EXHIBIT 10.6
February 20, 2004
Board of Directors
Mayor's Jewelers, Inc.
14051 N.W. 14th Street
Sunrise, Florida 33323
Back Bay Capital, LLC
40 Board Street, 10th Floor
Boston, MA 02109
Ladies and Gentlemen:
We have acted as special Delaware counsel to Mayor's Jewelers,
Inc., a Delaware corporation (the "Company"), in connection with the proposed
payment of a cash dividend in the aggregate amount of $2,185,755 on all of the
outstanding shares of Series A-1 Convertible Preferred Stock, par value $0.0001
per share (the "Series A-1 Preferred Stock"), of the Company (the "Dividend").
In this connection, you have requested our opinion as to certain matters under
the General Corporation Law of the State of Delaware (the "General Corporation
Law").
For the purpose of rendering our opinion as expressed herein,
we have been furnished with and have reviewed the following documents:
(i) the Certificate of Incorporation of the Company as filed
with the Secretary of State of the State of Delaware (the "Secretary of State")
on June 19, 1987, as amended by the Agreement and Plan of Merger of the Company
as filed with the Secretary of State on July 27, 1987, the Certificates of
Amendment of the Company as filed with the Secretary of State on June 23, 1989,
July 30, 1991, August 20, 1996 and July 12, 2000, respectively, and the
Certificates of Designations of the Company as filed with the Secretary of State
on December 3, 1996, August 20, 2002 and February 20, 2004, respectively
(collectively, the "Certificate of Incorporation");
(ii) the By-laws of the Company, as amended through the date
hereof (the "Bylaws"); and
(iii) a report from the Chief Financial Officer of the
Company, dated February 20, 2004, with respect to the surplus of the Company
before and after the payment of the Dividend (the "Officer's Report").
With respect to the foregoing documents, we have assumed: (i)
the authenticity of all documents submitted to us as originals; (ii) the
conformity to authentic originals of all documents submitted to us as certified,
conformed, photostatic, electronic or other copies or forms; (iii) the
genuineness of all signatures, and the incumbency, authority, legal right and
power and legal capacity under all applicable laws and regulations, of each of
the officers and other persons and entities signing or whose signatures appear
upon each of said documents as or on behalf of the parties thereto; and (iv)
that the foregoing documents, in the forms submitted to us for our review, have
not been and will not be altered or amended in any respect material to our
opinions as expressed herein. We have not reviewed any documents other than the
documents listed above for purposes of rendering our opinion as expressed
herein, and we assume that there exists no provision of any such other document,
or any statement or information contained therein, that bears upon or is
inconsistent with our opinion as expressed herein. In addition, we have
conducted no independent factual investigation of our own but rather have relied
solely upon the foregoing documents as listed hereinabove, the statements and
information set forth therein and the additional matters recited or assumed
herein, all of which we assume to be true, complete and accurate in all material
respects.
We have also been advised and have assumed: (i) that the
Certificate of Incorporation and the Bylaws are the certificate of incorporation
and bylaws, respectively, of the Company; (ii) that there are no shares of
Series A Convertible Preferred Stock, par value $0.0001 per share, of the
Company (the "Series A Preferred Stock") outstanding; (iii) that there are
15,050 shares of Series A-1 Preferred Stock validly issued and outstanding; (iv)
that the Company has no more than 46,945,261 shares of common stock, par value
$.0001 per share, issued; (v) that there are 15,050 shares of Series A Preferred
Stock held as treasury stock; (vi) that no shares of the Series A Junior
Participating Preferred Stock, par value $.0001, of the Company have been
issued; and (vii) that there exists no resolution of the Board of Directors of
the Company (or any committee thereof) which allocates an amount in excess of
the par value of the outstanding shares of capital stock of the Company to the
capital account of the Company.
ANALYSIS
STATUTORY AUTHORITY FOR PAYMENT OF DIVIDENDS.
Sections 170(a) and 173 of the General Corporation Law set
forth the general rules regarding declaration and payment of dividends. Section
170(a) provides in pertinent part as follows:
(a) The directors of every corporation, subject to any
restrictions contained in its certificate of incorporation,
may declare and pay dividends upon the shares of its capital
stock ... either (1) out of its surplus, as defined in and
computed in accordance with sections 154 and 244 of this
title, or (2) in the case there shall be no surplus, out of
its net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year.
8 DEL. C.ss.170(a). Section 173 provides that "[n]o corporation shall pay
dividends except in accordance with this chapter." 8 DEL. C.ss.173.
Dividends may be paid only out of "surplus," as that term is
defined in the General Corporation Law. In the event there is no surplus,
dividends may be paid out of the net profits of the corporation for the fiscal
year in which the dividend is declared and/or the immediately preceding fiscal
year. Dividends may not be paid, however, out of net profits of the corporation
2
if the capital represented by the issued and outstanding stock of all classes
having a preference upon the distribution of assets is impaired. 8 DEL.
C.ss.170(a). The statute defines the term "surplus" in relation to the
corporation's "capital," as outlined below.
DETERMINATION OF CAPITAL AND SURPLUS.
Under Delaware law, for the purposes of determining legally
available funds for the payment of dividends and the repurchase of shares, the
amount of "surplus" of a corporation is the amount by which the net assets of
the corporation (defined in Section 154 of the General Corporation Law as the
amount by which total assets exceed total liabilities) exceed the capital of the
corporation. The "capital" of a corporation is determined pursuant to Sections
154 and 244 of the General Corporation Law. Section 154 of the General
Corporation Law generally defines "capital" as that portion of the consideration
received by the corporation for the issued shares of its capital stock that the
directors determine to be capital, but in no event less than the aggregate par
value of the issued shares. 8 DEL. C. ss. 154. The capital of a corporation, as
so determined, may be increased from time to time by the board of directors, 8
DEL. C. ss. 154, and the capital of a corporation may be reduced under the
procedures set forth in 8 DEL. C. ss. 244. Thus, the capital of a corporation in
respect of shares having par value is an amount equal to the aggregate par value
of the issued shares having par value, plus such portion of the net assets of
the corporation as the board of directors by resolution has directed to be
allocated to the capital in respect of such shares, minus such amounts by which
the board of directors by resolution has caused the capital in respect of such
shares to be reduced in accordance with 8 DEL. C. ss. 244, but in no event may
the capital in respect of shares of stock having par value be less than the
aggregate par value of the issued shares having par value.
Section 154 provides that "[t]he excess, if any, at any given
time, of the net assets of the corporation over the amount so determined to be
capital shall be surplus. Net assets means the amount by which total assets
exceed total liabilities. Capital and surplus are not liabilities for this
purpose." 8 DEL. C.ss. 154. As so determined, the surplus of a corporation is
consequently an amount equal to the present fair value of the total assets of
the corporation, minus the total liabilities of the corporation, minus the
capital of the corporation (determined as described above). ID.; KLANG V.
SMITH'S FOOD & DRUG CENTERS, 702 A.2d 150, 153-54 (Del. 1997); FARLAND V. WILLS,
C.A. No. 4888 (Del. Ch. Nov. 12, 1975); MORRIS V. STANDARD GAS & ELEC. CO., 63
A.2d 577 (Del. Ch. 1949).
The MORRIS decision provides some guidance on the type of
valuation process that should be used by a board of directors in determining
whether a corporation has surplus for purposes of paying a dividend under the
General Corporation Law. Specifically, in MORRIS, the board of the defendant
corporation had three meetings to consider whether the corporation had lawfully
available funds to pay a dividend, during which it was provided with extensive
information, including: (i) the financial records of the corporation; (ii) the
report of an independent outside appraiser as to the value of the corporation's
3
assets; (iii) the report of the Treasurer of the corporation as to his valuation
of the corporation's assets; and (iv) three opinions of legal counsel stating
that payment of the dividend was permissible under Delaware law.
Based on this record, the Court found that the board of the
defendant corporation "took great care to obtain data on the point in issue, and
exercised an informed judgment on the matter." The Court held that the statute
"permits ... no one objective standard of value" and that "the directors must be
given reasonable latitude in ascertaining value." 63 A.2d at 585. The Court also
held that under the circumstances presented it could not substitute "either
plaintiff's or its own opinion of value for that reached by the directors where
there is charge of no fraud or bad faith." ID. at 585; ACCORD IN RE AMSTED
INDUS., INC. LITIG., Cons. C.A. No. 8224, Appendix 6-7 (Del. Ch. Aug. 24, 1988),
AFF'D SUB NOM. BARKAN V. AMSTED INDUS., INC., 567 A.2d 1279 (Del. 1989).
In KLANG V. SMITH'S FOOD & DRUG CENTERS, INC., C.A. No. 15012,
slip op. at 9 (Del. Ch. May 13, 1997), a decision involving the determination of
surplus in connection with a repurchase of stock under Section 160 of the
General Corporation Law, the Court of Chancery rejected the plaintiff's argument
that "use of going-concern valuation methods are inappropriate in the context of
asset valuation and calculation of available corporate surplus," and, relying
upon MORRIS, rejected the notion that there is only one valuation standard for
the calculation of surplus under Delaware law. The Court explained:
Directors are not restricted in the way they value assets or
liabilities as long as they fulfill their "duty to evaluate
the assets on the basis of acceptable data and by standards
which they are entitled to believe reasonably reflect present
`values.'" Thus, the issue is not whether [the financial
advisor's] method is expressly permitted under section 160,
but whether [the company's] directors based their revaluation
on acceptable data and whether they were entitled to believe
that [the financial advisor's] valuation of [the company's]
assets reasonably reflected [the company's] values both before
and after the repurchase.
KLANG, slip op. at 10-11 (quoting MORRIS, 63 A.2d at 582). The Delaware Supreme
Court affirmed the decision of the Court of Chancery in KLANG. In so affirming,
the Delaware Supreme Court rejected plaintiff's claim that the valuation
methodology employed by defendant corporation was inappropriate as a matter of
law. According to the Court, the opinion of the financial advisor, when properly
analyzed, provided substantial evidence as to compliance with Section 160 of the
General Corporation Law. Having failed to demonstrate bad faith or fraud and
having failed to demonstrate that the defendant directors had failed to evaluate
the assets on the basis of acceptable data or by standards which they were
entitled to believe reasonably reflect present values, "we defer to the board's
determination of surplus, and hold that [defendant's] self-tender offer did not
violate 8 DEL. C.
ss. 160."
By way of contrast to MORRIS and KLANG, in FARLAND V. WILLS,
C.A. No. 4888 (Del. Ch. Nov. 12, 1975), the Court of Chancery criticized a board
for not having made a reasonable effort in valuing the assets of the corporation
in connection with certain stock purchase arrangements. In invalidating the
4
challenged stock purchases, the Court cited 8 DEL. C. ss. 160 and, following the
decision in MORRIS, held that even though the directors were not required to
make a formal appraisal of the corporation's assets, they did have a duty to
evaluate the assets and liabilities of the corporation on the basis of
acceptable data by standards that they are entitled to believe reasonably
reflect present "values." Slip op. at 12. SEE ALSO PEREIRA V. COGAN, 294 B.R.
449, 532 (S.D.N.Y. May 8, 2003) (finding board breached fiduciary duties in
paying illegal dividend without making reasonable effort to determine surplus).
Thus, a board of directors has reasonable latitude in ascertaining value for
purposes of calculating surplus but must use standards that reasonably reflect
the present value of the assets.
RELIANCE ON BOOKS OF CORPORATION OR REPORTS OF OFFICERS OR EXPERTS.
In making a determination of whether or not a corporation has
surplus for purposes of paying a dividend, a board of directors generally may
rely on the books of the corporation if such reliance is made in good faith.
Section 141(e) of the General Corporation Law provides:
A member of the board of directors, or a member of any
committee designated by the board of directors, shall, in the
performance of such duties, be fully protected in relying in
good faith upon the records of the corporation and upon such
information, opinions, reports or statements presented to the
corporation by any of the corporation's officers or employees,
or committees of the board of directors, or by any other
person as to matters the member reasonably believes are within
such other person's professional or expert competence and who
has been selected with reasonable care by or on behalf of the
corporation.
8 DEL. C.ss.141(e). The principle set forth in Section 141(e) is restated with
particular reference to dividends in Section 172 of the General Corporation Law,
as follows:
A member of the board of directors, or a member of any
committee designated by the board of directors, shall be fully
protected in relying in good faith upon the records of the
corporation and upon such information, opinions, reports or
statements presented to the corporation by any of its officers
or employees, or committees of the board of directors, or by
any other person as to matters the director reasonably
believes are within such other person's professional or expert
competence and who has been selected with reasonable care by
or on behalf of the corporation, as to the value and amount of
the assets, liabilities and/or net profits of the corporation
or any other facts pertinent to the existence and amount of
surplus or other funds from which dividends might properly be
declared and paid, or with which the corporation's stock might
properly be purchased or redeemed.
5
8 DEL. C.ss.172. Thus, under Sections 141(e) and 172 of the General Corporation
Law, directors are protected from liability for wrongful declaration and payment
of a dividend when they rely in good faith upon the books and records of the
corporation, or rely in good faith upon the report of an independent expert
selected with reasonable care. KLANG V. SMITH'S FOOD & DRUG CENTERS, INC., C.A.
No. 15012, slip op. at 11-12 (Del. Ch. May 13, 1997), AFF'D, 702 A.2d 150 (Del.
1997). As noted by the Delaware Supreme Court in the context of a merger
proposal in SMITH V. VAN GORKOM, 488 A.2d 858, 876 (Del. 1985), the advice of
outside experts is not necessarily required in order for directors to exercise
due care. The Court stated: "[w]e do not imply that an outside valuation study
is essential to support an informed business judgment; nor do we state that
fairness opinions by independent investment bankers are required as a matter of
law. Often insiders familiar with the business of a going concern are in a
better position than are outsiders to gather relevant information; and under
appropriate circumstances, such directors may be fully protected in relying in
good faith upon valuation reports of their management." ID.
ANALYSIS
We understand that the Board of Directors of the Company (the
"Board") has received the Officer's Report as to the fair market value of the
assets and liabilities of the Company immediately prior to and after the
Dividend. We have assumed for the purposes of our opinion as expressed herein
that: (a) the Officer's Report was prepared in good faith, in accordance with
informed professional judgment and was the product of the exercise of proper and
customary methodology used in determining such values; (b) the "capital" of the
Company, as recited in the following paragraphs, immediately preceding and
following the Dividends will in fact constitute the "capital" of the Company (as
defined in and calculated in accordance with Sections 154 and 244 of the General
Corporation Law) and is a true and correct calculation thereof and a court would
so find; (c) the fair values of the total assets and total liabilities of the
Company immediately prior to and after the Dividend, as determined by the Board
as set forth below, in fact constitute and will constitute the fair values of
the total assets and total liabilities of the Company immediately prior to and
immediately after the Dividend, and are true and correct determinations thereof,
and a court would so find; and (d) the Board duly adopted resolutions approving
the declaration and payment of the Dividend in accordance with the General
Corporation Law, the Certificate of Incorporation and the Bylaws.
We have been advised and assume for purposes of our opinion as
expressed herein that the Board has determined (a) on an informed basis in the
good faith exercise of its business judgment, (b) based upon due consideration
of all relevant data, and (c) based upon information that the Board reasonably
and in good faith believes reflects present fair values, and consistent with the
most recent balance sheet and other recent financial information of the Company
and the Officer's Report, that immediately prior to the declaration and payment
of the Dividend (i) the present fair value of the Company's net assets (I.E.,
the present fair value of total assets minus total liabilities) will be at least
$38,258,000 and (ii) the capital of the Company in respect of issued shares of
capital stock of the Company will not be more than $5,000. Accordingly, the
Company's surplus (net assets ($38,258,000) minus capital ($5,000)), prior to
6
the Dividend will be at least $38,253,000. Moreover, we are advised and assume
for purposes of our opinion as expressed herein that the Board has similarly
determined that, immediately following the payment of the Dividend, the present
fair value of the Company's net assets (I.E., the present fair value of total
assets minus total liabilities) will be at least $36,072,000 and that the
capital of the Company in respect of issued shares of capital stock will not be
more than $5,000, resulting in surplus subsequent to the payment of the
Dividends of at least $36,067,000.
OPINION
Based upon and subject to the foregoing, and upon our review
of such other matters of law as we have deemed necessary and appropriate in
order to render our opinion as expressed herein, and subject to the assumptions,
limitations, exceptions and qualifications set forth herein, it is our opinion
that the declaration and payment of the Dividend would not contravene Section
170 of the General Corporation Law.
The foregoing opinion is limited to the General Corporation
Law, and we have not considered and express no opinion on the effect of any
other laws or the laws of any other state or jurisdiction, including federal
laws regulating securities or other federal laws, or the rules and regulations
of stock exchanges or of any other regulatory body. We have not considered and
express no opinion on the possible outcome of any challenge to the Dividend
based on equitable considerations, as to which we have no information. In
addition, we render no opinion as to: (i) the actual value of the assets or
liabilities of the Company and (ii) whether the Board has comported with its
fiduciary duties in connection with the proposed declaration and payment of the
Dividend.
Our opinion as expressed herein is rendered solely for your
benefit in connection with the matters addressed herein and, without our prior
written consent, may not be relied upon by you for any other purpose or be
furnished or quoted to, or be relied upon by, any other person or entity for any
purpose.
Very truly yours,
/s/ Richards, Layton & Finger, P.A.
Richards, Layton & Finger, P.A.
7