In the recent Illinois case of Ogdon v. Hoyt, a court held oral contracts for the sale of securities are enforceable. Plaintiff, David E. Ogdon (“Ogdon”), was a senior portfolio manager for Asset Allocation Company (the “Company”), a registered investment advisor that serviced small and medium size insurance companies, and owned a small portion of the Company’s stock. Defendant, Barry G. Hoyt (“Hoyt”), was the Chief Executive Officer and director of the Company and owned a large portion of the Company’s stock.
In 2001, an entity by the name of Cenco sought to purchase the Company. Cenco executed a stock purchase agreement (the “Agreement”) to purchase up to 33% of an entity that would be created to own the Company and its affiliated entities. As part of the transaction, six of the eight Company-related entities were consolidated to form Newco. Since the two other Company-related entities, AAM Advisors, Inc. (“AAM Advisors”) and AAM Convertibles, Inc. (“AAM Convertibles”), were S corporations that could not be purchased by Cenco, a C corporation, without adverse tax consequences, all of the contracts of AAM Advisors and AAM Convertibles were transferred to Newco. In exchange, AAM Advisors and AAM Convertibles received stock in Newco.
At the execution of the Agreement, Ogdon owned 4.6% and Hoyt owned 23% of Newco stock. Pursuant to the Agreement, Cenco was to purchase 25% of Newco by June 2001, and had a six-month option to purchase an additional 8.33% of Newco. In April 2002, Hoyt approached Ogdon about formulating a “side deal” that would permit Hoyt to avoid capital gains taxes and allow him to maintain control of the Board of Directors of Newco. Both parties agreed Ogdon would not tender as many shares as he was entitled to tender to Cenco. Hoyt promised to purchase from Ogdon shares Ogdon would not be selling to Cenco, so that Ogdon would receive the same deal as if he were selling directly to Cenco.
On May 31, 2001, Cenco proceeded with its purchase of 25% of Newco stock. Ogdon, in reliance upon his side deal with Hoyt, tendered fewer shares of Newco to Cenco than he could have. Ogdon sent an email to Hoyt confirming numbers for the side deal and suggested that they complete the transaction on June 30, 2001. Ultimately, the side deal did not close, and Ogdon filed suit to enforce the terms of the same.
Hoyt sought to dismiss Ogdon’s suit on the basis that it was barred by the Statute of Frauds, which requires a writing for contracts for the sale of goods for the price of $500.00 or more. Ogdon argued that sales of stock are specifically exempt from the Statute of Frauds by an amendment which provides that contracts for the sale or purchase of securities are enforceable whether or not there is a writing signed by the party against whom enforcement is sought. Hoyt argued the amendment only applied to publicly traded securities and, thus, was inapplicable to the side deal. The court, however, disagreed with Hoyt and found that the Statute of Frauds does not apply to the sale of securities, regardless of whether the securities are traded on a securities exchange. The Ogdon case demonstrates that oral contracts for the sale or purchase of securities, including closely held businesses, will generally be enforced by courts. If you have any questions concerning the enforceability of contracts for the sale or purchase of securities, please contact a member of the firm.