Broncos Owner Picks Up a Legal Victory in Spat with Former Owner

Nov 24, 2006

The 10th U.S. Circuit Court of Appeals has reversed a lower court and held that current Denver Broncos owner Pat Bowlen did not have to offer former team owner Edgar Kaiser an opportunity to buy an interest in the team that was equivalent to an offer made to former Broncos quarterback John Elway.
By way of background, the court noted that Bowlen bought a majority interest in the team from Kaiser for $51 million, $26 million in cash and the assumption of $25 million in debt, in 1984.
“Just before the deal was to be finalized,” noted the court, “Bowlen’s tax lawyer discovered an impediment. Holding the Majority Interest in the Partnership personally would make Bowlen subject to a substantial tax liability in Canada. This problem could be solved only by transferring ownership of the Majority Interest to a U.S. corporation. However, this could not be done under the original draft of the agreement governing the sale, which contained an express prohibition on transfer or assignment. To ensure the sale would proceed, Kaiser agreed to change the provision, and the final version of the Agreement permits Bowlen to transfer the Majority Interest to a subsidiary.
“Three other clauses in the Agreement are material to this lawsuit. First, the Agreement contains a right of first refusal (ROFR) that provides Kaiser with the right to repurchase any part of the Broncos franchise or the Majority Interest that Bowlen may offer to sell to a third party on the same terms as that third party may purchase. Notably, this provision, negotiated at length by sophisticated transactional lawyers, does not include a term applying the stated preferential right to sales of shares in the company to which Bowlen could transfer the Majority Interest under the revised version of the Agreement.
“Elsewhere in the contract was a standard investment representation that stated that Bowlen ‘is acquiring’ the Majority Interest for his ‘own account . . . and not as a nominee or agent.’ According to testimony by transactional lawyers involved in negotiating the Agreement, this language was necessary to avoid the effect of certain securities regulations and is included in many similar private offerings, including the agreement between Kaiser and Adams (which did not have a ROFR clause). Finally, the Agreement contains a ‘survival clause,’ that provides that all representations and warranties terminate one year after Bowlen took ownership.”
Meanwhile, the Broncos began having immense success on the field, due to the drafting and maturation of John Elway as their star quarterback. So enamored was Bowlen with Elway that he entered into a Memorandum of Understanding after the 1997-98 season, giving Elway an option to purchase a 10 percent interest in the holding company (Texas Northern) that had a minority interest in the team. “To buy the shares, Elway would only have to pay two-thirds the value of 10 percent of the equity value of the holding company minus $5 million,” wrote the court. “The memorandum also provided a way for either Elway or Bowlen to end the arrangement – either party could force a sale by Elway for the original purchase price plus $ 5 million plus 8 percent interest per annum”.
Elway never exercised his option to buy part of the holding company.
Nevertheless, in 1998, Kaiser filed suit against Bowlen, the Partnership and others, alleging that Bowlen “(1) breached a warranty in the contract by purchasing the majority interest as a nominee for his family’s company; and (2) violated a contract term that gave Kaiser a right of first refusal to buy back an interest equivalent to one offered to former Broncos’ quarterback John Elway.”
The court sided with Bowlen on the first point and Kaiser on the second. Both parties appealed.
In reviewing the breach of warranty claim, the appeals court agreed with the district court’s interpretation that “despite the statement in Section 6.20 that all representations and warranties will survive until the one-year anniversary of the Agreement, the representation in Section 4.08 applied only at the time of sale and instructed the jury to this effect. This is the best interpretation of the contract because the clause is clearly written in the present tense: a representation about how a purchaser of an asset is conducting himself at closing logically could not apply at any time other than at the time of sale. Bowlen did not continue ‘acquiring’ the Majority Interest for a year after the signing of the Agreement – after the deal closed, he had acquired it. Thus, there is no way Bowlen could have ‘acted as a nominee’ in ‘acquiring’ the Majority Interest after the date of sale. Any other suggestion is absurd and is contrary to the text of the Agreement and Colorado contract law, which the parties agree controls interpretation of the Agreement. See Atmel Corp. v. Vitesse Semiconductor Corp., 30 P.3d 789, 793 (Colo. Ct. App. 2001). The jury instructions properly explained the text of Section 4.08 of the Agreement and therefore were not misleading.”
Turning to the second item being appealed, the court wrote that “right of first refusal provisions are restrictions on alienation: A buyer of an asset must undergo the transaction costs of arranging a sale without knowing whether the previous owner of the asset who has a right of first refusal will come in and take the benefits of the buyer’s negotiation. Under Colorado law, as in most jurisdictions in the country, such restrictions are interpreted narrowly. In this case, Kaiser’s right of first refusal specifically applied to two entities: the Majority Interest in the Partnership and the Denver Broncos franchise. John Elway was not offered a stake in either of these entities; he was offered 10% of the shares of Texas Northern, the company that owned the Majority Interest. Theoretically, Kaiser and his team of attorneys could have negotiated for a ROFR that applied to any sale of stock in any parent company that owned the Majority Interest, but they failed to do so. Kaiser has not introduced any evidence that Bowlen violated the ROFR. Accordingly, judgment as a matter of law must be granted to Bowlen on the breach of contract claim.”
Edgar F. Kaiser, JR. v. Patrick D. Bowlen et al.;10th Cir.; Nos. 05-1050 and 05-1079, 455 F.3d 1197; 2006 U.S. App. LEXIS 19307; 8/1/06
Attorneys of Record: (for the Plaintiff-Appellant/Cross-Appellee) G. Stephen Long (John D. Phillips, William E. Quirk, and Bennett L. Cohen with him on the briefs), Shughart, Thomson & Kilroy, P.C., Denver, Colorado. (for the Defendants-Appellees/Cross-Appellants) Sean Connelly of Hoffman, Reilly, Pozner & Williamson, LLP, Denver, Colorado (Daniel M. Reilly and Wendy B. Fisher of Hoffman, Reilly, Pozner & Williamson, LLP, Denver, Colorado; Richard P. Slivka, Denver Broncos Football Club, Englewood, Colorado; with him on the briefs).


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