989)).
43
1 ments because it believes that “nothing in the record reveals that the parties
2 left anything for future negotiation, nor does the record show that the parties
3 in fact negotiated anything between April 9 and June 1.” Ante, at 33.
4 However, the agreement expressly declared that the stock purchase agree-
5 ment was still to be negotiated; coupling that with the fact that the stock
6 purchase agreement was later drafted at the very least creates an inference
7 that future negotiations took place. While the record contains no extrinsic
8 evidence that negotiations actually took place, we must determine whether,
9 at the time the parties entered into the April 9 agreement, they believed that
10 future negotiations would be needed. There is no better indication of that
11 belief than the fact that they actually expressed that belief in their agree-
12 ment.
13 The majority nonetheless emphasizes that the terms of the stock
14 purchase agreement were to be “standard.” April 9 Agreement at 3. The
15 majority then cites Shann v. Dunk, 84 F.3d 73 (2d Cir. 1996), to argue that a
16 contract will not necessarily become a Type II agreement by virtue of the fact
17 that the parties needed to fill in the gaps with additional boilerplate. See
id.
18 at 77-78.
19 The majority is correct that an agreement will not necessarily become a
44
1 Type II agreement simply because the parties leave some additional
2 “boilerplate” to be drafted. But Shann also makes clear that the key question
3 is how the parties viewed that boilerplate. If “everything had been agreed
4 and all that remained was the need for lawyers’ embellishments,” the agree-
5 ment would be a binding Type I agreement. Id. at 78. If instead the parties
6 had simply agreed on “all the important terms,” and had then “agreed to
7 negotiate in good faith over any differences that might arise relating to the
8 undrafted boilerplate,” the agreement would be a Type II agreement.
Id.
9 Assuming, arguendo, that the majority has correctly identified the
10 missing terms as “boilerplate,” the agreement still expressly stated that this
11 “boilerplate” remained to be negotiated. As a result, it is still appropriate to
12 apply a “strong presumption” against finding a Type I agreement.
13 III.
14 Once it is clear that this court must apply a “strong presumption”
15 against finding a Type I agreement, the only question remaining is whether
16 other factors point so compellingly to a Type I agreement, rather than a Type
17 II agreement, that this presumption can be overcome. No such evidence has
18 been presented that would entitle the defendants to summary judgment.
19 First, the majority rests on the fact that the April 9 agreement contains
45
1 no language expressly stating that the parties will not be bound by the
2 agreement. From this, the majority concludes that the April 9 agreement was
3 meant to be binding. In the majority’s view, that conclusion gets further
4 support from the agreement’s drafting history, during which it evolved from a
5 “summary of discussions” into a “letter agreement.”
6 The language of the agreement, and its drafting history, certainly
7 confirm that the parties intended for the agreement to be “binding.” But this
8 conclusion does little to address the most important question in the case:
9 what kind of binding agreement did the parties enter into? Indeed, if the
10 parties had intended to enter into a binding Type II agreement, one also
11 would not expect to see language in the contract expressly stating that the
12 parties had no intention to be bound. See Brown, 420 F.3d at 154 (“Where
13 there is no language [in an agreement] that may be read to bind the parties to
14 the ultimate goal, an explicit reservation [of the right not to be bound] would
15 serve no purpose.”). Similarly, calling the April 9 agreement an “agreement”
16 is just as consistent with a Type II contract as it is with a Type I contract.
17 Furthermore, the majority dismisses the language in the agreement
18 stating that the stock purchase was “presently contemplated.” 6 The fact that
6
It should also be noted that the parties referred to the stock purchase as a
“potential acquisition,” rather than as something more definitive.
46
1 the parties chose this phrasing, rather than something more definitive, raises
2 further doubts regarding the extent to which the parties intended to be bound
3 by the agreement. Saying that an agreement is “presently contemplated”
4 makes a great deal of sense in a Type II agreement, where the most impor-
5 tant terms have been agreed to, but further negotiations are still required. It
6 makes much less sense to use this language in a Type I agreement.7
7
The majority also relies on several publicly available transaction agreements to
make its case. These agreements were not cited by any of the parties, and they are not
part of the record. The majority appears to use them to establish an “industry practice” of
the use of the term “contemplated,” notwithstanding that these documents were all created
roughly nine years after the agreement at issue in this case.
In any event, these transaction documents do not bolster the majority’s position.
Although they do make use of the term “contemplated,” they elsewhere contain definitive
statements that make clear the fully binding nature of the transaction. See, e.g.,
Millennium Pharms., Inc., Agreement and Plan of Merger (Form 8-K) (Apr. 10, 2008) at 1,
4, available at
http://www.sec.gov/Archives/edgar/data/1002637/000104746908004416/a2184684zex-2_1.ht
m, (“Subject to the terms and conditions set forth in this Agreement . . . Merger Sub shall
. . . commence the Offer . . . . The Company hereby approves of and consents to the Offer
. . . .”) (emphasis added); J.P Morgan Chase & Co., Agreement and Plan of Merger (Form 8-
K) (Mar. 20, 2008) at 1, available at
http://www.sec.gov/Archives/edgar/data/19617/000089882208000301/mergeragreement2.ht
m (“Subject to the terms and conditions of this Agreement . . . Merger Sub shall merge with
and into Company”) (emphasis added); Int’l Paper Co., Purchase Agreement (Form 8-K)
(Mar. 20, 2008) at 1, available at
http://www.sec.gov/Archives/edgar/data/51434/000119312508061570/dex101.htm, (“Upon
the terms and subject to the conditions of this Agreement . . . Seller shall . . . sell, transfer,
assign and deliver to Purchaser, and Purchaser shall purchase, acquire and accept from
Seller . . . all of Seller’s. . . title and interest in . . . all of the Transferred Assets . . . .”)
(emphasis added); ChoicePoint Inc., Agreement and Plan of Merger (Form 8-K) (Feb. 22,
2008) at 1, available at
http://www.sec.gov/Archives/edgar/data/1040596/000119312508035585/dex21.htm, (“Upon
the terms and subject to the conditions set forth in this Agreement, at the Effective Time
. . . Merger Sub shall be merged with and into the Company . . . .”) (emphasis added);
Countrywide Fin. Corp., Agreement and Plan of Merger (Form 8-K) (Jan 17, 2008) at 1,
available at
47
1 The majority also relies on the context of the negotiations to support its
2 conclusion that the parties had entered into a Type I agreement. In the
3 majority’s view, because the negotiations did not take place under a cloud of
4 uncertainty, that lack of uncertainty is a factor weighing against a finding of
5 a Type II agreement.
6 When parties negotiate a contract in the face of significant uncertainty,
7 that uncertainty may be one factor that contributes to a finding that there is
8 a Type II agreement. See id. at 158. But there is absolutely nothing in
9 Brown that suggests that the presence of such uncertainty is required, or
10 even common, for Type II agreements. Indeed, the Brown court simply
11 concluded that such conditions were “consistent” with a Type II agreement.
12
Id.
13 In any event, the majority does not consider the limited extent of the
14 “certainty” that the parties were operating under. It is true enough that the
15 parties created a relatively elaborate “contingency plan” to deal with the
16 possibility that the stock transfer would not be completed. Yet the majority
17 fails to explain why this element of certainty carries particular persuasive
http://www.sec.gov/Archives/edgar/data/25191/000089882208000107/exhibit21.htm,
(“Subject to the terms and conditions of this Agreement, . . . Company shall merge with
and into Merger Sub.”) (emphasis added). Immunotherapy’s agreement did not contain
any such definitive language requiring that the actual stock purchase “shall” take place.
48
1 force.8 If anything, the presence of the “contingency plan” reveals that the
2 parties were quite unsure about whether or not the stock purchase was
3 actually going to take place – an uncertainty that is quite consistent with a
4 conclusion that the parties had a Type II agreement with regard to the
5 transfer of AVT’s stock.9
6 IV.
7 There is nothing in the majority’s discussion, or in CCC’s briefs, that I
8 believe adequately explains why the April 9 agreement is better viewed as a
9 binding Type I agreement, rather than a binding Type II agreement. My own
10 review also reveals nothing in the April 9 agreement, or in the record, that
11 can overcome the mandatory “strong presumption” against finding a Type I
12 agreement. Because of this, I conclude that the April 9 agreement was a Type
13 II agreement that did not actually require the parties to consummate the
8
As discussed in Part I, it is possible for parties to create an agreement that
constitutes a Type I agreement as to some issues, while consisting only of a Type II
agreement as to other issues. The certainty that the majority has identified may well be a
factor supporting a conclusion that the parties had a Type I agreement insofar as they had
agreed to divorce, one way or another. It is not a particularly persuasive factor supporting
a conclusion that the parties had a Type I agreement with respect to the stock transfer.
9
Undoubtedly, this uncertainty stemmed in part from questions about CCC’s ability
to obtain the necessary financing. But this uncertainty also could have stemmed from
doubts over whether the parties would be able to successfully negotiate the still-
outstanding issues. There is nothing in the contingency plan that excludes the latter
scenario as one of the sources of uncertainty.
49
1 stock transaction.10 Instead, the agreement merely required the parties to
2 engage in good faith negotiations concerning a final agreement for CCC to
3 purchase Immunotherapy’s shares. 11 I therefore respectfully dissent.
10
Because I reach this conclusion, I view the majority’s discussion of damages
versus specific performance to be unnecessary. If CCC was entitled to specific performance
of the agreement, it would only be entitled to force Immunotherapy to do what it had
promised, i.e., the most CCC could do would be to force Immunotherapy to engage in good
faith negotiations.
11
Of course, those negotiations would still have been carefully circumscribed by
various provisions in the April 9 agreement. It is not clear whether, as part of these good
faith negotiations, Immunotherapy would have been able to obtain any leverage if it had
been aware of the Johnson & Johnson deal. Accordingly, it may well be the case that
Immunotherapy’s Rule10b-5 claim should fail on the grounds that it suffered no damages
from the non-disclosure. The district court never reached that issue because it thought it
was bound by the “law of the case” doctrine. On appeal, the parties have not discussed
that issue in their briefs. I would therefore vacate the judgment and remand the case to
allow the district court to consider that issue in the first instance.
50
1 APPENDIX
2 CERAMI CONSULTING CORPORATION
3 765 Old Saw Mill Road
4 Tarrytown, New York 10591
5
6 April 9, 1999
7
8 David Dove, MD
9 Chief Operating Officer
10 Immunotherapy, Inc.
11 360 Lexington Avenue
12 New York, New York 10017
13
14 Dear David:
15 The following is a confidential letter agreement between Cerami
16 Consulting Corporation (“Cerami Consulting”) and Immunotherapy, Inc.
17 (“Immuno”), regarding the potential acquisition (the “Transaction”) of all right,
18 title and interest in Applied Vaccine Technologies Corp. (“AVT”) owned by
19 Immuno and its affiliates.
20 1. Subject to the terms and conditions hereof, it is presently contemplated that
21 Cerami Consulting would purchase the 50,000 shares of AVT common stock
22 owned by Immuno or its affiliates for an aggregate purchase price of
23 $1,000,000 in cash. Cerami Consulting plans to liquidate AVT and transfer
24 the assets and liabilities of AVT to a new company to be formed by Cerami
25 Consulting or its designee (“NewCo”).
26 2. Contemporaneously with the closing of the Transaction, Immuno will enter
27 into agreements with NewCo pursuant to which Immuno and its successors
28 will transfer to NewCo any and all notes, memoranda, scientific findings and
29 electronic media in any way documenting or relating to the formation,
30 development and improvement of the Virtual Lymph Node Technology (as
31 defined below) in the possession of Immuno, its successors, its employees or
32 its affiliates. Immuno will enter into such non-terminable consulting and
33 cooperation agreements as NewCo shall reasonably request, provided that,
34 Immuno shall not be required to incur any additional expense or obligation
51
1 in connection with any such agreements (collectively, the “Technology
2 Transfer Agreements”). In consideration for such agreements, NewCo will
3 grant to Immuno:
4 a. a royalty of 1.5% on the net sales of all Virtual Lymph Node products
5 (“products” shall mean any Virtual Lymph Node product which such
6 product shall include any product that combines multiple technologies into
7 a single marketable product that cannot function without the benefit of
8 the Virtual Lymph Node technology (e.g., a combination of a vaccine and
9 the Virtual Lymph Node)) made by Newco and 8.5% of the net proceeds
10 received from all any [sic] license, sublicensee, or joint venture for the
11 Virtual Lymph Node or its products (the “Virtual Lymph Node” means the
12 right, title and interest in the Patent Application filed March 2, 1998,
13 Serial No. 09/033402 and any continuations, continuations in part,
14 divisions, subdivisions and any patents issued pursuant thereto (the
15 “Patent Application”)) (together, the “Royalty”); provided, however, that
16 licensing fees received from third parties will not count as proceeds
17 received from sales of Virtual Lymph Node products.
18 b. In each year, commencing on the first anniversary of the closing date,
19 NewCo will pay to Immuno (or its successors and assigns) a minimum
20 Royalty of $50,000 per year for each of the ten years following the closing
21 date. To the extent that the cumulative amount of minimum payments
22 exceed the total amount of royalties due under clause 2.a. from time to
23 time, the excess shall be carried forward as a credit and applied to the
24 extent that royalties in any individual year exceed the minimum Royalty
25 for such year (such minimum payment would be deducted from any future
26 Royalty payment, e.g. if in year one there were no Royalties then NewCo
27 would pay the minimum Royalty amount to Immuno and then if in year
28 two there were Royalty payments owing to Immuno of $100,000, the first
29 years’ [sic] minimum Royalty payment would be credited against such
30 amount and the balance of $50,000 would be paid to Immuno.).
31 c. Immuno shall obtain a world-wide, non-exclusive right to license the
32 Patent Application for free in the event, and only in the event, that NewCo
33 fails to make its minimum royalty payments after the second anniversary
34 of the closing date of the Transactions.
52
1 3. Immuno understands and acknowledges that the Transaction is subject to
2 and conditioned upon Cerami Consulting obtaining financing at terms with
3 a tax consequences [sic] acceptable to Cerami Consulting in its sole discretion
4 on or before April 1, 1999 (the “Financing”); provided, however, that the date
5 shall be extended to May 1, 1999 if, on or prior to April 1, 1999, Cerami
6 Consulting (or its financing party) states in writing to you that a closing is
7 scheduled prior to June 1, 1999 with a credit worthy person to invest not less
8 than $1,000,000 in Cermi [sic] Consulting, AVT or Newco. Cerami Con-
9 sulting will not obtain the Financing from Coulter Pharmaceutical Corpora-
10 tion. Each party shall agree to use best efforts to minimize the tax costs of
11 the transaction and close the transaction prior to June 1, 1999. Cerami
12 Consulting shall promptly notify Immuno in the event that Cermai [sic]
13 Consulting is not able to obtain financing. In the event that Cerami
14 Consulting is unable to obtain the Financing on or before April 1, 1999, then
15 the parties to this letter agree to divide each area of use as provided in this
16 letter.
17 4. The parties expect that the following documents will be prepared, negotiated
18 and executed in connection with the acquisition of the shares.
19 a. a standard stock purchase agreement from Cerami Consulting to acquire
20 the shares of AVT owned by Immuno, including, but not limited to:
21 b. a mechanism for Cerami Consulting to acquire all shares of AVT held by
22 Immuno;
23 c. standard representations and warranties from Immuno and its affiliates
24 including, organization and capitalization, authorization of transactions,
25 non-contravention, subsidiaries, financial statements, absence of undis-
26 closed liabilities, litigation, title to assets, legal compliance, intellectual
27 property and brokers;
28 d. representations from Cerami Consulting and NewCo including, organi-
29 zation, authorization of transaction, financing, no restriction against
30 purchase of stock and brokers;
31 e. conditions to closing including, payment of purchase price, consents,
32 absence of litigation, resolution of the matters concerning Amnon Gonenne
53
1 including any restraining orders, representations being true and correct,
2 governmental filings, due diligence and release of liens (if any);
3 f. legal opinion from this law firm to Immuno stating that Newco (or Cerami
4 Consulting depending on the structure) is duly organized, duly authorized
5 to enter into the transaction agreements, and that such contracts are
6 enforceable against Newco (or Cerami Consulting, as the case may be).
7 Such opinion shall contain assumptions and exceptions typical of other
8 opinions delivered by this law firm in similar situations; and
9 g. as a condition to closing a legal opinion from Immuno’s outside counsel in
10 form and content satisfactory to Cerami Consulting regarding the legality
11 and enforceability of the Transaction under New York and Delaware law.
12 5. The parties expect that a document with the following provisions will be
13 prepared, negotiated and executed in connection with the Technology
14 Transfer Agreements:
15 a. transfer of the notes and technical information concerning the Virtual
16 Lymph Node to NewCo;
17 b. consulting services to be provided by Immuno, its successors, its employ-
18 ees, including Cohava Gelber, and other scientists as reasonably requested
19 by NewCo;
20 c. payment of the Royalty and the minimum Royalty amounts by NewCo to
21 Immuno or its successors and assigns;
22 d. mutual non solicit and confidentiality from Immuno and Cerami
23 Consulting or NewCo and their key employees and an agreement to keep
24 confidential techniques used which involve the Virtual Lymph Node for
25 discovering new antigens and antibodies, including an agreement not
26 share with third parties any techniques developed exclusively by Immuno
27 for such discovery;
28 e. a non-compete agreement and such non-solicit agreements from each of
29 Len Gordon, David Dove and Cohava Gelber for a period of 2 and one half
30 years following the closing date (such agreement will permit Immuno to
54
1 discover antigens and antibodies as provided below). Such non-compete
2 shall be in addition to, and no way limit [sic] (even after expiration of such
3 non-compete agreements) NewCo’s right of ownership, including the right
4 to modify, the Patent Application and future patent thereof.
5 6. As of the date hereof, Cerami Consulting and Immuno shall have the co-
6 exclusive, world wide right to use the Virtual Lymph Node for the discovery
7 of antigens and antibodies using non human animals (the “Discovery
8 Products”). In the event the Transaction is consummated, NewCo shall grant
9 Immuno a world-wide, non exclusive (as opposed to co-exclusive), non
10 transferable, license to use the Virtual Lymph Node for the discovery
11 Discovery Products [sic]. NewCo shall receive a royalty of 1% on the net sales
12 of all Discovery Products and 5.0% of the net proceeds received from all third
13 party licenses; provided, however, that licensing fees received from third
14 parties will not count as proceeds received from sales of Discovery Products.
15 No minimum royalty would apply.
16 7. Cerami Consulting and Immuno agree to split the use of the Virtual Lymph
17 Node technology in humans in the event, and only in the event, Cerami
18 Consulting or its affiliate does not purchase the AVT shares from Immuno as
19 provided in this letter, unless such failure to purchase is caused by Immuno’s
20 refusal to comply with the provisions of this letter, in the following manner:
21 a. The parties will alternate choosing from the following list until each has
22 chosen three areas. Immuno shall choose first. The areas are 1. Infectious
23 disease; 2. Cancer; 3. Autoimmune disease; 4. Allergy; 5. Solid Organ
24 Transplant; 6. Bone Marrow Transplant; 7. Cardiovascular disease; and
25 8. Metabolic Disease.
26 b. Each party will give the other party a non competition agreement with
27 respect to the other party’s choices.
28 c. Each party is free to develop and compete in any areas other than the
29 three exclusive areas of the other.
30 d. The royalty split shall provide reasonable protection to each party to
31 ensure that license fees are being accounted for accurately.
55
1
2
3 Very truly yours,
4
5 CERAMI CONSULTING CORPORATION
6
7 By:
8 Anthony Cerami
9 President
10
11
12 Accepted and agreed to as of this 9th day of April, 1999:
13
14 IMMUNOTHERAPY, INC.
15
16 By: /s/ C. Leonard Gordon
17 Name: C. Leonard Gordon
18 Title: Chairman
19
56
