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Ciolino v. Ameriquest Transportation Services


November 22, 2010


The opinion of the court was delivered by: Irenas, Senior District Judge



This case involves Plaintiff Joseph Ciolino's ("Ciolino") claim that Defendant Ameriquest Transportation Services, Inc. ("Ameriquest"), a New Jersey corporation, violated the terms of Ciolino's employment contract by diluting his ownership interest in Ameriquest.*fn1 Ciolino seeks declaratory relief that he is entitled to a current and continuing undiluted 5% interest in Ameriquest. A one day bench trial was held on October 19, 2010. The Court now issues this Opinion in accordance with Federal Rule of Civil Procedure 52(a)(1).


The factual recitation that follows sets forth the uncontested background facts of this case. Findings of fact from trial will be included in the Court's analysis of Ciolino's claim.

Prior to his employment with Ameriquest, Ciolino held an executive position at Ryder Systems, with which he had been employed for twelve and a half years. (Pl's Direct Test. at 3)

In March 1998, Ciolino and Ameriquest entered into a Memorandum of Understanding ("MOU") in connection with Ciolino's acceptance of an executive position with Ameriquest.*fn2 (Compl. ¶ 5) Pursuant to the MOU, Ciolino's compensation package included a base salary, performance bonuses, commissions, and a grant of stock options. (See MOU ¶ 1) The instant dispute centers on paragraph 1D, which was the product of extensive, hand-written alterations to the original typed text:

Stock options amounting to 2% of the outstanding and issued shares as of the date of employment will be awarded to "employee" upon his first day of employment. The per share price of the options will be at the Initial Offering price (adjusted for stock splits) of $25 per share. The exercise date of the options will be five years at offering (I.P.O.) from the first day of employment. Anti dilution provisions will be incorporated with the options so that the options associated with the original 2% will not fall below that percentage of the outstanding stock prior to any Initial Public Offering of the company. Options will fully vest after five years or at initial public offering within I.P.O. Guidelines[] of employment and should the employee leave the company prior to the five year vesting period or Initial Public Offering he will forfeit all interest in the aforementioned stock options.

Additional stock options will be made available to employee as performance compensation. A pool of up to 8% of the outstanding and issued stock will be set aside for management stock options from which the performance compensation options will be issued. The 8% pool will be in addition to the aforementioned 2% stock option. Performance compensation will be awarded on [an] annual basis. Additional stock options will be made available of up to 3% of outstanding and issued stock over a 5 year period or prior to an initial public offering. Antidilution provisions will be incorporated as is stated in Item 1D regarding the original 2% stock optio[n] award . . . for a tota[l] of 5%.*fn3

(MOU ¶ 1D)

Ciolino timely exercised his stock options between February 2000 and May 2003.*fn4 (Compl. ¶ 7) His total purchases amounted to 5% of Ameriquest's stock. Subsequently, Ameriquest issued additional shares of its stock to other shareholders, but did not offer to issue additional shares to Ciolino.*fn5 (Id.) As a result, Ciolino currently owns less than five percent of the outstanding Ameriquest stock. (See id.) Ciolino's employment with Ameriquest ended in July 2004. (Pl's Direct Test. at 2)

By letter to Ameriquest dated December 22, 2008, Ciolino sought an accounting of the outstanding shares of Ameriquest stock, as well as tender of sufficient shares, the purchase of which would restore Ciolino's ownership interest to 5%. (Compl. ¶ 8) Ameriquest rejected Ciolino's requests. (Compl. ¶ 9)

Ciolino initiated the instant action by filing a two count Complaint on March 23, 2009. Count I alleges that Ameriquest breached the MOU by diluting Ciolino's stock ownership interest, and seeks a declaration that Ciolino is "entitled to a current and continuing undiluted five percent (5%) interest in Ameriquest." (Compl. ¶¶ 14, 15) Count II alleges that Ameriquest violated the New Jersey Business Corporation Act by refusing Ciolino's demand to review its books and records, and asks the Court to direct Ameriquest to provide Ciolino with access to those documents. (Compl. ¶¶ 17-20)

On August 10, 2009, this Court denied Ameriquest's Motion to Dismiss the Complaint. A bench trial was held before this Court on October 19, 2010. This Opinion constitutes the Court's findings of fact and conclusions of law pursuant to Fed. R. Civ. P. 52(a). Pierre v. Hess Oil Virgin Islands Corp., 624 F.2d 445, 450 (3d Cir. 1980)(compliance with Rule 52(a) does not require findings of fact and conclusions of law to be stated separately in a court's opinion).


As a general rule, courts should enforce contracts as the parties intended. Henchy v. City of Absecon, 148 F.Supp. 2d 435, 439 (D.N.J. 2001); Kampf v. Franklin Life Ins. Co., 33 N.J. 36, 43 (1960). In interpreting a contract, a court must discern and implement the common intention of the parties. Tessmar v. Grosner, 23 N.J. 193, 201 (1957). The court's role is to consider what is written in the context of the circumstances at the time of drafting and to apply a rational meaning in keeping with the expressed general purpose. Atlantic Northern Airlines, Inc. v. Schwimmer, 12 N.J. 293, 302 (1953). Under New Jersey law, extrinsic evidence is admissible to explain the meaning of contract provisions "even when the contract on its face is free from ambiguity." Conway v. 287 Corporate Ctr. Assocs., 187 N.J. 259, 269 (2006).


The dispute in this case centers on the interpretation of a single sentence from paragraph 1D of the MOU: "Anti dilution provisions will be incorporated with the options so that the options associated with the original 2% will not fall below that percentage of the outstanding stock prior to any Initial Public Offering of the company."*fn6 (MOU ¶ 1D) The question this Court must decide is whether this anti-dilution provision protected the value of Ciolino's option rights prior to exercise or whether it guaranteed Ciolino an ongoing option to maintain a 5% ownership stake in Ameriquest.

Ciolino argues that the provision entitled him to purchase a continuing 5% interest in Ameriquest at the option price until an initial public offering ("IPO").*fn7 (Pl's Direct Test. at 16) Ciolino's interpretation is based on the principle that redundant contractual constructions should be avoided, the alleged intent at the time of drafting, and extrinsic evidence allegedly demonstrating Ameriquest's acceptance of his understanding of the anti-dilution provision. Ameriquest, on the other hand, argues that the provision protected Ciolino's options prior to exercise. Ameriquest contends that the language of the contract is clear on its face and the intention of the parties at the time of drafting was for anti-dilution to protect only the stock options.

Based on the testimony and evidence presented at trial and the arguments made by the parties, the Court concludes that the anti-dilution provision protected Ciolino's stock options from dilution, but did not grant him an ongoing 5% ownership interest in Ameriquest until an IPO.*fn8 A plain reading of the language itself indicates that by its terms the provision applies to the stock options. The MOU sets forth the number of options that Ciolino will get and specifies that anti-dilution will protect the options themselves, not the underlying stock. There is no plausible reading of the contract that would support Ciolino's contention that he is entitled to a continuing and undiluted 5% interest in Ameriquest stock.

The Court finds Ciolino's arguments in support of his interpretation unpersuasive. First, the Court does not agree that the anti-dilution language is redundant. Ciolino argues that if anti-dilution protected the stock options, the phrase would be redundant as anti-dilution is inherently present since the options are expressed as a percentage. However, it is clear from the face of the MOU that Ciolino would be issued "stock options amounting to 2% of the outstanding and issued shares" at a specified time. (MOU ¶ 1D) (emphasis added) The percentage is simply a reference point for the number of options Ciolino would be issued. It is this specified number of options that would be protected from dilution.

Second, the Court finds Ciolino's extrinsic evidence unpersuasive. Ciolino argued that Ameriquest's Annual Reports demonstrated that Ameriquest itself interpreted the anti-dilution provision as granting Ciolino a continuing undiluted 5% interest in Ameriquest. (See Trial Transcript at 90-95) Although Ciolino had fully exercised his options as of April 2003, the Annual Reports for the years 2006 and 2007 state: "Some of the option awards vest over the earlier of two (2) years or upon an initial public offering and some are subject to an anti-dilution provision."*fn9 (See Exs. 8, 9 at 12) Ciolino argues that "[i]f Defendant truly believed that the antidilution rights were limited to the options themselves, there would have been no reason to continue to disclose Plaintiff's antidilution rights in any Annual Report after the 2002 Annual Report."*fn10 (Pl's Post Trial Br. at 13)

The inclusion of the anti-dilution reference in the Annual Reports may show carelessness on the part of Ameriquest or its auditors for not realizing that Ciolino's options were exercised and vested, but it does not prove that Ameriquest interpreted the anti-dilution provision as granting Ciolino an undiluted 5% interest in Ameriquest stock. The Annual Reports plainly state that "option awards," not shares of stock acquired therefrom, "are subject to an anti-dilution provision." (See Exs. 8, 9 at 12) In addition, the Annual Reports reference Clark's right to purchase additional shares of stock to maintain his interest in Ameriquest by unambiguously referring to his "20% equity interest in the Company" and not an anti-dilution right. (See id.)

Third, the Court is not persuaded, as Ciolino argues, that "no reasonable businessperson in the position of Plaintiff would take the enormous risk of leaving a great employment situation and moving across the country to launch a start-up business without the assurance that he would not be frozen out of a meaningful ownership interest some day in the future." (Pl's Post-Trial Br. at 14) There are any number of reasons why a "reasonable businessperson in the position of Plaintiff" might want to be involved in a start-up business, and the Court will not support an unreasonable interpretation of the anti-dilution provision in order to justify Ciolino's notions of a fair employment contract.*fn11

The Court further finds that it is Ciolino's interpretation of the anti-dilution provision that does not make business sense. Allowing Ciolino to maintain his 5% interest at the exercise price would be dilutive to the other shareholders if Ameriquest ever sold stock at a price greater than Ciolino's exercise price. For example, had Ciolino been allowed to make such a purchase as of December 31, 2009, he would have acquired such stock at a 93% discount off the value of the shares at the time. (Trial Transcript 33:12-22) This potential dilution would deter potential investors from purchasing stock and prevent Ameriquest from using stock as consideration for acquisitions or other transactions, as any stock so purchased could be subject to immediate dilution. As this Court explained during trial, if the initial investors all had the right to maintain an equity interest through stock purchases at substantially discounted rates, "the company could never really get new investment other than a public offering because what investor would put money at full value in if the initial people could just, after he did it, bulk up their stock with cheap stock." (Trial Transcript at 32:2-6) Moreover, if no public offering occurs, Ciolino's interpretation of the provision would mean that he would have a perpetual right to purchase Ameriquest stock at a significantly discounted price, a right which could conceivably be passed on to his heirs. (See Clark Direct Test. at 9; see also Trial Transcript at 31:12-15)

Therefore, because the Court finds that the provision at issue was intended to protect Ciolino's stock options from dilution prior to exercise, and Ciolino fully exercised his options as of 2003, the anti-dilution provision had no further effect after that date. Accordingly, Ameriquest did not breach the MOU by issuing additional stock without providing Ciolino the opportunity to purchase additional stock.*fn12


For the reasons stated above, Judgment will be entered in favor of Ameriquest. An appropriate Order accompanies this Opinion.


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