Reiss v. Financial Performance Corp., 97 N.Y.2d 195 (2001)

A duly executed stock warrant is an enforceable contract when it contains all material terms, and courts will not imply terms to address contingencies the parties foresaw but did not include in the agreement.

Summary

Reiss and Rebot Corp. received stock warrants from Financial Performance Corp. The warrants lacked provisions adjusting for reverse stock splits. After a reverse split, Reiss and Rebot sought to exercise their warrants for the original number of shares at the original price, which Financial Performance Corp. refused. The New York Court of Appeals held that the warrants were enforceable as written. The court declined to imply a term adjusting for the reverse stock split, finding that the parties, sophisticated business entities, could have included such a provision but did not. The court reasoned that it would not rewrite the contract under the guise of interpretation, even if it resulted in a windfall for the warrant holders.

Facts

Financial Performance Corp. issued stock warrants to Rebot Corp. and Marvin Reiss. These warrants allowed the purchase of shares at 10 cents per share, expiring on specific dates. Unlike a previous warrant issued to Robert Trump, the warrants issued to Rebot and Reiss did not include a warrant agreement with provisions for adjusting the warrant terms in the event of a reverse stock split.

In 1996, Financial Performance Corp. implemented a one-for-five reverse stock split, increasing the value of each share fivefold while reducing the number of outstanding shares. When Rebot and Reiss attempted to exercise their warrants, they sought to purchase the originally specified number of shares at 10 cents per share, without adjustment for the split. Financial Performance Corp. refused, leading to a lawsuit.

Procedural History

Reiss and Rebot Corp. sued Financial Performance Corp. for a declaratory judgment allowing them to exercise their warrants as initially written and seeking an extension of the warrant expiration dates. The Supreme Court denied injunctive relief and dismissed the action. The Appellate Division modified, ruling in favor of Financial Performance Corp., implying a term for adjustment. The Court of Appeals modified the Appellate Division’s order to reinstate the first cause of action for declaratory relief.

Issue(s)

Whether warrants to purchase shares of stock of a corporation must be adjusted in light of a reverse stock split authorized by the corporation after the warrants were issued, when the warrants themselves do not contain any adjustment provisions.

Holding

No, because the warrants are enforceable according to their terms. The warrants are complete and unambiguous, and the Court will not imply a term that the parties could have included but did not.

Court’s Reasoning

The Court emphasized that stock warrants are contracts enforceable according to their terms, especially when the warrants, like those in this case, contain all material provisions (number of shares, price, expiration date) and are drafted by sophisticated parties. The court relied on the principle articulated in W.W.W. Assocs. v Giancontieri, 77 N.Y.2d 157, 162 (1990), that agreements set down in clear, complete documents should be enforced as written.

The Court distinguished Cofman v. Acton Corp., 958 F.2d 494 (1st Cir. 1992), where a term was implied in a settlement agreement due to a missing essential term regarding stock dilution. Here, the Court found no ambiguity or missing term, emphasizing that “[a]n omission or mistake in a contract does not constitute an ambiguity.” The court also cited Schmidt v. Magnetic Head Corp., 97 A.D.2d 151, 157 (1983), clarifying that ambiguity must be ascertained from the face of the agreement without extrinsic evidence.

The Court highlighted that it will not add or excise terms to create a new contract, quoting Schmidt, 97 A.D.2d at 157, which in turn quotes Morlee Sales Corp. v. Manufacturers Trust Co., 9 N.Y.2d 16, 19 (1961). The fact that Financial Performance Corp. issued other warrants with adjustment provisions suggested an intentional omission in the warrants held by Reiss and Rebot Corp.

The court acknowledged Financial Performance Corp.’s argument that enforcing the warrants would create a windfall for the plaintiffs but determined that the potential for such a windfall did not justify rewriting the contract. The court noted, “It does not follow, however, that Financial should be given a comparable remedy to save it from the consequences of its own agreements and its own decision to perform a reverse stock split.”