STF Equity Fund v. Prof. Interactive Entertainment

Filed 5/25/10 STF Equity Fund v. Prof. Interactive Entertainment CA2/5

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION FIVE

APPEAL from a judgment of the Superior Court of Los Angeles County.

Joseph Biderman, Judge. Affirmed.

Michael S. Traylor for Defendant and Appellant.

Venable, Ben D. Whitwell, Christopher Williams for Plaintiffs and Respondents.

_______________

Plaintiff STF Equity Fund ("STF") and William H. Young, III ("Young") sued defendant Professional Interactive Entertainment, Inc. ("PIE") for breach of a warrant agreement. After a bench trial, the court entered judgment in favor of Young and ordered PIE, upon Young's election, to issue two percent of its outstanding stock to Young for the purchase price of $40,000. PIE appeals that judgment, contending that the trial court erred in misconstruing the terms of the agreement, and in enforcing PIE's obligations under the agreement even though conditions precedent to those obligations had not occurred. Finding no error, we affirm.

FACTS AND PROCEDURAL SUMMARY

PIE is a Delaware company incorporated on June 3, 2002, with its principal place of business in Santa Monica. PIE was initially authorized to issue a total of 40,000,000 shares of capital stock, of which 30,000,000 shares were designated common stock and 10,000,000 shares were designated preferred stock. PIE is the sole shareholder of a number of subsidiaries, including Global Gaming League, Inc., "an online gaming and social networking company [which] provides a platform for online gaming tournaments."

In late 2001, STF loaned PIE's predecessor $100,000 pursuant to a convertible promissory note. This debt of the corporation was converted into equity when plaintiff Young, a shareholder of STF, was issued 247,086 shares of PIE common stock in satisfaction of PIE's obligations under the note.

On June 24, 2002, STF made a second loan to PIE in the amount of $200,000. In consideration of the loan, and pursuant to a convertible promissory note, STF was entitled to receive either repayment of the principal sum with interest, or shares of PIE common stock equal to approximately two percent of PIE's issued and outstanding common stock. In April 2004, PIE issued 400,000 shares of common stock to Young in satisfaction of the note, again converting debt of the corporation into equity. As further consideration for this loan, STF and PIE entered into a warrant agreement (the "Warrant Agreement"), which is the subject of this lawsuit.

The Warrant Agreement provided that "STF [], or its permitted registered assigns ('Holder'), is entitled . . . at any time or from time to time commencing on June 24, 2003, ('the Effective Date') [and] June 24, 2007 (the 'Expiration Date'), to purchase from [PIE], up to 400,000 shares of Common Stock of [PIE], representing on the date hereof approximately 2% of the issued and outstanding capital stock of [PIE] on a fully diluted basis, at an exercise price per share equal to $0.10 (the 'Purchase Price'). Both the number of shares of Common Stock purchasable upon exercise of this Warrant and the Purchase Price are subject to adjustment and change as provided herein."

Section 4 of the Warrant Agreement set forth the circumstances under which the number of shares and their purchase price would be subject to adjustment. Those circumstances included a stock split, subdivision or combination of existing shares, a merger involving the company, and "a recapitalization of the Common Stock (other than a subdivision, combination, or Merger (as defined below) transaction provided for elsewhere in this Section 4)."

In addition to the foregoing provisions, the Warrant Agreement set forth the procedure for plaintiff's exercise of the warrant (the "Notice of Exercise"), a procedure for PIE to compute, at plaintiff's request, the adjusted number of shares or share price subject to the warrant (the "Certificate of Adjustment"), and a restriction on transfer of the warrant.

After execution of the Warrant Agreement and before the expiration of the option, PIE's Board of Directors amended its articles of incorporation and modified its capital structure to increase the number of its authorized shares of common stock to 100,000,000. Plaintiff believed that this constituted a recapitalization within , resulting in an increase of the number of shares subject to the option to over 1.3 million or two percent of the issued and outstanding shares of common stock as of the exercise date, for the same $40,000 purchase price. Consequently, in 2006, in anticipation of the exercise of the warrant, plaintiff requested from PIE a Certificate of Adjustment as provided in the Warrant Agreement. PIE refused to issue the Certificate, contending that there had been no recapitalization which would trigger the adjustment provision of the Warrant Agreement.

In April 2007, before the Warrant Agreement was set to expire, Young and STF filed this lawsuit alleging PIE's breach of the Warrant Agreement. In addition to damages, Young and STF sought declaratory relief and specific performance, to wit, an order directing PIE to "(1) adjust the number of shares purchasable under the Warrant, (2) provide a 'Certificate as to Adjustments' to STF or Young and (3) to allow STF or Young to purchase PIE Common Stock shares up to the increased adjusted level."

Trial was to the court. Plaintiff introduced expert testimony to establish the meaning of the term recapitalization as used in the Warrant Agreement. The court concluded that "[t]he uncontroverted expert testimony before the Court established that recapitalization of [PIE] occurred upon authorization for and issuance of additional shares" and that "PIE's failure to provide the Certificate of Adjustment constituted a breach of the Warrant Agreement," thus excusing Young's "obligation to exercise his warrant." Based on these findings, the trial court ordered that "in exchange for his payment of $40,000, PIE is directed to issue to Young a Certificate of Adjustment and issuance of the number of shares reflecting two percent (2%) of the outstanding Common Stock of PIE as of 6/23/07." PIE timely appealed that ruling.

CONTENTIONS

PIE cites four findings underlying the judgment in favor of plaintiff which it contends are not supported by substantial evidence: That STF effectuated a proper transfer of the Warrant Agreement to Young; that plaintiff's failure to timely exercise the option did not adversely affect his right to acquire those shares; that PIE had undergone a recapitalization within the meaning of the Warrant Agreement; and that plaintiff was entitled to purchase two percent of the issued and outstanding shares of PIE for $40,000, with no adjustment to the purchase price. We consider each contention in turn.

STANDARD OF REVIEW

"[F]actual findings made by the trier of fact are generally reviewed for substantial evidence. Factual issues may be reviewed de novo when the facts are uncontroverted and only one deduction or inference may reasonably be drawn." (Ermoian v. Desert Hosp. (2007) 152 Cal.App.4th 475, 500-501, internal citations omitted.) "Under the substantial evidence standard of review, our review begins and ends with the determination as to whether, on the entire record, there is substantial evidence, contradicted or uncontradicted, which will support the trial court's factual determinations." (Id. at p. 501.)

DISCUSSION

1.      The validity of the transfer from STF to Young

As PIE argues, in February 2004, "Plaintiff STF Equity Fund purported to assign its interest the Warrant Agreement to Plaintiff William Young. This purported assignment is . . . invalid. As a result of its invalidity, no interest was assigned to

Mr. Young. Accordingly, STF Equity retained its interest in the Warrant Agreement and as an 'improper plaintiff,' judgment should have been entered in favor of Defendants."

PIE maintains that the assignment from STF to Young was invalid because it was not authorized by the Warrant Agreement. That agreement contains restrictions on the ability of STF, the warrantholder, to transfer its rights thereunder. Specifically, paragraph 8 of the Warrant Agreement provides that the warrant may be transferred to a "parent, subsidiary or affiliate" of the holder of the warrant, or "any officer, director, partner or member of any such parent, subsidiary or affiliate." PIE notes that Young, an individual, is by definition not a parent, subsidiary or affiliate of STF, nor does he purport to be an officer, director, partner or member of a parent, subsidiary or affiliate of STF. And while Young was an officer, director and sole shareholder of the warrantholder STF, the transfer of the warrant to an officer, director or shareholder of the warrantholder was not specified as a permitted transfer by the Warrant Agreement.

Relying on People ex rel. Dept. Pub. Wks. v. McNamara Corp. Ltd. (1972) 28 Cal.App.3d 641,Young contends that "STF's assignment of the Warrant Agreement to its sole shareholder Mr. Young is not recognized by the law as a 'transfer' and, thus, is not subject to any assignability or transfer restrictions as a matter of law." In the cited case, the rights and obligations of the contractor under a construction contract with the State of California were assigned to the wholly-owned subsidiaries of the contractor, notwithstanding a prohibition on assignment without the consent of the State. The State maintained that the unauthorized assignment was a prima facie breach of contract, depriving the contractor of the ability to pursue its claims against the State. The appellate court disagreed: "'[I]f an assignment results merely from a change in the legal form of ownership of a business, its validity depends upon whether it affects the interests of the parties protected by the nonassignability of the contract.' [] 'Where a transfer results merely from a change in the legal form of a business and does not affect the interests of the party protected by the nonassignable provisions of the lease, a breach of that provision does not occur.'" (Id. at pp. 648-649, internal citations omitted.) The court concluded that to find a breach of the prohibition against assignment in such a situation "would be to exalt form above substance." So too here, to conclude that STF's transfer of its rights under the Warrant Agreement to its sole shareholder constituted a breach of that agreement would exalt form over substance. Were it material to the transaction, Young could have caused STF to form a subsidiary, to appoint Young an officer or director thereof, and to transfer STF's rights under the Warrant Agreement to Young. It was not material to the transaction, and PIE's rights were in no way undermined by the transfer from STF to Young of the former's rights under the Warrant Agreement. Indeed, PIE previously issued 647,086 shares of its common stock directly to Young in satisfaction of two convertible promissory notes in favor of STF. Consequently, the trial court properly found that STF's assignment of its rights to Young was valid.

2.      Effect of plaintiff's failure to timely exercise the option

PIE next contends that Young's failure to exercise the option in the manner prescribed in the Warrant Agreement precludes the issuance of the subject shares. In support of this argument, PIE cites the longstanding rule that "when the provisions of an option contract prescribe the particular manner in which the option is to be exercised, they must be strictly followed." (Palo Alto Town & Country Village, Inc. v. Bbtc Company (1974) 11 Cal.3d 494, 498, internal citations omitted.) Here, PIE maintains, and Young does not dispute, that Young did not deliver a "Notice of Exercise" to PIE at the principal office of the company as prescribed by section 2 of the Warrant Agreement. Accordingly, PIE concludes that a condition precedent to PIE's obligation to issue the shares under the warrant did not occur.

At trial, Young presented evidence that he had made repeated, timely requests of PIE to issue a Certificate of Adjustment pursuant to section 5 of the Warrant Agreement. Young maintained that this information was necessary in order for him to exercise the warrant. PIE refused to issue the requested certificate. Young argued that, because he had done everything in his power to exercise the warrant but had been thwarted by PIE's refusal to cooperate, PIE could not rely on Young's failure to exercise the option in the manner specified in the Warrant Agreement to relieve it of its obligation to issue the shares subject to the warrant. The trial court agreed, concluding that PIE's failure to supply a Certificate of Adjustment at Young's request constituted a breach of the Warrant Agreement, which excused Young's obligation to timely tender the option.

On appeal, PIE argues that "no anticipatory repudiation occurred." However, PIE cites neither evidence in the record nor legal authority in support of this argument. Rather, PIE quotes Commercial Code section 2611 to the effect that "[u]ntil the repudiating party's next performance is due he can retract his repudiation unless the aggrieved party has since the repudiation canceled or materially changed his position or otherwise indicated that he considers the repudiation final." PIE explains: "no 'next performance' was due unless Plaintiff exercised the option. Furthermore, any repudiation could have been canceled at any time up until the requirement to tender the shares had arrived. As this never occurred as a sole result of Plaintiff's neglect (at best) or decision (most likely) to exercise the option, there could not be an anticipatory repudiation."

PIE misunderstands that import of the statutory language. Had PIE changed its mind, it could have, consistent with Commercial Code section 2611, retracted its repudiation of its obligation to provide a Certificate of Adjustment by fulfilling its obligation to do so; that is, by providing a Certificate of Adjustment. It did not do so. Thus, Commercial Code section 2611 has no relevance to the facts before us. PIE has failed to identify any error in the trial court's finding that Young took all steps required of him to exercise the warrant. To the contrary, substantial evidence supports the trial court's conclusion that PIE breached the Certificate of Adjustment provision of the Warrant Agreement, excusing Young's performance of the Notice of Exercise provision.

3.      The evidence of a recapitalization of PIE

Section 4.2 of the Warrant Agreement provides in pertinent part: "If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination, or Merger (as defined below) transaction provided for elsewhere in this Section 4), provision shall be made so that the Holder shall thereafter be entitled to receive upon exercise of this Warrant the number of shares of stock or other securities or property of the Company or otherwise, to which a holder of Common Stock deliverable upon exercise would have been entitled upon such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the Holder after the recapitalization to the end that the provisions of this Section 4, including adjustment of the Purchase Price and the number of shares issuable upon exercise of this Warrant, shall be applicable after that event as nearly equivalent as may be practicable."

At the heart of this controversy is the parties' dispute about whether PIE's amendment of its articles of incorporation to increase the number of authorized shares of common stock from 30,000,000 to 100,000,000 constituted a "recapitalization" within the meaning of the above-quoted language. The term was not defined in the Warrant Agreement, and the trial court permitted expert witnesses to explain the meaning of the term. PIE contends that this was error, since "[i]t is the intent of the parties that controls and the expert testimony proffered was of no assistance in this regard." PIE further avers that "Plaintiff failed to submit any evidence of the intent of the parties and the legal definition of 'recapitalization' does not support that such occurred."

Contrary to PIE's contention, Young testified that it was his stated intention at the time the Warrant Agreement was negotiated that, upon exercise of the warrant, he would receive two percent of the common shares of PIE: "I told [Sean Sullivan, PIE's representative] that I felt that I didn't want to make any investment where the stock would be diluted and I was getting ready, if I put up the other $200,000, to me that was a tremendous amount of money and at that time I wanted some guarantee that I would never, my stock would never be diluted." Indeed, Young was so concerned about the possibility of his shareholdings being diluted that he requested written confirmation from PIE of Mr. Sullivan's oral representation that his stock would not be diluted. In response to this concern, PIE's attorneys, Akin Gump, provided Young with a letter containing the following language: "In exchange for STF Equity Fund's investments in Professional Interactive Entertainment, Inc. (the 'Company'), enclosed please find a promissory note convertible into shares of Common Stock of the Company representing approximately 2% of the issued and outstanding capital stock of the Company on a fully diluted basis on the issuance date. Please also find a common stock purchase warrant entitling STF to purchase additional shares of Common Stock representing approximately 2% of the issued and outstanding capital stock of the Company on a fully diluted basis on the issuance date. Upon conversion and exercise of the note and warrant, respectively, STF Equity Fund will hold approximately 4% of the issued and outstanding shares of the Company."

The foregoing evidence fully supports the trial court's finding that the use of the term "recapitalization" in the Warrant Agreement was meant to include an increase in the aggregate number of authorized shares of PIE, such that, absent an adjustment to the number of share subject to the warrant, the warrantholder's shareholdings would be substantially diluted.

4.      The purchase price of the common stock

Finally, PIE contends that, even if Young is entitled to purchase two percent of the company's issued and outstanding shares of common stock, the Warrant Agreement specifically sets the purchase price at $.10 per share. By ordering PIE to issue 1,329,401 shares to Young for $40,000, the trial court has set the purchase price at approximately $.03 per share. PIE maintains that this was error.

As Young points out, the first paragraph of the Warrant Agreement provides that "[b]oth the number of shares of Common Stock purchasable upon exercise of this Warrant and the Purchase Price are subject to adjustment and change as provided herein." Likewise, Section 4 of the Warrant Agreement entitles the warrantholder to an adjustment of the number of shares to be purchased through exercise of the warrant as well as a corresponding adjustment in the purchase price if there is a recapitalization of the common stock: "In any such case, appropriate adjustment shall be made in the application of the provisions of the Section 4 with respect to the rights of the Holder after the recapitalization to the end that the provisions of this Section 4, including adjustment of the Purchase Price and the number of shares issuable upon exercise of this Warrant, shall be applicable after that event as nearly equivalent as may be practicable." The trial court's ruling that, in exchange for his $40,000 payment, Young is entitled to receive two

percent of the outstanding shares of PIE common stock, or 1,329,401 shares, is consistent with these provisions of the Warrant Agreement.

DISPOSITION

The judgment is affirmed.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

ARMSTRONG, Acting P. J.

I concur:

WEISMAN, J.^*

MOSK, J., Concurring

The warrant allows the adjustment of the purchase price and number of shares in the event of certain specified circumstances. The one invoked by plaintiff is recapitalizations. Plaintiff claims, and the trial court found, that the authorization for an issuance of additional shares that diluted plaintiffs interest constituted such a recapitalization. I never thought of the issuance of shares as constituting a recapitalization.

The term recapitalization is one developed in tax law as a form of a reorganization. (See Eustice, Federal Income Taxation of Corporations and Shareholders (2009)  12.27 (Eustice).) It is also used in the California Corporate Securities Law of 1968 (see Corp. Code,  25000 et seq., pt. 2, ch. 3) and in the regulations for that law (Cal. Admin. Code, tit. 10,  260.121).)

An early administrative ruling adopted the view of Cook on Corporations that a recapitalization is an arrangement whereby the stock and bonds of the corporation are readjusted as to amount, income, or priority, or an agreement of all stockholders and creditors to change and increase or decrease the capitalization of debts of the corporation or both, and the Supreme Court said more briefly, that the term connotes reshuffling of a capital structure within the framework of an existing corporation. [Helvering v. Southwest Consolidated Corp. (1942) 315 U.S. 194]. (Eustice, supra,  12.27.) Congress has not attempted a definition of what is recapitalization. (Bazley v. Commissioner (1947) 331 U.S. 737, 741.) Although the term has not been defined explicitly in the tax code or the regulations, its definition is the one developed in the case law. (Willens (2006) 112 Tax Notes 1079.)

Generally, a recapitalization is a type of Internal Revenue Code, 26 U.S.C. section 368(a)(1)(E) (or Type E) reorganization. That provision has been utilized for the issuance of a preferred stock in discharge of outstanding bonds (26 C.F.R.  1.368-2(e)(1), the exchange of preferred stock for common stock (26 C.F.R. 1.368-2(e)(2)), the exchange of common stock for preferred stock (26 C.F.R. 1.368-2(e)(3)), the exchange of old bonds for new bonds with a different face value or interest rate (I.R.S. Rev. Rul. 58.546, 1958-2 C.B. 143), and a change in stock or securities by virtue of a change in the corporate charter (I.R.S. Rev. Rul. 56-654, 1956-2 C.B. 216).

The most commonly cited definition of a recapitalization is the re-shuffling of the capital structure within the framework of an existing corporation. [Helvering v. Southwest Consolidated Corp., supra, 315 U.S. 194]. A recapitalization can occur upon the exercise of a right to convert one kind of stock into another or upon the adoption of a charter amendment that changes the rights and privileges of the outstanding stock. (Hime, The Application of Sections 305(b) and 305(c) to Redemptions, Recapitalizations and Acquisitions (1995) 48 Tax Law 375, 420; see also 14A Fletcher, Cyclopedia Law of Corporations (2008) 7018.70.)

One authority has written In a recapitalization, a company leverages itselfreducing equity and increasing debtin a transaction thats a cross between a leveraged buyout and an issuer repurchase. Typically, a public shareholder will receive a package of cash (often in an amount approaching or possibly even exceeding the stocks then current market price) plus a proportionately lower number of shares of the newly recapitalized entity and, in some instances, a yield security, either debt or preferred stock. [] Formal Recapitalizations. There are two kinds of recapitalizations. The first is the formal recapitalization, which requires shareholder approval. The plan is usually submitted to the shareholders through a proxy, ultimately followed by a shareholders meeting. This is a recapitalization by operation of law and is known as a state law merger or recapitalization. [] . . . [] Informal Recapitalizations. The informal recapitalization doesnt require a shareholder vote, and usually involves some kind of exchange offer to shareholders. Typically, target company debt securities, preferred stock, cash, or some combination thereof is offered for the stock. Such a debt-heavy issuer exchange offer has the same general result as a formal recapitalization, such as increased debt and reduction of outstanding equity. (Rachelson, Corporate Acquisitions, Mergers and Divestitures (2010)  10:49.) Another authority has said that a recapitalization involves an exchange of stock or securities of a corporation for other stock or securities of the same corporation. (2 Alberty, Advising Small Businesses (2010) 26:12.)

There are also dictionary definitions. Thus, in Fitch, Dictionary of Banking Terms (5th ed. 2006) 376, a recapitalization is defined as Any major changes in a corporations paid in capital, resulting from issuance of new shares of stock, reorganization and bankruptcy, or exchange of common stock shares for bonds and notes, as in a leveraged buyout. In banking, it is any restructuring of a troubled bank assisted by a deposit insurance fund, as in a bailout of a failing bank, where the insurance fund pays the acquiring bank the difference between the book value of a troubled banks assets and the estimated market value. The insurance fund may also take an equity position in the restructured bank. Blacks Law Dictionary defined a recapitalization as an adjustment or recasting of a corporations capital structurethat is, its stocks, bonds, or other securitiesthrough amendment of the articles of incorporation or merger with a parent or subsidiary. (Blacks Law Dictionary (9th ed. 2009) 1382, col. 1.) One state definition is, [a]s used in this section, the term recapitalization includes any reduction in stated capital and excludes any new or additional share authorization for which approval of the Insurance Department is not required by section 204 of this act. (15 Pa. Stats.  21205.)

Thus, those authorities support my impression that a recapitalization is something other than the issuance of additional stock. Yet in Shoffner v. Woodward (Ga. App. 1990) 394 S.E.2d 921, the Georgia court faced a situation that bore some resemblance to the one here. The stock purchase agreement stated if there shall be any stock dividend or other distribution of capital stock or any increase or decrease in the number of outstanding shares of capital stock of the [company] as a result of recapitalization, reorganization, merger or otherwise,[appellant is entitled to additional compensation according to the formula] . . . . (Id. at p. 923, italics added.) The company sold shares of outstanding stock to shareholders as part of an agreement to sell stock to another company, and thereby reduced its obligations and increased its capital. The parties agreed that the provision was an antidilution provision. (Ibid.)

The court in employing principles also used in California (Civ. Code,  1644, 1645) said, When interpreting contracts, we follow the rule that [w]ords generally bear their usual and common signification; but . . . words used in a particular trade or business will be construed, generally, to be used in reference to this peculiar meaning. O.C.G.A. 13-2-2 (2). (Shoffner v. Woodward, supra, 394 S.E.2d at p. 923.) Also, as in California, Although not expressly defined therein, recapitalization is a term used in the Georgia Business Corporation Code to refer to certain stock transactions. See O.C.G.A. 14-2-1110 (5) (F), -- 1112 (b) (3) (A) (iii); see also Comment to O.C.G.A. 14-2-1004 (a) (10). Accordingly, we find recapitalization is a business finance term, and as the agreement at issue involved the sale of stock, we will assume the term was used in that sense. Neither party has cited us to a Georgia case or statute that defines or interprets the term recapitalization, nor has our research disclosed any Georgia authority. The term is most commonly interpreted in cases concerning the applicability of 26 USC 368, which defines certain corporate transactions that are exempt from taxation, and which includes recapitalization in the definition of reorganization. Id. at (a) (1) (E). Courts applying this provision have defined recapitalization as reshuffling of a capital structure within the framework of an existing corporation ( Helvering v. Southwest Consolidated Corp., 315 U.S. 194, 202 (62 S.Ct. 546, 86 L.Ed.789) (1942)); as a new form of the previous participation in an enterprise, involving no change of substance in the rights and relations of the interested parties one to another or to the corporate assets ( Bazley v. Commissioner, 331 U.S. 737, 740 (67 S.Ct. 1489, 91 L.Ed.1782) (1947)); as a transaction in which stockholders receive new securities without substantially changing their original investment (Commissioner v. Neustadt's Trust, 131 F2d 528, 530 (2nd Cir. 1942)); and as (a) an arrangement whereby the stock, bonds or other securities of a corporation are readjusted as to amount, income or priority, or (b) an agreement of all stockholders and creditors to change and increase or decrease the capitalization or debts of the corporation or both. [Cit.] United Gas &c. Co. v. Commissioner, 142 F2d 216, 218 (3rd Cir. 1944). See also 17 Fletcher, Cyclopedia of Corporations, 3:48 (defines recapitalization as any change in the amount or type of authorized stock, including an increase or decrease in the amount of authorized shares or a change in par value of existing shares); Treas. Reg. 1.368-2 (e) (examples of recapitalization include exchanging bonds for stock and surrendering preferred stock in exchange for no par value common stock). [] Like the Bazley court, 331 U.S. at 741, we will not attempt an abstract definition of recapitalization, but will ascertain the meaning of the term in the context in which it is used and in accordance with the parties' intention. The purpose of the antidilution provision was to provide for an adjustment in the event there was a proportional change in the company's outstanding shares through corporate actions such as a stock split so that appellant's right to additional compensation at the time of a subsequent qualifying sale would not be diluted. See Wood v. Coastal States Gas Corp., 401 A2d 932, 938 (II) (c) (Del. Supr. 1979). Accordingly, we hold the term recapitalization in section 1.02 (c) was intended to encompass a change in the number or character of the outstanding shares of the company unaccompanied by a change in the stockholders' existing investment. Where, however, additional investments are made by the stockholders so as to increase the economic value of the company, that constitutes a fundamental change in the company's capital structure -- a capitalization rather than a recapitalization -- and the antidilution provision does not apply. In the transaction at issue, while the total number of outstanding shares increased, there also was a corresponding rise in the net economic value of the company in the form of the consideration paid by appellees . . . for the 781 shares. Thus, rather than diluting appellants share, the transaction increased the value of the company. We agree with appellant that the debt/equity ratio of the company changed as a result, but this change occurred not because of a recapitalization of the existing investments but as a consequence of the addition of new capital to the company's balance sheet. Shoffner v. Woodward, supra, 394 S.E.2d at pp. 923-924.) Thus, the Georgia court suggested that the term was meant to cover a change in the number of outstanding shares that cause a dilution of the value of the stock, which is what occurred here.

In Ecorp, Inc. v. Rooksby (Ind. App. 2001) 746 N.E.2d 128, an Indiana court was faced with a claim by an employee that he was entitled to certain compensation in the event of a recapitalization. The employer said that the sale of coal sites and payment of creditors did not constitute a recapitalization. The court said that the court must determine the intent of the parties and that when a technical term is used, testimony concerning the meaning may be submitted to the factfinder to determine the meaning. The court then said that Indiana law did not define the term and quoted from some of the same authorities as did the Georgia court. (Id. at pp. 131-132.) The court added, Likewise, state courts dealing with the term recapitalization in contracts are careful to define the term in the context of the parties intent. In a Delaware decision, the Supreme Court addressed a stock certificate provision granting preferred shareholders a beneficial adjustment in their stock after recapitalization. Wood v. Coastal States Gas Corp., 401 A.2d 932, 939 (Del. 1979). The Coastal court acknowledged that the circumstances of that case may have fit under the general definition of recapitalization, which is, a fundamental realignment of relationships amongst a companys securities or a reshuffling of the capital structure. Id.(Citing Helvering, 315 U.S. 194). However, the stock certificate provision contemplated more specific circumstances as a recapitalization that would trigger the beneficial adjustment. Id. (noting that the general definition of recapitalization was not the test, rather the critical question concerns what was said in the contract); see also Shoffner v. Woodward, 195 Ga.App. 778, 394 S.E.2d 921, 924 (Ga.Ct.App. 1990) (We will not attempt an abstract definition of recapitalization, but will ascertain the meaning of the term in the context in which it is used and in accordance with the parties intention.). (Id. at p. 132.) The court concluded, Given the technical nature of the term used, reasonable people could arrive at different conclusions about the meaning of recapitalization in Rooksby's employment contract. In other words, an ambiguity exists in the employment contract that can only be resolved in light of extrinsic evidence. As such, the trial court should have employed rules of contract construction and extrinsic evidence . . . to determine and give effect to the parties reasonable expectations. See Fresh Cut, 650 N.E.2d at 1133. (Ibid.) Thus, the court determined that the interpretation involved a factual dispute and reversed a summary judgment.

It is the general rule that when a contract is reduced in writing, the intent of the parties is to be ascertained from the writing itself, if possible. (Civ. Code,  1639.) Interpretation of a written instrument when extrinsic evidence is unnecessary is a question of law for the trial court to determine. As is the situation here, when the meaning of contractual language is uncertain, however, or subject to differing interpretation, and parol evidence is used to ascertain the true meaning, interpretation of the contract provision is a question of fact. (Horsemens Benevolent & Protective Assn. v. Valley Racing Assn. (1992) 4 Cal.App.4th 1538.) If the intent of a contractual provision is dependent upon an interpretation of facts, the interpretation of the contract is a matter for the finder of fact to decide, (Id. at p. 1560.) A trial courts initial determination that a provision term is ambiguous is a question of law, subject to independent review. (Winet v. Price (1992) 4 Cal.App.4th 1159, 1165.) If parol evidence is admitted, and if that evidence is in conflict then we apply the substantial evidence rule. (De Anza Enterprises v. Johnson (2002) 104 Cal.App.4th 1307, 1315.)

The trial court impliedly determined that the term recapitalization was sufficiently ambiguous to permit parol evidence. The trial court was correct in doing so. The parol evidence included the testimony of an expert on the trade usage of the term recapitalization. The expert testified that the companys issuance of stock for cash, as well as for convertible notes and warrants, permitted the auditors to render a clean opinion on the financial statements, and that such transactions constituted recapitalizations. Mr. Young, a plaintiff, testified that the communications between the parties in connection with the transaction were to the effect he would be protected against dilution. This was confirmed by defendants attorney. Finally, an ambiguity in the warrant should be interpreted most strongly against the party who caused the uncertainty to exist. (Civ. Code,  1654.) Thus, there is substantial evidence to support the trial courts implied finding as to the intent of the parties.

Although I have doubts about use of the term recapitalization for the issuance of stock, in the specific circumstances here, there is sufficient ambiguity so as to affirm the trial courts decision under the substantial evidence standard of review. Accordingly, I concur in the majority opinion.

MOSK, J.

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^* Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.