Bolt v. Merrimack Pharm., Inc. - 503 F.3d 913 (9th Cir. 2007)

Rule:

The difference between what a business owns--its assets --and what it owes--its liabilities --represents its net worth, which accountants sometimes refer to as equity. Net worth is defined as a measure of one's wealth, usually calculated as the excess of total assets over total liabilities.

Facts:

Plaintiff Albert D. Bolt owned 52,488 shares of series A redeemable preferred stock issued by Merrimack Pharmaceuticals, Inc. (“Merrimack”). Merrimack had an obligation to redeem the series A stock if its net worth equaled or exceeded $ 5 million. As of December 31, 2001, Merrimack’s balance sheet showed that the company has total assets amounting to $11,331,070, and total liabilities amounting to $1,270,230. During 2001, Merrimack had also issued 3,315,201 shares of Series B Redeemable Convertible Preferred Stock ("Series B Stock") with a book value of $ 11,915,267. The Series B Stock appeared in the "mezzanine" of the balance sheet, between the liabilities section and the stockholders' deficit (equity) section. Plaintiff sought to redeem his shares of series A redeemable preferred stock, but Merrimack rejected the plaintiff’s demands for redemption. Subsequently, the plaintiff sued Merrimack in which he sought a declaratory judgment that Merrimack’s net worth exceeded $ 5 million as of December 31, 2001. The United States District Court for the Eastern District of California granted summary judgment in favor of plaintiff and concluded that Merrimack’s net worth exceeded $ 5 million as of that date. Merrimack appealed.

Issue:

Did Merrimack’s net worth, as determined in accordance with generally accepted accounting principles (GAAP) and as shown on the balance sheet, equal or exceed $ 5 million as of December 31, 2001?

Answer:

Yes.

Conclusion:

The appellate court found that the common and well-established meaning of the term "net worth" was the difference between a corporation's total assets and its total liabilities. The company's balance sheet showed the company's net worth equaled $ 10,060,840, well in excess of the $ 5 million threshold. No GAAP authority required classifying the company's series B stock as part of total liabilities, therefore, the court defer to the auditor's conclusion that the company's balance sheet presented fairly the financial position of the company in conformity with accounting principles generally accepted in the United States of America. Accordingly, the judgment was affirmed.