Opinion
NOT TO BE PUBLISHED
APPEAL from an order of the Superior Court of San Diego County No. GIC 881729, Yuri Hofmann, Judge.
HALLER, Acting P. J.
Arthur Budman sued St. Bernard Software, Inc. (SBS) and its chief financial officer, Alfred Riedler, alleging fraud and negligent misrepresentation pertaining to Budman's SBS stock. Defendants petitioned to compel arbitration of Budman's claims, relying on an arbitration provision in the stock purchase agreement between Budman and one of SBS's predecessor corporations. The court denied the petition, finding the arbitration provision was inapplicable because Budman's claims did not relate to his former employment with SBS's predecessor.
Defendants appeal. We conclude Budman's claims fall within the scope of the arbitration provision, and SBS is a proper party to assert the arbitration provision. We further determine the arbitration provision remains enforceable despite two corporate mergers. We thus reverse and remand.
FACTUAL AND PROCEDURAL BACKGROUND
In March 1998, Internet Products, Inc. (IPI) employed Budman as its president. One year later, in March 1999, IPI and Budman entered into a restricted stock purchase agreement (Agreement).
Under the Agreement, Budman agreed to purchase 600,000 shares of IPI common stock for $96,000, and to pay this amount with a promissory note secured by a pledge of the securities. The Agreement provided that IPI had the right to repurchase the shares under certain conditions, and that Budman could not sell or transfer the shares while they were subject to this repurchase option. The Agreement contained a vesting schedule after which the stock would no longer be restricted. IPI had the "right, but not an obligation" to repurchase the shares if Budman's employment terminated for any reason. The purpose of the Agreement was to encourage Budman's continued employment, and to provide IPI with the right to repurchase the shares under the specified circumstances.
Paragraph 6 of the Agreement provided that upon a merger, Budman's "substituted" securities "shall be immediately subject to this Agreement . . . for all purposes . . . ." Paragraph 15 contained a mandatory arbitration provision, the terms of which will be set forth in detail below. Paragraph 13 stated that each party had been "afforded the opportunity to consult independent counsel" and therefore "the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party [IPI] shall not be employed in the interpretation of this Agreement."
Less than two years after the parties signed the Agreement, IPI merged with the predecessor company to SBS ("the former SBS"). On the effective merger date, Budman's rights in the IPI stock were extinguished and his shares were automatically converted to shares of common stock of the former SBS.
In connection with the merger, Budman terminated his employment with the company and entered into a severance agreement. In the severance agreement, the parties agreed that as a result of the merger, Budman's shares purchased in the Agreement would fully vest at the close of the merger. The parties further agreed that "Budman shall remain liable to [IPI] or [the former] SBS under the [promissory note] and that the SBS common stock received by . . . Budman in exchange for the [IPI] Stock shall be substituted as security . . . to secure . . . Budman's obligations under the Note."
Six years later, in July 2006, the former SBS merged with a public shell and became a new entity (the defendant in this case) referred to as SBS. As part of that merger, Budman's common stock in the former SBS was extinguished and was automatically converted into shares of the new SBS. At the time of the merger, Budman contacted Riedler, SBS's chief financial officer, and asked whether Budman was entitled to freely trade his SBS stock. Riedler responded that Budman was subject to a six-month holding period, and referred to a specific provision in the Agreement establishing a "Stand-Off Period" during which Budman was prohibited from selling the shares for a certain time after a public offering.
Eight months later, in March 2007, Budman filed a complaint against SBI and Riedler, alleging fraud, negligent misrepresentation, and negligence. Budman alleged that in reliance on Riedler's statements, he refrained from trading his shares. Budman alleged he later discovered there was no applicable holding period, and his shares were transferable on the first public offering date. Budman claimed Riedler knew or should have known of this fact, and that if Budman had known the true facts, he would have immediately traded his 155,899 shares of stock, and that by not doing so, he lost $514,466.70.
In response, SBS and Riedler moved to compel arbitration under the Agreement's arbitration provision (Paragraph 15).
In opposing the motion, Budman argued SBS could not enforce the arbitration provision because SBS was not a party to the contract, and the two mergers "extinguish[ed]" the "rights and obligations" of the Agreement. Budman additionally argued that his claims against the new SBS were beyond the scope of the arbitration provision because the arbitration provision applied only to disputes arising from his employment with IPI.
Defendants responded that under California law, all assets and liabilities of two merging companies vest in the surviving company, and therefore the former SBS and the new SBS each succeeded to the rights and obligations of the Agreement. Defendants also relied on Paragraph 6 of the Agreement which stated the Agreement remains applicable to substituted securities after a merger. Defendants additionally argued that Budman's causes of action fell within the broad scope of the Agreement's arbitration provision because the claims related to the Agreement, even if they did not specifically concern Budman's prior employment.
After considering the parties' submissions and conducting a hearing, the court denied defendants' motion to compel arbitration based on its conclusion that the arbitration provision applied only to disputes relating to Budman's employment with IPI. The court stated the current claims "have nothing to do" with Budman's IPI employment or his ownership of IPI stock during the term of his employment. Based on this conclusion, the court found there was no need to reach Budman's additional arguments pertaining to the enforceability of the Agreement.
DISCUSSION
I. Generally Applicable Legal Principles
Code of Civil Procedure sections 1281.2 and 1290.2 provide for the resolution of motions to compel arbitration in summary proceedings. (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 972 (Engalla).) Under these statutes, the party seeking to compel arbitration bears the initial burden of proving the existence of a valid agreement to arbitrate. (Ibid.)The burden then falls on the party opposing arbitration to show the agreement cannot be interpreted to apply to the dispute. (Balandran v. Labor Ready, Inc. (2004) 124 Cal.App.4th 1522, 1527 (Balandran).)
In determining whether the parties met their burdens, the trial court must focus on the contract language. " 'Private arbitration is a matter of agreement between the parties and is governed by contract law. . . . Arbitration agreements are to be construed like other contracts to give effect to the intention of the parties. . . . ' 'When deciding whether the parties agreed to arbitrate a certain matter . . ., courts generally . . . should apply ordinary state-law principles that govern the formation of contracts.' . . . 'If contractual language is clear and explicit, it governs. . . .' 'The court should attempt to give effect to the parties' intentions, in light of the usual and ordinary meaning of the contractual language and the circumstances under which the agreement was made.' " (In re Tobacco Cases I (2004) 124 Cal.App.4th 1095, 1104.)
Ambiguities as to the scope of the arbitration clause must be resolved in favor of arbitration. (In re Tobacco Cases I, supra, 124 Cal.App.4th at p. 1104.) This rule is based on the strong public policy favoring arbitration under California and federal law. (Id. at p 1103;see Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 96-98.) A " ' "court should order [parties] to arbitrate unless it is clear that the arbitration clause cannot be interpreted to cover the dispute." ' [Citation.] ' " 'A heavy presumption weighs the scales in favor of arbitrability; an order directing arbitration should be granted "unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute. Doubts should be resolved in favor of coverage." ' " ' " (Cione v. Foresters Equity Services, Inc. (1997) 58 Cal.App.4th 625, 642.)
In ruling on an arbitration motion, the trial court sits as a trier of fact and considers information contained in declarations and other documentary evidence, and any oral testimony presented. (Engalla, supra, 15 Cal.4th at p. 972.) A reviewing court must uphold the trial court's resolution of disputed facts if supported by substantial evidence. (Nyulassy v. Lockheed Martin Corp. (2004) 120 Cal.App.4th 1267, 1277.) However, where, as here, there was no disputed extrinsic evidence, we apply a de novo review standard and conduct an independent analysis to determine whether the claims are subject to arbitration under the principles summarized above. (Ibid.; see Giuliano v. Inland Empire Personnel, Inc. (2007) 149 Cal.App.4th 1276, 1284.)
II. Scope of Provision Includes Disputes Relating to Budman's Stock
In examining the propriety of the trial court's finding that the Agreement's arbitration provision applied only to employment-related disputes, we begin with the language of the provision:
The Agreement defines "Employee" as Budman and "Company" as IPI.
The first sentence of this arbitration provision broadly requires arbitration of all claims arising out of or relating to Budman's "employment relationship" with IPI. (Italics added.) The phrase "employment relationship" is then specifically defined to include "any agreements previously or hereafter entered into between [Budman and IPI] in connection with such employment relationship . . . ." (Italics added.) This definition ("any agreements previously or hereafter entered into . . .") is then expressly defined to include "the Agreement."
Under this language, Budman necessarily agreed to arbitrate any claim "arising out of or relating to" the Agreement. If the "employment relationship" includes agreements entered into during the employment (which includes the Agreement), and all disputes relating to the "employment relationship" are subject to arbitration, then it logically follows that disputes arising out of or relating to the Agreement fall within the mandatory arbitration clause. This interpretation is consistent with the fact that the arbitration provision is contained in the Agreement. There would be no reason to place an arbitration provision in the Agreement if it was not intended to apply to claims "arising from or relating to" the Agreement.
Significantly, Budman does not contend that his fraud and misrepresentation claims do not arise out of or relate to the Agreement, or that tort claims are not potentially covered by the arbitration provision. Instead, he argues that "[t]he arbitration clause does not purport to apply to litigations that are instituted to interpret [or enforce] the terms of the [Agreement]" and "rather, the arbitration clause is specifically limited to employment issues." Budman thus argues that the arbitration provision was intended to apply only to "typical employment disputes" and cannot govern claims that arise after the employment had terminated.
Budman's proposed interpretation is unsupported by the language of the arbitration provision and the general rules favoring arbitration of disputes. First, the arbitration provision does not expressly or implicitly limit its applicability to "typical" employment causes of action. Instead, the first sentence of the provision broadly applies to claims relating to Budman's "employment relationship" with IPI, and specifically defines his employment relationship to include agreements between Budman and IPI in connection with the employment relationship, including the Agreement. As Budman notes, the term "employment relationship" must be given its ordinary and popular meaning "unless used by the parties in a technical sense." (Italics added.) In this case the parties specifically defined "employment relationship" to include the Agreement, and provided that all claims relating to the "employment relationship" (as broadly defined to include the Agreement) were subject to arbitration.
Further, the language of the Agreement contemplates that its terms apply even after Budman left the company, and thus that the arbitration provision would continue to apply to disputes arising after the employment is ended. For example, the Agreement provides that "[Budman] understands that an investment in the Company is speculative, . . . and that he must bear the economic risks of the investment . . . for an indefinite period of time. [Budman] is able to bear these economic risks and to hold the Shares for an indefinite period." (Italics added.) This reference to an "indefinite period" reflects the parties' intent that the Agreement would continue despite the termination of an employment relationship. Likewise, the Agreement provides that the Company has "the right, but not an obligation" to repurchase the stock if Budman terminates his employment with the company within three years of the agreement. (Italics added.) Thus, if the Company does not repurchase the stock, Budman will continue to be an owner of the stock subject to the applicable terms of the Agreement. Further, as discussed more fully below, the Agreement specifically provides that it will apply to successors and assigns of both IPI and Budman.
Budman contends the parties must have intended the arbitration provision would apply only to employment disputes because the listed claims in the provision's second sentence are claims that primarily involve employment-related disputes (e.g., wrongful termination, wage claims, discrimination). However, by adding the phrase "include, but are not limited to," the parties necessarily intended that the list be illustrative rather than comprehensive. The identification of employment-related causes of action demonstrates that the arbitration provision was intended to cover typical employment disputes. However, this intention does not reasonably lead to the conclusion that the parties intended to exclude claims arising solely from the Agreement, such as the tort claims asserted in this case. The Agreement specifically includes "tort claims" in the list of claims covered by arbitration.
In this respect, Budman's reliance on Balandran, supra, 124 Cal.App.4th 1522 is misplaced. In Balandran, the plaintiffs signed an employment application with a company, agreeing to arbitrate "any dispute arising out of my employment, including any claims of discrimination, harassment or wrongful termination that I believe I have against [the employer] and all other employment related issues . . . ." (Id. at p. 1528, italics added.) The plaintiffs brought a lawsuit against the company alleging the company discriminated against them by failing to hire them. (Id. at p. 1526.) The company sought to enforce the arbitration clause, but the reviewing court found the plaintiffs' claims were beyond the scope of the agreement because the plaintiffs were never employed by the company. (Id. at pp. 1528-1530.) The Balandran court stated that the company "concede[d] that plaintiffs were not [its] employees and therefore the company [did] not attempt to argue that plaintiffs' preemployment discrimination claims 'aris[e] out of [their] employment.' [The company] instead argue[d] plaintiffs' claims fall within that part of the arbitration clause that applies to 'all other employment related issues.' " (Id. at p. 1526.) The Balandran court rejected the latter argument, explaining that " 'all other employment related issues' " was not a separate category of claims, but instead was part of the " 'including' " clause that defined " 'disputes arising out of . . . employment.' " (Id. at pp. 1529-1530.)
The language of the arbitration provision in this case is materially different from the Balandran agreement. The arbitration provision here specifically applied to claims arising out of Budman's employment relationship with IPI, which was defined to include the Agreement. In Balandran, the "including" clause referred to the types of employment claims that were covered by the agreement, e.g., discrimination and/or harassment claims. (Balandran, supra, 124 Cal.App.4th at p. 1525.) In this case, the "including" clause in the first sentence refers to the meaning of the "employment relationship." Moreover, in this case, unlike in Balandran, the plaintiff was employed by the company at the time he signed the arbitration provision.
Budman additionally argues that the parties' intent to limit the claims to traditional employment-type disputes is reflected by the requirement that the arbitration shall be conducted "in accordance with the then current Employment Dispute Resolution Rules . . . of the American Arbitration Association ('AAA') . . . ." Viewing the arbitration provision as a whole, we are unconvinced this single reference to the AAA employment dispute rules was intended to limit the scope of the arbitration requirement, particularly given the broad language in the first portion of the provision. When interpreting a contract, a court must focus on the entire agreement, rather than isolating individual words or phrases. (Civ. Code, § 1641; Transportation Guar. Co. v. Jellins (1946) 29 Cal.2d 242, 247-248.) Further, there is nothing in the record showing the "Employment Dispute Resolution Rules" cannot be reasonably applied to the current dispute. The arbitration provision qualifies the requirement with the phrase "to the extent that such [AAA] Rules do not conflict with any provision of this Agreement." Thus, if a specific AAA Employment Dispute Resolution rule is inapplicable to a dispute involving the sales restrictions on Budman's stock, the arbitrator may apply a different rule.
We also find Budman's reliance on the attorney fees and choice of law provisions in the Agreement to be misplaced. Budman argues that because these provisions refer only to the Agreement, and not the broader employment relationship, the parties must have intended that the arbitration provision would not apply broadly to disputes arising from the Agreement. However, the fact that the arbitration provision is broader than the other provisions (by including employment-related claims) does not logically mean the parties intended to exclude from the arbitration requirement all claims relating to the Agreement. Moreover, an arbitration provision differs in substance from an attorney fees provision and/or choice of law provision. Thus, the fact that the provisions used different words does not necessarily mean that the parties intended to eliminate arbitration for disputes arising from the Agreement.
The attorney fees provision states: "In the event either party shall commence any action or proceeding against the other party by reason of any breach or claimed breach in the performance of any of the terms or conditions of this Agreement, or to seek a judicial declaration of rights under this Agreement, the prevailing party in such action shall be entitled to recover reasonable attorneys' fees and costs." The choice of law provision states: "This Agreement is entered into and to be performed in San Diego, California, and it shall be interpreted and enforced under, and all questions relating thereto shall be determined in accordance with, the laws of the State of California."
In reaching our conclusion that Budman's claims fall within the scope of the arbitration provision, we recognize that this provision was not a model of clarity. Based on its many references to employment-type claims, the provision appears to have been derived from an arbitration provision contained in an employment agreement, and then modified to encompass claims arising out of, or relating to, the Agreement. However, the
fact that the arbitration provision is not as clear as it could have been, is not sufficient to find in Budman's favor in this particular case. California law requires that we interpret ambiguous agreements in favor of upholding arbitration. Given the strong policy supporting arbitration in this state, "doubts concerning the scope of arbitrable issues are to be resolved in favor of arbitration." (Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal.3d 312, 323; Fitz v. NCR Corp. (2004) 118 Cal.App.4th 702, 711.) Moreover, this is not a case in which it would be appropriate to construe ambiguities against the drafting party. Budman specifically agreed that this rule of construction would not apply to the interpretation of the Agreement. Paragraph 13 of the Agreement states: "As each party has been afforded the opportunity to consult independent counsel, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement." (Italics added.)
We conclude Budman's fraud and negligent misrepresentation claims fall within the scope of the Agreement's arbitration provision.
III. Merger Did Not Render Arbitration Provision Unenforceable
Budman alternatively urges us to uphold the trial court's order because the Agreement is no longer enforceable after IPI merged with the former SBS (a Delaware corporation), which then merged with the new SBS (a Delaware corporation). Budman argues that under Delaware law (generally applicable to analyzing the rights of a surviving Delaware corporation), a stock-for-stock merger automatically extinguishes a prior agreement pertaining to the former stock, citing Shields v. Shields (Del.Ct.Ch. 1985) 498 A.2d 161 (Shields) and Langfelder v. Universal Laboratories, Inc. (3d Cir. 1947) 163 F.2d 804.
We reject this argument for several reasons. First, the Agreement and the merger documents specifically designate California law as the controlling law. Under California law, all assets and liabilities of two merging companies vest in the surviving company, which necessarily includes the parties' rights and obligations under the Agreement, and related promissory note and pledge agreement. (See Corp. Code, § 1107.) There is no California authority providing that a stock purchase agreement containing a provision stating the agreement shall continue to be valid after a merger cannot be enforced after the merger.
Although the court did not reach this argument, we may consider it on appeal because the parties fully briefed the issue and there was no extrinsic evidence presented.
Moreover, even if we were to apply Delaware law, the cases relied upon by Budman are distinguishable. (Shields, supra, 498 A.2d 161; Langfelder v. Universal Laboratories, Inc., supra, 163 F.2d 804.) Shields involved a dispute over a right of first refusal attached to stock in a family's closely held corporation that established a low (book) value for the purchase price. (Shields, supra, 498 A.2d at p. 163.) This right of first refusal created a "lottery effect" whereby the last surviving shareholder of the family company would realize the entire appreciated value of all the company assets. (Id. at pp. 163-164.)To defeat this effect, the existing corporation merged with a newly created corporation and the shareholders entered into a new agreement that eliminated the previous transfer restrictions. (Id. at pp. 164-165.) A minority shareholder brought suit alleging the merger triggered the right to exercise his right of first refusal, and then sought a preliminary injunction.
The Shields court refused to grant the preliminary injunction, finding it was unlikely the minority shareholder would prevail on the merits. (Shields, supra, 498 A.2d at p. 166.) The court explained that a merger "legally moots the terms of a restriction on transfer of the stock of a disappearing corporation" because the subject matter of the restriction (the stock in the former corporation) "ceases to exist legally." (Id. at p. 168.) Citing well established Delaware law that a merger "may have the effect of eliminating" certain " 'vested' " rights attached to the former securities, the Shields court found it "neither shocking nor novel" that the minority shareholder lost his rights attached to the prior stock. (Ibid.; see Langfelder v. Universal Laboratories, Inc. (D.C. Del. 1946) 68 F.Supp. 209, 211 [recognizing that a merger may serve to eliminate a previously accrued dividend right].) The Shields court suggested, however, that a rule that a prior agreement was extinguished would not necessarily apply if the parties had an express agreement to the contrary: "[a]greements between stockholders with respect to their stock may, of course, take any number of forms . . ., and it is conceivable that such an agreement could provide that in the event of a merger resulting in the signatories holding shares of another corporation that certain consequences would occur . . . ." (Shields, supra, 498 A.2d at p. 168; see also 12 Fletcher Cyc. Corp. (rev. ed. 2007) Right to Transfer Shares, § 5460.30.)
In this case, the parties specifically agreed to a certain consequence in the event of a merger—that the terms of the Agreement would remain enforceable as to the substituted securities. This case differs from Shields because in Shields the majority shareholders entered into a new agreement which specifically deleted the prior requirement pertaining to the shareholder rights. (Shields, supra, 498 A.2d at pp. 165-166.) In this case, there was no evidence of a subsequent agreement that specifically rendered the Agreement or its arbitration provision unenforceable. In this regard, Budman's reliance on the language of various provisions in the merger documents is unhelpful. These provisions merely reflect the rule that rights in the stock of the disappearing corporation are generally extinguished, but the provisions do not specifically concern the continued viability of the stock purchase agreement.
In concluding the arbitration provision is enforceable on the record before us, we do not intend to suggest a conclusion as to the applicability or enforceability of any provision of the Agreement pertaining to the merits of the parties' claims.
DISPOSITION
The court is ordered to vacate its order denying defendants' motion to compel arbitration, and to enter a new order granting the motion. Respondent to bear appellants' costs on appeal.
WE CONCUR: O'ROURKE, J., AARON, J.