How often does this happen? Two business acquaintances develop a friendship over a number of years. An opportunity then arises and the two friends decide that they will work together to take advantage of the situation. They then draft a one paragraph or one page letter which they are sure will be sufficient for all purposes since their friendship will undoubtedly prevail over any unforeseen disputes.
Unfortunately, a difference of opinion then arises and it turns out that one page letter did not address the situation and the friendship gives way to each person’s own economic interests.
This was the chain of events that occurred in a recent case decided by the Massachusetts Appeals Court, Robert and Ardis James Foundation and another vs. Daniel Maxwell Meyers. The facts of the case were typical of many similar disputes. Meyers was one of the founders of First Marblehead LP which was formed in 1995. James was a professional investor who had graduated from Harvard Business School and taught at MIT. In 1997, Meyers and James had developed a friendship which included taking leisure trips together. According to the court, Meyers purchased a leisure boat by selling 10,000 shares of his privately held stock in First Marblehead to James. In 1998 and 1999, James and Meyers signed two letter agreements under which James agreed to provide funds to Meyers and another founder of First Marblehead, Stephen Anbinder. Meyers and Anbinder would use the funds to purchase stock in First Marblehead and in return James would share in the sales proceeds. The letter agreements did not provide any provisions regarding their termination or establish any conditions upon which Meyers would be required to sell his stock.
First Marblehead was a great success and an initial public offering occurred in 2003, under which shares were traded on the New York Stock Exchange. In 2005, James and Anbinder reached an agreement regarding the disposition of the shares of stock purchased by Anbinder that James had funded. Pursuant to that agreement, James’ investment of $461,625 yielded a payment to James of $8,791,000.
James was unable to reach an agreement with Meyers and James’ foundation filed a complaint in 2006 which, in part, alleged that Meyers had violated the 1998 and 1999 agreements by not unwinding them when James had requested that he do so. As a result of stock splits, the 31,107 shares purchased by Meyers that James had funded had grown to 1,866,402 shares at the time of the trial in 2011. The Trial judge found that Meyers had no duty to sell "on demand" but that Meyers had a duty of good faith and fair dealing implied in the letter agreements to engage in reasonable efforts to arrive at a reasonable time for sale of the stock, and that Meyers had failed to do so.
The Appeals Court disagreed and held that Meyers' refusal to unwind the agreements did not violate the implied covenant of good faith and fair dealing. The Appeals Court did find that the agreements contemplated that a sale of the stock would occur and that Meyers could not refuse to sell the stock indefinitely. However, the Appeals Court did not determine what “indefinitely” meant.
The moral of the story of course is to "get in writing." While Meyers and James both wanted short user friendly letter agreements, their desire for simplicity resulted in years of litigation which could have been easily avoided.