## Facts

- Albert D. Bolt owned 52,488 shares of Series A Redeemable Preferred Stock in Merrimack Pharmaceuticals, Inc., a Massachusetts corporation.
- Merrimack’s Restated Articles of Organization provided that, at any time after December 31, 1997, Merrimack would redeem Series A shares at the stated redemption price upon a holder’s request if the corporation’s “net worth,” determined in accordance with GAAP and shown on the most recently ended fiscal quarter’s balance sheet, equaled or exceeded \$5,000,000.
- Bolt submitted redemption requests in April 2001 and again in March 2002; Merrimack rejected both.
- Merrimack’s audited balance sheet dated December 31, 2001 reported total assets of \$11,331,070 and total liabilities of \$1,270,230.
- The same financial statements showed redeemable convertible preferred stock (including Series A and Series B) presented outside stockholders’ equity and reported a total stockholders’ deficit of (\$2,402,807).
- PricewaterhouseCoopers LLP audited Merrimack’s financial statements and opined that they fairly presented Merrimack’s financial position in conformity with GAAP.
- Bolt filed a diversity action in the U.S. District Court for the Eastern District of California seeking a declaratory judgment that Merrimack’s net worth exceeded \$5 million as of December 31, 2001, triggering Merrimack’s duty to redeem his Series A shares.
- Merrimack argued that “net worth” meant stockholders’ equity (or stockholders’ deficit) and that, under that definition, its net worth was negative; Merrimack also relied on the balance-sheet presentation of redeemable preferred stock outside liabilities.
- The district court granted summary judgment for Bolt and declared that Merrimack’s net worth exceeded \$5,000,000 as of December 31, 2001. Merrimack appealed.

## Issues

1. Under Massachusetts law and Merrimack’s Restated Articles of Organization, does “net worth” in the Series A redemption provision mean stockholders’ equity/deficit, or does it mean assets minus liabilities as reflected on the GAAP-prepared balance sheet?
2. In determining “net worth” under the charter’s GAAP-based balance-sheet reference, should redeemable preferred stock presented outside liabilities and equity (in a mezzanine category) be treated as part of the liability side of the net-worth calculation for the \$5 million trigger?

## Decision

- The Ninth Circuit affirmed the district court’s summary judgment for Bolt.
- The court held that Merrimack’s “net worth,” as used in the redemption provision and measured by reference to GAAP and the quarter-end balance sheet, exceeded \$5,000,000 as of December 31, 2001.
- The court rejected Merrimack’s attempt to equate “net worth” with stockholders’ equity/deficit when that definition did not appear in the Restated Articles.
- Because the charter’s \$5 million condition was satisfied, Merrimack was required to redeem Bolt’s Series A shares at the contractual redemption price upon his request.

## Legal Principles

- A corporation’s articles of organization are interpreted under ordinary contract rules of the state of incorporation; here, Massachusetts law governed.
- When a charter provision uses a financial term without defining it, courts look to the provision’s text and context and apply a reasonable meaning consistent with the instrument as a whole.
- A reference to GAAP and to amounts “shown on the balance sheet” supplies a measurement method and context for the calculation, but it does not automatically rewrite the parties’ bargain to match a single balance-sheet caption (such as “stockholders’ deficit”) when the charter does not use that caption.
- Financial-statement presentation choices (including mezzanine classification for redeemable securities) may inform interpretation, but the controlling question remains what the charter language requires for the redemption trigger.
- Summary judgment is proper when the material facts (including the relevant balance-sheet figures) are undisputed and the dispute turns on interpretation of the governing charter language.

## Conclusion

In *Albert D. Bolt v. Merrimack Pharmaceuticals, Inc.*, the Ninth Circuit, applying Massachusetts contract principles to Merrimack’s Restated Articles of Organization, affirmed a declaratory judgment that the company’s GAAP-based, quarter-end “net worth” exceeded \$5 million as of December 31, 2001, and therefore Merrimack was obligated to redeem Bolt’s Series A redeemable preferred shares at the specified redemption price when he requested redemption.


Albert D. Bolt v. Merrimack Pharmaceuticals, Inc., 503 F.3d 913 (2007)