## Facts

- Twelve limited partnerships and Acton Corporation settled prior litigation for a base cash payment plus a contingent “sweetener” in Section 2.2 tied to Acton’s stock price.
- Section 2.2 allowed each partnership, within three years, to demand a one-time payment equal to 7,500 multiplied by “X,” where “X” equaled the share “price” on an exercise date minus $7; “price” was defined as the average closing price over a partnership-selected 30-trading-day period before the exercise date.
- At settlement, Acton was performing poorly and its stock traded in a low range; the contingent clause was intended to provide additional value if Acton’s fortunes improved.
- About a year later, Acton implemented a one-for-five reverse stock split, reducing outstanding shares and increasing the nominal per-share price proportionally.
- Acton informed the partnerships that the reverse split required adjusting the $7 figure to $35 to preserve the clause’s economic equivalence after the split.
- The partnerships rejected the adjustment, selected a 30-day post-split period with an average price of $20.54, applied the original $7 subtraction, and demanded $1,218,600 total (12 × 7,500 × ($20.54 − $7)).
- The district court, applying Massachusetts law, rejected the partnerships’ interpretation and entered judgment for Acton; the partnerships appealed.

## Issues

1. Under Massachusetts contract law, whether Section 2.2’s contingent payment formula required a proportional adjustment to the $7 deduction after a one-for-five reverse stock split.
2. Whether the partnerships could apply the higher post-split per-share price while keeping the $7 figure unchanged, producing a large increase in the contingent payment.

## Decision

- The First Circuit affirmed judgment for Acton.
- The court held that Section 2.2, read in context, did not permit the partnerships to combine the post-split price with an unadjusted $7 deduction to obtain a large payment based on a purely nominal price change.
- The court agreed that the partnerships’ construction would effectively add a term the parties did not intend and would produce a commercially unreasonable result.

## Legal Principles

- Under Massachusetts law, contractual language is construed in light of the agreement’s context, surrounding circumstances, and commercial purpose, not by isolated literalism.
- Even text that appears clear in isolation may be treated as ambiguous when an unanticipated event shows that a literal reading conflicts with the agreement’s evident function.
- Courts reject constructions that create an unreasonable result or an unintended windfall, especially where the triggering corporate action (e.g., a reverse stock split) changes nominal share price without changing underlying value in a way consistent with the clause’s purpose.
- A court will not adopt an interpretation that effectively rewrites the contract by supplying a term that common sense indicates the parties did not bargain for.

## Conclusion

The court enforced Section 2.2 according to its commercial purpose—providing a modest contingent benefit if Acton genuinely improved—and refused an interpretation that would convert a reverse stock split into a large, unintended payout.


Cofman v. Acton Corp., 958 F.2d 494 (1st Cir. 1992)