Cofman v. Acton Corporation

Twelve partnerships (the partnerships) (plaintiffs) had claims against Acton Corporation (defendant). The parties entered into settlement negotiations, with the partnerships suggesting a payment of $180,000. Acton countered with $120,000, or $10,000 for each partnership, and an added sweetener: the option to demand a one-time payment in the amount of the Acton stock price as of the exercise date, minus $7, multiplied by 7,500. The partnerships agreed. About a year later, Acton’s stock was not faring well; it generally traded between $1.50 and $3.12. Acton executed a one-for-five reverse stock split—an artificial shrinking of the number of outstanding shares—leaving each stockholder with one share for every five shares owned before the split. Acton notified the partnerships of the reverse stock split’s effect on their agreement, including an increase of the $7 figure to $35. The partnerships brought suit in federal district court, rejecting the change from $7 to $35 but demanding payment based on a new price per share of $20.54. Subtracting $7 from this per-share price and multiplying by 7,500 yielded $101,550. Multiplied by 12 to account for each partnership, this became $1,218,600—the amount that the partnerships claimed they were owed. The court ruled in favor of Acton, holding that the partnerships’ argument would require the addition of a new provision to the agreement that common sense dictated was never intended. The partnerships appealed. The United States Court of Appeals for the First Circuit granted certiorari.