HR Issues in M & A - BNA Report by Baker & McKenzie LLP

http://www.bakermckenzie.com/-/media/files/insight/publications/2016/12/rest-easy-how-to-master/ar_na_resteasy_oct16.pdf?la=en

Right and Wrong as a Clue to the Meaning of the Universe

He is the only comfort, he is also the supreme terror: the thing we most need and the thing we most want to hide from. He is our only possible ally, and we have made ourselves his enemies. Some people talk as if meeting the gaze of absolute goodness would be fun. They need to think again.

Anything You Say or Do May Be Used Against Your Company - How To Cope With Data Security Breach.

1. Data Security Policy. Before you decide whether and how to disclose information about your company's data security practices, keep in mind that any such disclosures could well end up being used by plaintiffs’ lawyers and courts as support for a claim that your company overstated and misled consumers regarding those practices. It is important to remember that, even when plaintiffs survive a motion to dismiss, the company maintains the right to  defend the accuracy of its statements once the facts are properly before the court. Nevertheless, the costs incurred in defending the statements’ accuracy through litigation, or  to  settle a  matter, can be  significant. Those costs should be kept in mind when deciding  whether and how to make statements about the company’s data security measures.  Any such statements should be carefully crafted and should match the company’s actual data security practices.

• After Zappos.com experienced a data breach incident, consumer plaintiffs relied on an alleged statement the company allegedly communicated to shoppers on its e-commerce site that "shopping on Zappos.com is safe and secure—guaranteed’’ to assert that the company negligently misrepresented the safety of plaintiffs’ financial information and violated California’s unfair competition statute. In re Zappos.com, Inc.,  No.  12-325, 2013  BL 239619 (D. Nev.  Sept. 9, 2013). The court found the statement sufficient to form the basis for both counts at the motion to dismiss stage. Id.  
• Plaintiffs have also relied on  statements in  privacy policies to assert deception-based claims. In Grigsby v. Valve Corp., for  example, a consumer plaintiff  relied on statements allegedly made in the company’s privacy policy to  support a claim of unfair or deceptive practices. Grigsby v.  Valve Corp., No.  12-553, 2013  BL 96372 (W.D.  Wash. Mar. 18,  2013) (12 PVLR 649, 4/15/13). Prior to the breach, the privacy policy purportedly indicated that ‘‘Valve has taken reasonable steps to protect the information users share with us, including, but not  limited to,  setup of  processes, equipment and software to avoid unauthorized access or disclosure of this information. . . .’’ Plaintiff, characterizing this statement as a representation that users’ information ‘‘would be  protected,’’ alleged that he relied on this representation in choosing to purchase goods from the company. This assertion was sufficient, at the motion to dismiss stage, to allege that Valve  acted unfairly or deceptively (finding plaintiffs stated a claim by relying on a statement in the privacy policy that the company used "reasonable administrative, technical, and physical security controls,’’ despite separate language in the policy stating that no security measure is 100 percent effective) (13 PVLR 1604,  9/15/14).

2. Press Release. Consider carefully what information to disclose after a breach and make sure such disclosures are accurate because such disclosures may be relied on by courts to determine whether the plaintiffs were sufficiently injured or face an imminent risk of injury to have standing to sue either in a federal court under Article III of the U.S. Constitution or a state court. Actual damage is generally an element of the causes of action plaintiffs bring over data security breaches. At the motion to dismiss stage, one source of information courts may use to determine whether a sufficient injury exists is the company’s own statements, if any, about the extent and effect of the breach.

• See, e.g.,  Reilly v. Ceridian Corp., 664 F.3d  38, 41 (3d  Cir.  2011) (concluding  that "Appellants’ allegations of hypothetical, future injury do  not  establish standing under Article III’’) (10 PVLR  1859, 12/19/11); Maglio v. Advocate Health & Hosps. Corp., 40 N.E.3d 746,  753 (Ill. App. Ct. 2015) (finding ‘‘plaintiffs’ allegations of injury are clearly speculative, and therefore plaintiffs lack standing to bring suit’’)  (14  PVLR 1091,  6/15/15).
• In Remijas v. Neiman Marcus, Neiman Marcus posted public statements on its website to keep customers abreast of the data security breach it had suffered, including acknowledging that 350,000 cards were potentially exposed, and 9,200 of those cards had experienced fraud. Remijas v.  Neiman Marcus Grp.  LLC, 794 F.3d 688, 690 (7th Cir. 2015) (14 PVLR 1807, 10/5/15). Neiman argued in its  motion to dismiss that the consumer plaintiffs did not face an actual or imminent risk of harm sufficient for Article III standing. The Seventh Circuit focused on Neiman Marcus’s own public statements, particularly the statement that 9,200 of the potentially exposed payment cards had already suffered fraudulent charges, to conclude that future harm was sufficiently imminent to confer standing to the company’s customers.
• C.f.,  SuperValu, Inc., Customer Data Sec. Breach Litig., No.  14-4660, 2016  BL 3925 (D. Minn. January 7, 2016) (finding consumer plaintiffs lacked standing, rejecting Plaintiff’s reliance on the company’s press releases because those press releases in fact stated that there had been no determination that customer data had been stolen and no evidence that it had been misused).

3. Offering Credit Monitoring Services for Free in the wake of a breach. Offering credit monitoring to consumers whose information may have been compromised may be treated as an admission that those consumers face an imminent risk of injury. Many companies that suffer a data security breach offer free credit monitoring to consumers whose personal information may have been compromised in order to reduce the possibility that consumers could argue in litigation that they are ‘‘injured’’ from having to purchase such monitoring themselves. Consider including a statement clarifying the reason for the offer.

• In  Neiman Marcus, the U.S. Court of  Appeals for the Seventh Circuit treated Neiman Marcus’ offer of credit monitoring to its customers as an effective admission that the customers faced a sufficiently imminent risk of fraud to give them Article III standing. Neiman Marcus, 794  F.3d at 694. The court found the offer ‘‘telling,’’ reasoning that ‘‘it is unlikely that’’ Neiman Marcus made the offer ‘‘because the risk [to plaintiffs’] is so ephemeral that it can safely be disregarded. These credit-monitoring services come at a price that is more than de minimis.’’ Id.

4. Consider Ways to Protect Communications and Documents under the Attorney-Client Privilege or Work Product Doctrine. 

• In  the  wake of  the  cyber-attack, Target set up a two-track response program. The first track involved a team of forensic experts who were engaged on behalf of several credit card brands (the PCI Investigator). The purpose of  the second track was to assist counsel in conducting an   investigation of the data breach to enable counsel to provide legal advice to Target. This track involved two key groups: (i) the Data Breach Task Force, which was made up of, among other persons, internal counsel and information technology specialists, and (ii) forensic experts engaged by Target’s outside counsel. During discovery, Target produced all communications with the PCI Investigator, but withheld communications with, and the work product of, the Data Breach Task Force and the experts engaged by counsel. Financial institutions pressing class actions against Target filed a  motion to compel Target to produce, among other things, documents generated by the Data Breach Task Force and the forensic experts engaged to support counsel. The U.S. District Court for the District of Minnesota denied the motion as to documents generated by the Data Breach Task Force and the forensic ex
• perts engaged by counsel. In re Target Corp.  Customer Data Sec. Breach Litig., No.  14-2522 (D.  Minn. Oct. 23,  2015). "T
he work of the [second track] was focused not on remediation of the breach, as plaintiffs contend, but on informing Target’s in-house and outside counsel about the breach so that Target’s attorneys could provide the company with legal advice and prepare to defend the company in litigation.’’ Id. Target also ‘‘produced documents and other tangible things, including forensic images, from which Plaintiffs can learn how the data breach occurred and about Target’s response to  the breach.’’ Id.

Yahoo Data Security Breach and Merger Agreement with Verizon

July 23, 2016, Yahoo and Verizon entered into a Stock Purchase Agreement (https://www.sec.gov/Archives/edgar/data/1011006/000119312516656036/d178500dex21.htm). Months after, but prior to the closing, Yahoo publicly announced that data associated with at least 500 million user accounts had been stolen in 2014. The data included customer names, email addresses, phone numbers, dates of birth, passwords and security questions and answers.

Within days of the announcement, several class action lawsuits were filed against Yahoo claiming that the company intentionally or recklessly failed to protect user data in violation of various state and federal laws, including the Federal Trade Commission Act and California privacy statutes.

Assuming you were the corporate fiduciary looking to minimize your risk of personal liability, you should consider the following when contemplating your next merger or acquisition:

One - Choose the Right Deal Structure

VZ seems to be trying to acquire Yahoo to obtain its proprietary advertising and content assets, but not other underperforming aspects of Yahoo's business. Yet, VZ structured the transaction as a stock acquisition and not as an asset sale. By acquiring all of Yahoo's stock, VA will acquire all of its liabilities, including those associated with the data security breach that occurred in 2014. When evaluating a transaction, fiduciaries should consider whether an asset sale or stock sale makes more sense given the momentum behind the transaction. If the transaction is driven by discrete assets, carving out and purchasing only the desired assets and excluding explicitly any data (and all liabilities) associated with the other assets would make sense.

Two - Consider Stripping Knowledge and MAE Qualifiers in IP / Data Reps

In order to address data breach liabilities, the purchase agreement between Yahoo and VZ included the following rep under Section 2.16 Intellectual Property:

"(p) To the Knowledge of Seller, there have not been any incidents of, or third party claims alleging, (i) Security Breaches, unauthorized access or unauthorized use of any of Seller’s or the Business Subsidiaries’ information technology systems or (ii) loss, theft, unauthorized access or acquisition, modification, disclosure, corruption, or other misuse of any Personal Data in Seller’s or the Business Subsidiaries’ possession, or other confidential data owned by Seller or the Business Subsidiaries (or provided to Seller or the Business Subsidiaries by their customers) in Seller’s or the Business Subsidiaries’ possession, in each case (i) and (ii) that could reasonably be expected to have a Business Material Adverse Effect. Neither Seller nor the Business Subsidiaries have notified in writing, or to the Knowledge of Seller, been required by applicable Law or a Governmental Authority to notify in writing, any Person of any Security Breach. To the Knowledge of Seller, neither Seller nor the Business Subsidiaries have received any notice of any claims, investigations (including investigations by a Governmental Authority), or alleged violations of Laws with respect to Personal Data possessed by Seller or the Business Subsidiaries, in each case that could reasonably be expected to have a Business Material Adverse Effect."

*** Knowledge ***

As reported by media, Yahoo had been unaware of the breach for over two years. The late discovery is not uncommon since most hacks rely on malicious codes that enter a network disguised as a mundane attachment and then sits silently until activated, days, weeks, months or even years later. It is very plausible for a buyer to acquire a business, only to suffer a host of post-closing consequences of a data breach facilitated by bugs implanted pre-closing. Had Yahoo and VZ closed the transaction prior to the discovery of the data breach, VZ would have inherited significant data breach liabilities, but would have had limited recourse against Yahoo because Yahoo technically did not breach the reps under Section 2.16(p) of the purchase agreement.

*** MAE ***

In the case of data security breaches, it is often very difficult, if not impossible, to quantify whether an incident will have a material adverse effect until a significant amount of time has passed after closing. The duration of lawsuits, magnitude of fines, full impact of reputational damage, and cost of internal remediation and revamping of security protocols and systems can remain largely unknown for an extended period of time.

Every data security breach is unique and the Yahoo breach does not seem to involve credit cards or issuing banks, two factors that may significantly increase the cost of remedy. Termination of the purchase agreement for MAE or renegotiation of the purchase price seem to be one of the limited options that the parties may have, but neither party would know the full scope of what is being renegotiated. Thus, reaching an agreement may prove quite elusive.

Setting threshold in the definition of MAE in the context of a data breach might be helpful to specifically delineate the parties rights and remedies such as an event involving fewer than 50,000 accounts except for any event involving any unauthorized disclosure of or access to PHI.

Consider setting a separate escrow pool for data security breaches.

Three - No Substitute for Thorough and Affirmative Due Diligence

Buyers should insist on provisions in the purchase agreement that allows 3rd party testing of target's technology and systems for identifying latent date breach issues and significant vulnerabilities, similar to those Phase I and II testing for environmental liabilities, including rights to conduct additional extensive testings upon discovery of potential issues to fully understand the scope of the problem and the magnitude of the potential liabilities.

M & A - Common Interest Agreement

In an M & A transaction, where the transaction will violate the rights of a third party or will require a certain kind of regulatory clearance, both parties may wish to coordinate their legal analysis and may agree that they recognize that some information sharing in connection therewith may be privileged and suggest a so-called "common interest agreement" or "joint defense agreement," under which the parties agree that certain information is disclosed for purposes of pursuing the parties' common legal interest and disclosure is therefore not a waiver of privilege.

Early 2016, the New York Court of Appeals, the highest court in New York, decided a case involving Bank of America's acquisition of Countrywide - Ambac Assurance Corp. v. Countrywide Home Loans (New York 2016). A third-party plaintiff wanted access to privileged communications which had been shared in the course of the diligence and planning process under a carefully-drafted common interest agreement. The third party asserted that the privilege was nevertheless waived when Countrywide disclosed the information to Bank of America, which subsequently acquired Countrywide. The Court of Appeals, after some historic analysis of the common interest exception, held that the common interest exception to privilege waiver only applies when the common interest is the defense, essentially as co-defendants, of a pending or reasonably anticipated litigation. Economic common interest is not sufficient. The fact that the party to whom the information is disclosed will shortly own the company that's the subject of a claim and will therefore bear the economic risks of the matter is not sufficient. In essence, the court took the world back to the traditional common law view of the privilege waiver. It noted that the common interest exception to waiver was intended originally only for common criminal defendants in a single proceeding, and that the great liberalization in New York had been to extend it to common defendants in civil litigation. But the court wasn't prepared to go any further than that, notwithstanding that fact that, as it recognized in its opinion, quite a number of jurisdictions take a more liberal view.

Can you avoid the problem simply by selecting a governing law for your agreement other than New York and a forum for disputes other than New York? The unfortunate fact is you cannot. Privilege is an evidentiary rule as to which the governing law is not entirely clear. It may be the law of the forum, or the law of some other jurisdiction that the forum court determines has a greater interest in the matter or as to which the parties reasonably relied. More importantly, the case in which the waiver is going to be asserted isn't likely to be a case under the acquisition agreement, or a case in which the acquisition agreement's venue provisions or choice of forum provisions control. It's going to be, as was the case in Countrywide, a third-party claim, whether a governmental claim or a private claim. If that claim is brought in New York, the court may well apply the Ambac decision.

There are a couple of things you can do to reduce risk. One, if this is a diligence issue and maintaining the privilege is important, try to recreate the legal advice. If the contingency you're trying to examine is a governmental investigation, provide another expert regulatory counsel retained by the buyer all the non-privileged information that's been generated in the course of the matter - all the communications with the government, all the facts provided by the company to its counsel - and let that counsel come up with its own view. This might be too expensive and time-consuming.

Another option is available if the issue involved is one that arises from the particular transaction, such as possible violation of the rights of a third party or the antitrust laws. The Court of Appeals expressly recognized in its Ambac opinion that the privilege is protected if the parties engage common counsel to review the matter. You could engage a neutral law firm to analyze, for example, the transaction from an antitrust perspective. That law firm can collect information from both parties, write a report that analyzes the transaction and give it to both parties. The parties can then negotiate the deal on the basis of the conclusions that are reached in that report. 

M & A - Attorney-Client Privilege Carveouts

In its late 2013 ruling that the attorney-client privilege passes in a Delaware law merger from the acquired corporation to the surviving corporation, the Great Hill court noted that concerned parties "can" always contractually carve out pre-merger attorney-client privileged communications from assets transferred to the surviving corporation. e.g., "all communications between sellers' or target's counsel, on one hand, and sellers and target, on the other, regarding the negotiation, documentation, and consummation of the transaction will be deemed to be attorney-client privileged, and post-closing will be owned by and controlled by the sellers."

On the buyer's side, however, if, after closing, the buyer stumbles on to the smoking gun e-mail conclusively proving that the sellers defrauded the buyer, who wants to be the lawyer on the buyer's legal team who tells the buyer's general counsel that the buyer cannot use that e-mail because it's a privileged communication that we happened to give away simply because everyone was doing it per the Great Hill case? Why should buyer give away an important asset that it paid money for and that Delaware law says buyers get by default? (The default rule being different in New York, though.) If the sellers are so concerned about being able to communicate fully, frankly, and freely with their counsel, then maybe the sellers should have engaged separate counsel rather than allowing the more common arrangement where the sellers' counsel acts both for the target and the selling stockholders.

Three key issues to think about from the buyer's end facing a hotly pursued target:

One, what communications are covered? Only communications related to the deal, i.e. deal communications, or any and all communications between the client and its counsel?

Second, who controls the privilege, for example, when litigating third-party claims or responding to government subpoenas?

And third, who has access to the privileged communications - the buyer only or do you want a common interest agreement with equal rights and access subject to some restrictions against the parties' use of the privileged communications against each other? You can even try a "my server/your server" approach, where seller keeps all the communications on seller's and its counsel's servers, while buyer keeps all communications on target servers.

In reality, though, in most cases it's going to be very hard to unpack what privilege belongs to the target company and what privilege belongs to the sellers. For example, all the data that goes into defining the reps and the disclosure schedules will be coming from the target company.

Private M & A - Fortify "Survive"

Unlike in a public company acquisition, where the target's representations die at the closing, in a private company acquisition, the representations survive the closing and provide the basis for the buyer's post-closing indemnification remedy.

Both sides in a transaction heavily negotiate how long the buyer may assert post-closing indemnification claims for breaches of these representations. Most practitioners insert verbiage into the agreement specifying how long the sellers' representations "survive." They intend to establish a contractual statute of limitations for bringing post-closing indemnification claims. But the court in the Western Filter decision, which is a Ninth Circuit decision, held that language to be ambiguous.

Use "The parties, intending to contractually shorten the applicable statute of limitations, agree that the target company's representations will expire on the [first] anniversary of the closing date and that all liabilities of the sellers, and all remedies exercisable by the buyer, with respect to those representations will terminate on that anniversary."

Private M & A - Sandbagging v. Benefits of the Bargain

All sandbagging contexts assume an actual breach of a representation, knowledge of the same by the buyer and closing---a busted rep. The risk to the seller is the buyer's lie in wait and sandbag by bringing the claims post-closing. Hence the seller's attempt to include an anti-sandbagging clause---it is a defense to a claim for indemnification if the buyer knew of the facts giving rise to the indemnifiable loss prior to the closing. The buyer will counter with a so-called "pro-sandbagging" or "benefit of the bargain" clause, saying that the fact that the buyer knew or should have known about a breach of a representation is irrelevant to the indemnification claim, which can be brought regardless of the buyer's knowledge.

In CBS, Inc. v. Ziff-Davis, 75 N.Y.2d 496 (N.Y. 1990) decided by the New York Court of Appeals, the court held that the proper analysis of a claim for indemnity is not whether the buyer relied on the accuracy of the facts represented to it, but whether it relied on the contractual promise to make good through an indemnity if the representation was untrue.

A number of people will tell you that under New York law silence in the agreement is pro-sandbagging. Unfortunately, it's not quite that clear. In fact, New York law recognizes an exception from the general rule that pre-closing knowledge is not a defense to a claim for indemnity, knowledge is a defense if the source of the information that tells the buyer that the representation is untrue is the seller. The source of the information may be very clear if the seller simply shows up at the closing and says, "Before you close I want to tell you about this variation from the representations," or even puts the disclosure in the closing certificate. It's not quite as clear that the seller was the source of the information if something came up during the diligence process. Any buyer who relies on the underlying law to function as a pro-sandbagging provision makes a serious mistake. That's because the first thing you're going to have to do is to litigate what the underlying law is and, in New York, for example, you're not necessarily going to like the result, since you will then need to litigate the source of the information. The relatively recent decision of the Southern District, Powers v. Stanley Black & Decker, 137 F. Supp. 3d 358 (S.D.N.Y. 2015), the court held New York law to be that information that the buyer acquired from the sellers is a defense to an indemnity claim unless there's a properly worded pro-sandbagging clause, something along the lines that the right to indemnification or other post-closing remedy based on a breach of a representation or a warranty shall not be affected by any knowledge acquired or capable of having been acquired by the buyer at any time, whether prior to or after the execution or delivery of the agreement or the closing. In that case, the court gave effect to a properly drafted pro-sandbagging clause.

Private M & A - Survival Clause and Placeholder Claims - Potential (but not Actual) Claims

See IMx Information Management Solutions v. Multiplan, C.A. No. 7786-VCP (Del. Ch. Ct. March 27, 2014); Albert A. Gore v. Al Jazeera America Holdings, C. A. No. 10040-VCG (Del. Ch. Ct. Aug. 13, 2015); and  Prairie Capital III, LP. v. Double E Holding Corp., C. A. No. 10127-VCL (Del. Ch. Ct. Nov. 24, 2015).  A placeholder claim, as defined by the Gore case, is a demand for indemnification that does not arise from a hard third-party demand made during the escrow period.

Three takeaways:

One, if you want the ability to bring a placeholder claim, then say so and say it clearly. For example, try drafting, "a representation survives to the extent a timely claim notice is given in good faith based on facts reasonably expected to establish a valid claim," or "indemnifiable losses include those that buyer expects in good faith that it could reasonably be expected to incur."

Two as always, words matter. Words like "may incur" really do mean something different from "will incur," especially in the placeholder claim context.

Three, take care to clearly define what constitutes an indemnifiable claim, and especially allow for the possibility of third-party claims when the survival clock is ticking or when subsequent similar claims are about to go on the rampage. For example, instead of the plain-vanilla indemnification for a breach of representation, how about seller indemnifying for any third-party claims that, if true, would constitute a breach of the representation? Or simply language like, "Seller indemnifies for all third-party claims"?

Private M & A - Fortify "Indemnify"

Make it clear that both third-party and first-party damages are recoverable by the buyer: "The sellers shall indemnify the buyer against and shall pay, compensate, and reimburse the buyer for any damages suffered by the buyer as a result of breaches of the sellers' representations regardless of whether those damages relate to a third-party claim." This is the type of verbiage that a buyer's lawyer should use. If you do not word your indemnification provision this way when you represent the buyer, you may be asking for trouble.

The word, "indemnify,"---not all people, and more importantly not all judges and juries, can be counted on to assign the same meanings to these terms as we, deal lawyers, do. The typical indemnification provision says that the sellers will indemnify the buyer against all losses and damages the buyer incurs as result of inaccurate representations of the sellers.

Many, if not most, deal lawyers would tell you that the word "indemnify," when used in that context, means essentially the same thing as the word "pay." What they're intending to say when they use the term is that the sellers will pay to the buyer the amount of all losses and damages suffered as a result of inaccuracies in the sellers' representations.

Let's take a quick example. If the sellers make a representation in the acquisition agreement stating that all the equipment in the target company's factories is in good and safe condition, and if that representation turns out to be inaccurate because some of the equipment was in fact in horribly bad and dangerous condition, and that bad equipment explodes and turns into a pile of rubble shortly after the closing, we expect the buyer to be made whole under the indemnification provision. So if it costs the buyer, say, $10 million to buy new equipment to replace the equipment destroyed in the explosion, then we expect the buyer to be able to recover that $10 million under a standard indemnification clause.

But not so fast. If all the buyer included in the agreement was the naked term "indemnify," it's not at all clear that the buyer can recover that $10 million. Why is that? Because some people and, more importantly, some courts, construe the term "indemnify" to cover only third-party claims, such as claims by target company employees who got hurt when the machine exploded, but not first-party damages, like the cost of replacing some now worthless equipment.

At the very least, some courts consider the term, indemnify, ambiguous, as a relatively recent California case, the Zalkind case, decided in 2011, suggests. I suggest that all of you in the audience take a look at that case. It might scare you a little.

***

194 Cal.App.4th 1010 (2011)
124 Cal.Rptr.3d 105
STANLEY ZALKIND et al., Plaintiffs, Cross-defendants and Appellants,
v.
CERADYNE, INC., Defendant, Cross-complainant and Appellant.

No. G043266.
Court of Appeals of California, Fourth District, Division Three.

April 27, 2011.
1016*1016 Charles D. Christopher for Plaintiffs, Cross-defendants and Appellants.

Stradling Yocca Carlson & Rauth, John F. Cannon, Kent W. Easter, Stephen L. Ram and Shane P. Criqui for Defendant, Cross-complainant and Appellant.

OPINION

FYBEL, J. —

INTRODUCTION

Ceradyne, Inc. (Ceradyne), entered into an asset purchase agreement (Asset Purchase Agreement) with Stanley Zalkind and Elizabeth Zalkind (the Zalkinds) and Quest Technology, LP (Quest), a limited partnership owned by the Zalkinds. Under the terms of the Asset Purchase Agreement, Ceradyne 1017*1017 purchased all of Quest's assets for a price of $2.44 million, of which $300,000 was paid in cash and the remainder paid with unregistered shares of Ceradyne stock.

The Zalkinds and Quest later sued Ceradyne, asserting a single cause of action for breach of contract. The Zalkinds and Quest alleged Ceradyne breached the Asset Purchase Agreement by not obtaining timely registration with the Securities and Exchange Commission (SEC) of the Ceradyne stock. Ceradyne filed a cross-complaint against the Zalkinds and Quest, asserting a single cause of action for securities fraud in violation of Corporations Code section 25401. Ceradyne alleged the Zalkinds made misrepresentations and omitted material facts to inflate the value of Quest's assets.

Ceradyne moved for summary judgment on the complaint, and the Zalkinds and Quest moved for summary judgment on the cross-complaint. The trial court granted both motions, and all parties have appealed.

We affirm in full. As to Ceradyne's summary judgment motion, we conclude the Zalkinds and Quest's complaint was time-barred because it was not filed within the 24-month limitations period in section 14.4 of the Asset Purchase Agreement. We hold that the Asset Purchase Agreement's definition of indemnification and damages included the Zalkinds and Quest's direct claim for breach of contract against Ceradyne. We also hold the limitations period is reasonable and enforceable.

As to the Zalkinds and Quest's summary judgment motion, we conclude that under Corporations Code section 25501, Ceradyne has no damages and cannot obtain rescission of the Asset Purchase Agreement. We hold the term "the complaint" referred to in section 25501's definition of a seller's damages means the pleading filed by the seller of the security that asserts a violation of Corporations Code section 25401 (here, Ceradyne's cross-complaint).

FACTS

Ceradyne designs and manufactures advanced technical ceramic products for industrial, automotive, defense, and commercial uses. Quest, a limited partnership, was an original equipment manufacturer of injection-molded ceramic components. As of May 2004, the Zalkinds owned a 99 percent interest in Quest.

In May 2004, the Zalkinds and Quest entered into the Asset Purchase Agreement with Ceradyne, by which the Zalkinds agreed to sell Quest's assets to Ceradyne for $2.44 million, of which $300,000 was paid in cash and the balance paid with unregistered shares of Ceradyne (the stock consideration).

1018*1018 Section 8.10 of the Asset Purchase Agreement required Ceradyne to use its best efforts to register the stock consideration with the SEC. Registration would permit the stock consideration to be publicly traded. Ceradyne was required to file a form S-3 registration statement within 30 days of the closing date of the Asset Purchase Agreement. Section 3.1(b)(ii) of the Asset Purchase Agreement provides: "If the Registration Statement covering the Stock Consideration is not declared effective by the SEC on or before November 30, 2004, then within ten (10) days of such date, [Ceradyne] shall make a cash payment to the Selling Parties in the amount of $2,140,000, against delivery by the Selling Parties to [Ceradyne] of duly-endorsed stock certificates constituting the Stock Consideration."

Section 14 of the Asset Purchase Agreement is entitled "Indemnification." Section 14.2 provides that Ceradyne "shall indemnify, hold harmless and defend the Selling Parties and their respective successors and assigns ... from and against any and all Damages that arise from or are in connection with: [¶] (a) Any breach of or inaccuracy in any of the representations or warranties of any of [Ceradyne] contained in Section 6 of this Agreement or in any of the certificates delivered hereunder by or on behalf of [Ceradyne] pursuant to such representations or warranties; or [¶] (b) Any breach or default by [Ceradyne] of its covenants or agreements contained in this Agreement." Section 14.1 similarly provides that Quest and Stanley Zalkind agree to "indemnify, hold harmless and defend" Ceradyne from and against any and all "Damages."

Section 14.3 of the Asset Purchase Agreement states: "`Damages,' as used in this Section 14, shall mean: (i) demands, claims, actions, suits, investigations and legal or other proceedings brought against any indemnified party or parties, and any judgments or assessments, fines or penalties rendered therein or any settlements thereof, and (ii) all liabilities, damages, losses, Taxes, assessments, costs and expenses (including, without limitation, reasonable attorneys' and accountants' fees and expenses) incurred by any indemnified party or parties, to the extent not reimbursed or paid for by insurance, whether or not they have arisen from or were incurred in or as a result of any demand, claim, action, suit, assessment or other proceeding or any settlement or judgment."

Section 14.4(a) of the Asset Purchase Agreement provides that "[n]o claim for indemnification under this Section 14 may be made more than twenty-four (24) months after the Closing Date [(May 14, 2004)]," with exceptions not applicable here.

Pursuant to the Asset Purchase Agreement, the Zalkinds received 71,397 shares of Ceradyne common stock based on the average closing price of 1019*1019 $29.973 per share for the 10 days preceding the closing date of May 14, 2004. These shares grew to 107,095.5 after Ceradyne had a three-for-two stock split.[1]

On August 19, 2004, Ceradyne filed the form S-3 registration statement with the SEC for the stock consideration. On September 28, 2004, Stanley Zalkind and Ceradyne's chief financial officer agreed to extend the Asset Purchase Agreement's deadline for registering the stock consideration in section 3.1(b)(ii) for one month from the original date of November 30, 2004. Between November 2004 and March 2005, Ceradyne filed three separate amendments to the form S-3 in response to correspondence from the SEC. The Zalkinds did not invoke section 3.1(b)(ii) of the Asset Purchase Agreement and demand $2.14 million in cash from Ceradyne for failure to timely register the stock consideration. On March 15, 2005, the SEC declared the registration of the stock consideration to be effective.

By April 15, 2005, the Zalkinds had sold 106,500 shares of the stock consideration. Their proceeds from the public sales were $2,351,669.61 based on an average selling price of $22.08 per share.

After May 14, 2004, Quest was operated as a division of Ceradyne with Stanley Zalkind and other key employees still in place. For the remainder of 2004, the Quest division had sales of about $1 million and net income of about $41,000. In 2005, the Quest division experienced a net loss of $33,814, in 2006 a loss of $564,576, and in 2007 a loss of $696,598. In 2007, Ceradyne terminated Stanley Zalkind's employment.

PROCEDURAL HISTORY

In June 2008, the Zalkinds and Quest filed a complaint against Ceradyne, alleging breach of the registration requirements of section 8.10 of the Asset Purchase Agreement. The Zalkinds and Quest filed a first amended complaint, the operative pleading, in October 2008.

The first amended complaint alleged that Ceradyne breached section 8.10 of the Asset Purchase Agreement by failing to file the form S-3 registration statement within 30 days of May 14, 2004, and by failing to use best efforts to cause the stock consideration to be registered by the SEC. The first amended complaint also alleged the delay in registering the stock consideration meant the Zalkinds could not take advantage of a temporary and 1020*1020 significant rise in the price of Ceradyne shares between December 31, 2004, and January 12, 2005. The Zalkinds were damaged, according to the first amended complaint, because if they had been able to sell their Ceradyne shares during that time period, they would have realized $1,479,444.50 more than they ultimately did.

After conducting discovery, Ceradyne filed a cross-complaint against the Zalkinds and Quest in May 2009. The cross-complaint asserted a single cause of action for violation of Corporations Code section 25401 and alleged the Zalkinds made a series of false and misleading statements and omissions of material fact about Quest's revenue projections and customer and market opportunities to induce Ceradyne to enter into the Asset Purchase Agreement and purchase Quest's assets. The cross-complaint sought damages and rescission of the Asset Purchase Agreement.

Ceradyne moved for summary judgment on the first amended complaint on the ground, among others, the Zalkinds and Quest's lawsuit constituted a claim for indemnification under section 14 of the Asset Purchase Agreement but was not filed within 24 months of the closing date of May 14, 2004. The Zalkinds and Quest moved for summary judgment on the cross-complaint on the ground, among others, that Ceradyne suffered no damages under Corporations Code section 25501.

The trial court took the motions under submission after hearing argument of counsel and issued a minute order on November 6, 2009, granting both motions. On December 2, the court signed an order submitted by the Zalkinds and Quest, stating: "Plaintiffs' summary judgment motion is granted with respect to the Cross-complaint on the grounds Cross-Complainant has not suffered any damages and rescission is unavailable because the parties cannot be returned to the status quo ante. Summary judgment i[s] not warranted on any other bases proffered by Plaintiffs. [¶] ... Cross-[complainant]'s summary judgment motion is granted with respect to the Complaint on the grounds the two-year limitations provision in section 14.4 of the Asset Purchase Agreement executed by the parties bars Plaintiffs' claims. Summary judgment i[s] not warranted on any other bases proffered by Cross-complainant[]."

Judgment was entered on December 14, 2009. After entry of judgment, Ceradyne moved to correct a "clerical error" in the order granting summary judgment, or, alternatively, for reconsideration. In the motion, Ceradyne asserted the statement "Summary judgment i[s] not warranted on any other bases proffered by Cross-complainant[]" was inconsistent with the trial court's tentative ruling, argument and findings at oral argument, and the court's minute order. Ceradyne also asserted the order granting summary 1021*1021 judgment did not comply with Code of Civil Procedure section 437c, subdivision (g). The trial court denied the motion, stating: "Any error in including that statement without stating the grounds for it would be judicial not clerical error. The Court intended to include the statement in the order."

STANDARD OF REVIEW

"A trial court properly grants summary judgment where no triable issue of material fact exists and the moving party is entitled to judgment as a matter of law. [Citation.] We review the trial court's decision de novo, considering all of the evidence the parties offered in connection with the motion (except that which the court properly excluded) and the uncontradicted inferences the evidence reasonably supports. [Citation.]" (Merrill v. Navegar, Inc. (2001) 26 Cal.4th 465, 476 [110 Cal.Rptr.2d 370, 28 P.3d 116].)

DISCUSSION: THE ZALKINDS AND QUEST'S APPEAL

The trial court concluded the Zalkinds and Quest's complaint was time-barred because it was not filed within the 24-month limitations period prescribed by section 14.4 of the Asset Purchase Agreement. It was undisputed the Zalkinds and Quest filed their lawsuit for breach of contract against Ceradyne more than 24 months after the closing date. If the lawsuit for breach of contract filed by the Zalkinds and Quest is a "claim for indemnification" under section 14 of the Asset Purchase Agreement, then their complaint is time-barred.

After examining the language of section 14 of the Asset Purchase Agreement and relevant law on the meaning of indemnification, we agree with Ceradyne the term "claim for indemnification" as used in the Asset Purchase Agreement includes the Zalkinds and Quest's breach of contract action.

I.

THE ZALKINDS AND QUEST'S COMPLAINT WAS TIME-BARRED BECAUSE IT WAS NOT FILED WITHIN THE 24-MONTH LIMITATIONS PERIOD IN SECTION 14.4 OF THE ASSET PURCHASE AGREEMENT.

A.

The Issue: Does the Term "Indemnify" in Section 14.2 of the Asset Purchase Agreement Include Direct Actions Between the Parties?

Section 14.4 of the Asset Purchase Agreement states, in relevant part, "[n]o claim for indemnification under this Section 14 may be made more than 1022*1022 twenty-four (24) months after the Closing Date...." If a lawsuit for breach of contract is a "claim for indemnification" under section 14 of the Asset Purchase Agreement, then the Zalkinds and Quest's complaint is time-barred.

What does "claim for indemnification" under section 14.4 of the Asset Purchase Agreement mean?

The Zalkinds and Quest argue indemnification under section 14.4 of the Asset Purchase Agreement covers "only claims involving liability or potential liability to third parties or obligations imposed on a party by operation of law" and therefore does not apply to their direct claims against Ceradyne for its alleged breach of the Asset Purchase Agreement. Ceradyne argues the 24-month limitations period of section 14 applies to the Zalkinds and Quest's complaint because section 14 was drafted broadly to encompass "both direct, garden variety breach of contract claims between the parties and claims arising from third parties."

(1) The parties agree the Asset Purchase Agreement was a fully integrated contract and there is no extrinsic evidence relating to section 14.[2] (Founding Members of the Newport Beach Country Club v. Newport Beach Country Club, Inc., supra, 109 Cal.App.4th at pp. 953-954.) We therefore look to the language of the Asset Purchase Agreement itself. (Id. at p. 956.) "The basic goal of contract interpretation is to give effect to the parties' mutual intent at the time of contracting. [Citations.] When a contract is reduced to writing, the parties' intention is determined from the writing alone, if possible. [Citation.] `The words of a contract are to be understood in their ordinary and popular sense.'" (Id. at p. 955.) When, as in this case, no extrinsic evidence is introduced, the appellate court independently construes the contract. (Id. at pp. 955-956.)

Section 14.2 of the Asset Purchase Agreement provides in relevant part: "Subject to the limitations in Section 14.4 hereof, the Buyer shall indemnify, hold harmless and defend the Selling Parties and their respective successors and assigns ... from and against any and all Damages that arise from or are in connection with: [¶] ... [¶] (b) Any breach or default by the Buyer of its covenants or agreements contained in this Agreement."

1023*1023 Section 14.3 of the Asset Purchase Agreement states: "`Damages,' as used in this Section 14, shall mean: (i) demands, claims, actions, suits, investigations and legal or other proceedings brought against any indemnified party or parties, and any judgments or assessments, fines or penalties rendered therein or any settlements thereof, and (ii) all liabilities, damages, losses, Taxes, assessments, costs and expenses (including, without limitation, reasonable attorneys' and accountants' fees and expenses) incurred by any indemnified party or parties, to the extent not reimbursed or paid for by insurance, whether or not they have arisen from or were incurred in or as a result of any demand, claim, action, suit, assessment or other proceeding or any settlement or judgment." (Italics added.)

If the word "Damages" in section 14.2 of the Asset Purchase Agreement is replaced by the italicized language from section 14.3, and the words "Buyer" and "Selling Parties" are replaced with the parties' names, the result is the following: "[Ceradyne] shall indemnify, hold harmless and defend the [Zalkinds and Quest] ... from and against any and all damages, losses incurred by [the Zalkinds and Quest] that arise from or are in connection with: [¶] ... [¶] (b) Any breach or default by [Ceradyne] of its covenants or agreements contained in this Agreement."

The Zalkinds and Quest alleged they incurred damages and loss arising from Ceradyne's breach of its covenants or agreements contained in the Asset Purchase Agreement. The issue comes down to the meaning of "[Ceradyne] shall indemnify" such loss. Does "indemnify" have the narrow meaning, asserted by the Zalkinds and Quest, of reimbursement for losses to third party claims, or does it have the broader meaning, asserted by Ceradyne, of paying for or reimbursing any claimed loss?

B.

Although the Terms "Indemnify" and "Indemnity" Ordinarily Refer to Third Party Claims, They May Include Direct Claims, Depending on the Parties' Intent.

(2) The terms "indemnify" and "indemnity" have been defined in several ways. "Indemnity may be defined as the obligation resting on one party to make good a loss or damage another party has incurred." (Rossmoor Sanitation, Inc. v. Pylon, Inc. (1975) 13 Cal.3d 622, 628 [119 Cal.Rptr. 449, 532 P.2d 97] (Rossmoor).) Civil Code section 2772 defines "indemnity" as "a contract by which one engages to save another from a legal consequence of the conduct of one of the parties, or of some other person." The indemnitor is the party obligated to pay another, and the indemnitee is the party entitled to 1024*1024 receive the payment from the indemnitor. (Maryland Casualty Co. v. Bailey & Sons, Inc. (1995) 35 Cal.App.4th 856, 864 [41 Cal.Rptr.2d 519].)

(3) Indemnity generally refers to third party claims. "A clause which contains the words `indemnify' and `hold harmless' is an indemnity clause which generally obligates the indemnitor to reimburse the indemnitee for any damages the indemnitee becomes obligated to pay third persons. [Citation.] Indemnification agreements ordinarily relate to third party claims." (Myers Building Industries, Ltd. v. Interface Technology, Inc. (1993) 13 Cal.App.4th 949, 969 [17 Cal.Rptr.2d 242] (Myers); see also Queen Villas Homeowners Assn. v. TCB Property Management (2007) 149 Cal.App.4th 1, 5 [56 Cal.Rptr.3d 528] [quoting Myers]; Wilshire-Doheny Associates, Ltd. v. Shapiro (2000) 83 Cal.App.4th 1380, 1396 [100 Cal.Rptr. 2d 478] (Wilshire-Doheny) ["`[A]n indemnitor in an indemnity contract generally undertakes to protect the indemnitee against loss or damage through liability to a third person.'"].) "`Contracts of indemnity are distinguishable from those of guaranty and suretyship in that in indemnity contracts the engagement is to make good and save another from loss upon some obligation which he has incurred or is about to incur to a third person, and is not, as in guaranty and suretyship, a promise to one to whom another is answerable.'" (Somers v. United States F. & G. Co. (1923) 191 Cal. 542, 547 [217 P. 746].)

Although indemnity generally relates to third party claims, "this general rule does not apply if the parties to a contract use the term `indemnity' to include direct liability as well as third party liability." (Dream Theater, Inc. v. Dream Theater (2004) 124 Cal.App.4th 547, 555 [21 Cal.Rptr.3d 322].) "[E]ach indemnity agreement is `interpreted according to the language and contents of the contract as well as the intention of the parties as indicated by the contract.'" (Wilshire-Doheny, supra, 83 Cal.App.4th at p. 1396.) When indemnity is expressly provided by contract, the extent of the duty to indemnify must be determined from the contract itself. (Rossmoor, supra, 13 Cal.3d at p. 628; see also Heppler v. J.M. Peters Co. (1999) 73 Cal.App.4th 1265, 1277 [87 Cal.Rptr.2d 497] ["parties to an indemnity contract have great freedom of action in allocating risk, subject to certain limitations of public policy"]; Rooz v. Kimmel (1997) 55 Cal.App.4th 573, 583 [64 Cal.Rptr.2d 177] ["We must determine the scope of a contractual duty of indemnification ... from the contract itself."]; Myers, supra, 13 Cal.App.4th at pp. 968-969 ["The extent of the duty to indemnify is determined from the contract."].)

(4) "[T]he question whether an indemnity agreement covers a given case turns primarily on contractual interpretation, and it is the intent of the parties as expressed in the agreement that should control. When the parties knowingly bargain for the protection at issue, the protection should be afforded. This requires an inquiry into the circumstances of the damage or injury and 1025*1025 the language of the contract; of necessity, each case will turn on its own facts." (Rossmoor, supra, 13 Cal.3d at p. 633.) The indemnity provisions of a contract are to be construed under the same rules for interpreting contracts, "`with a view to determining the actual intent of the parties.'" (Wilshire-Doheny, supra, 83 Cal.App.4th at p. 1396; see also Maryland Casualty Co. v. Bailey & Sons, Inc., supra, 35 Cal.App.4th at p. 864.)

C.

Section 14.2 of the Asset Purchase Agreement Is Written Broadly to Include Direct Claims and Does Not Expressly Exclude Them.

(5) The terms "indemnify" and "indemnity" do not necessarily refer only to third party claims and are reasonably susceptible to the interpretation urged by Ceradyne. As we have noted, the California Supreme Court has defined "indemnity" as "the obligation resting on one party to make good a loss or damage another party has incurred." (Rossmoor, supra, 13 Cal.3d at p. 628.) This definition is not limited to third party claims and is broad enough to include the Zalkinds and Quest's direct breach of contract claim against Ceradyne. One court has concluded the definition of "indemnity" in Civil Code section 2772 "plainly states that indemnity may apply to either direct or third party claims." (Dream Theater, Inc. v. Dream Theater, supra, 124 Cal.App.4th at p. 556, fn. 5.)

In Wilshire-Doheny, supra, 83 Cal.App.4th 1380, the court addressed the issue whether particular indemnity provisions were limited to third party claims. In that case, Stanley Shapiro and Jeffrey R. Matsen were corporate officers of Daishin U.S.A. Co., Ltd. (Daishin USA). (Id. at p. 1384.) Pursuant to three different indemnity provisions, Daishin USA agreed to indemnify Shapiro and Matsen with respect to any action or claim brought against them in their capacity as corporate officers. (Id. at pp. 1387, 1394-1395.) Daishin USA sued Shapiro and Matsen, alleging various causes of action arising out of their conduct as corporate officers. (Id. at pp. 1385-1386.) Shapiro and Matsen prevailed at trial, but the trial court denied their motion for attorney fees, which was based on the indemnity provisions. (Id. at pp. 1387-1388.) The Court of Appeal reversed, rejecting the argument the indemnity provisions were limited to third party claims: "There is nothing in the language of any of the three indemnity provisions specifically limiting their application to third party lawsuits. [Daishin USA] point[s] to no extrinsic evidence introduced to demonstrate that the parties intended these provisions to apply to third party lawsuits only. [Citations.] Thus, it has not been shown the indemnity provisions are inapplicable merely because [Shapiro and Matsen] seek indemnification for attorney's fees and costs incurred in an action brought by the indemnitor...." (Id. at p. 1396.)

1026*1026 Black's Law Dictionary broadly defines "indemnification" as "1. The action of compensating for loss or damage sustained. 2. The compensation so made." (Black's Law Dict. (8th ed. 2004) p. 783, boldface omitted.) Black's Law Dictionary similarly defines "indemnity" as "1. A duty to make good any loss, damage, or liability incurred by another.... 2. The right of an injured party to claim reimbursement for its loss, damage, or liability from a person who has such a duty. 3. Reimbursement or compensation for loss, damage, or liability in tort; esp., the right of a party who is secondarily liable to recover from the party who is primarily liable for reimbursement of expenditures paid to a third party for injuries resulting from a violation of a common-law duty." (Id. at p. 784, boldface omitted.) The first definition in Black's Law Dictionary for "indemnify" is "[t]o reimburse (another) for a loss suffered because of a third party's or one's own act or default." (Id. at pp. 783-784, italics added.)

(6) Several Ninth Circuit Court of Appeals cases have adopted a similar definition of "indemnify" from the sixth edition of Black's Law Dictionary. (Yang Ming Marine v. Okamoto Freighters Ltd. (9th Cir. 2001) 259 F.3d 1086, 1092; Atari Corp. v. Ernst & Whinney (9th Cir. 1992) 981 F.2d 1025, 1031-1032.)[3] These cases hold an indemnity provision may encompass direct breach of contract claims. In Atari, supra, 981 F.2d at page 1031, the Ninth Circuit concluded the district court erred by limiting an indemnification provision to third party claims, stating "the district court was wrong to assume that the word `indemnify' necessarily carries with it the baggage of the clauses in which it most frequently appears." The word "indemnify," the Ninth Circuit stated, "refers to compensation for loss in general, not just particular types of loss." (Ibid.)

(7) In Battelle Memorial Institute v. Nowsco Pipeline Services (S.D. Ohio 1999) 56 F.Supp.2d 944, 950, the court defined "indemnity" to include "the shifting of losses, rather than any requirement that third party losses be involved." The court stated: "It is clear from both the Ohio and Sixth Circuit definitions of indemnification that a party wishing to narrow an indemnification clause to third-party damage is obligated to limit the scope of the clause expressly; and absent such express limitation, indemnification clauses may apply to damage suffered by the contracting parties themselves." (Id. at p. 951.) In this case, section 14 of the Asset Purchase Agreement does not expressly limit the meaning of "indemnify" to third party claims, and, as we have mentioned, there is no extrinsic evidence relating to section 14.

1027*1027 Section 14.2 and the definition of damages in section 14.3 of the Asset Purchase Agreement are broadly worded to provide that Ceradyne "shall indemnify, hold harmless and defend" the Zalkinds and Quest from and against "any and all" damages and losses incurred by the Zalkinds and Quest "that arise from or are in connection with: [¶] ... [¶] ... [a]ny breach or default by [Ceradyne] of its covenants or agreements contained in this Agreement." This language does not limit indemnification to third party claims and extends indemnification to "any and all" damages incurred by the Zalkinds and Quest arising out of Ceradyne's breach of the Asset Purchase Agreement. Read in the context of section 14.2, the word "indemnify" makes better sense when read to mean "make good," "reimburse," or "compensate."

D.

Other Parts of Section 14 of the Asset Purchase Agreement Support the Conclusion "Indemnify" Includes Direct Claims Between the Parties.

(8) Another indication of the meaning of "indemnify" in section 14.2 of the Asset Purchase Agreement comes from the use of the terms "indemnity," "indemnify," and "damages" in other parts of section 14. "The whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other." (Civ. Code, § 1641.) To the extent practicable, the meaning of a contract must be derived from reading the whole of the contract, with individual provisions interpreted together, in order to give effect to all provisions and to avoid rendering some meaningless. (Sy First Family Ltd. Partnership v. Cheung (1999) 70 Cal.App.4th 1334, 1342 [83 Cal.Rptr.2d 340]; City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1998) 68 Cal.App.4th 445, 473 [80 Cal.Rptr.2d 329].)

Section 14.3 of the Asset Purchase Agreement defines the term "damages" by dividing them into two categories. The first category is "demands, claims, actions, suits, investigations and legal or other proceedings brought against any indemnified party or parties, and any judgments or assessments, fines or penalties rendered therein or any settlements thereof." This category correlates to indemnification of third party claims. The second category is "all liabilities, damages, losses, Taxes, assessments, costs and expenses (including, without limitation, reasonable attorneys' and accountants' fees and expenses) incurred by any indemnified party or parties, to the extent not reimbursed or paid for by insurance, whether or not they have arisen from or were incurred in or as a result of any demand, claim, action, suit, assessment or other proceeding or any settlement or judgment." This category would include damages sought in a direct lawsuit between the parties. The clause 1028*1028 "whether or not they have arisen from or were incurred in or as a result of any demand, claim, action, suit, assessment or other proceeding or any settlement or judgment" in particular suggests the second category is not limited to third party claims for which a party to the Asset Purchase Agreement seeks indemnity.

Section 14.5 of the Asset Purchase Agreement is entitled "Notice of Claims." The first sentence of section 14.5 requires prompt notification to the indemnifying party of a claim for indemnity. The second and third sentences distinguish third party claims. The second sentence reads: "In the event of any claim for indemnification hereunder resulting from or in connection with any claim or legal proceeding by a third party, the notice to the indemnifying party shall specify, if known, the amount or any estimate of the amount of the liability arising therefrom." The third sentence provides that neither the indemnified party nor any indemnifying party may settle a claim by a third party without the other party's prior written consent. There would be no need to distinguish third party claims in section 14.5 if "indemnify" only referred to third party claims.

Section 14.6 of the Asset Purchase Agreement is entitled "Third Party Claims" and concerns the indemnifying party's defense obligations. Section 14.6 states, "[i]n connection with any claim giving rise to indemnity hereunder that results or may result from or arises or may arise out of any claim or legal proceeding by a person who is not a party to this Agreement...." This section would not be necessary if indemnification by definition meant only third party claims.

Section 14.8 of the Asset Purchase Agreement, entitled "Subrogation," states, "[i]n the event that an indemnifying party pays all or any portion of a third party claim or demand concerning which the indemnified party submits a claim for indemnification ..., the indemnifying party shall be subrogated." This passage expressly recognizes subrogation rights to third party claims and would be unnecessary if, by definition, indemnification only applied to third party claims.

Section 14.9 of the Asset Purchase Agreement, entitled "Remedies," states: "The indemnification rights and remedies set forth in this Section 14 shall be the sole and exclusive rights and remedies of the parties hereto with respect to any Damages incurred by any such parties for which indemnification is provided to such parties under this Section 14; provided, however, that if the Selling Parties fail to perform their covenant to sell the Purchased Assets to the Buyer, Buyer shall be entitled to obtain specific performance of such covenant, and injunctive relief against any breach or threatened breach thereof." The part after the second "provided" would be unnecessary if indemnification only referred to third party claims.

1029*1029 Many provisions in section 14 of the Asset Purchase Agreement therefore support the conclusion the parties intended the term "indemnify" in section 14.2 to have the broader meaning and to encompass direct claims for breach of contract. If the term "indemnify" were limited to third party claims, portions of sections 14.3, 14.5, 14.6, 14.8, and 14.9 would be superfluous.

The Zalkinds and Quest argue the references to third party claims in those sections of the Asset Purchase Agreement were meant to distinguish third party claims from claims arising by operation of law, i.e., liabilities that arise without a demand or claim, such as environmental cleanup. This interpretation might be convincing if the term "indemnify" necessarily refers only to third party claims, as the Zalkinds and Quest argue. However, the term "indemnify" in section 14 is subject to the broader definition that encompasses direct claims, and section 14, read as a whole, makes better sense with that interpretation, rather than the narrow interpretation limiting "indemnify" to third party claims.

The Zalkinds and Quest argue Ceradyne's interpretation of section 14 of the Asset Purchase Agreement would require Ceradyne to defend them in this lawsuit. That result would obtain if section 14.2 were read in isolation: Section 14.2 does require the indemnifying party to "indemnify, hold harmless and defend." (Italics added.) But section 14.2 must be read with section 14.6, which sets forth the rights and duties of defense and applies only to third party claims, and the balance of the Asset Purchase Agreement.

II.

AGREEMENTS TO SHORTEN THE STATUTE OF LIMITATIONS ARE ENFORCEABLE IF REASONABLE, AND CIVIL CODE SECTION 2778 IS INAPPLICABLE BASED ON THE TERMS OF SECTION 14 OF THE ASSET PURCHASE AGREEMENT.

The Zalkinds and Quest argue we must strictly construe the language of section 14 of the Asset Purchase Agreement against Ceradyne because agreements to shorten the statute of limitations are disfavored. In Lewis v. Hopper (1956) 140 Cal.App.2d 365, 367 [295 P.2d 93] (Lewis), the court stated: "`[C]ontractual stipulations which limit the right to sue to a period shorter than that granted by statute, are not looked upon with favor because they are in derogation of the statutory limitation. Hence, they should be construed with strictness against the party invoking them.'" (See also Sanders v. American Casualty Co. (1969) 269 Cal.App.2d 306, 309 [74 Cal.Rptr. 634] ["this general rule is correct..."].) In Western Filter Corp. v. Argan, Inc. (9th Cir. 2008) 540 F.3d 947, 952, the court cited that rule and the Lewis case with approval; however, no published California opinion has done so in the over 40 years since Sanders v. American Casualty Co. in 1969.

1030*1030 (9) As Ceradyne argues, agreements to shorten the statute of limitations do not violate public policy and are enforced if reasonable. "Courts generally enforce parties' agreements for a shorter limitations period than otherwise provided by statute, provided it is reasonable." (Moreno v. Sanchez (2003) 106 Cal.App.4th 1415, 1430 [131 Cal.Rptr.2d 684]; see also Charnay v. Cobert (2006) 145 Cal.App.4th 170, 183 [51 Cal.Rptr.3d 471]; Hambrecht & Quist Venture Partners v. American Medical Internat., Inc. (1995) 38 Cal.App.4th 1532, 1548 [46 Cal.Rptr.2d 33].) Long before Lewis, the California Supreme Court held, "[i]t is a well-settled proposition of law that the parties to a contract may stipulate therein for a period of limitation, shorter than that fixed by the statute of limitations, and that such stipulation violates no principle of public policy, provided the period fixed be not so unreasonable as to show imposition or undue advantage in some way. [Citations.]" (Beeson v. Schloss (1920) 183 Cal. 618, 622-623 [192 P. 292]; see also Tebbets v. Fidelity and Casualty Co. (1909) 155 Cal. 137, 139 [99 P. 501] [statute of limitations is a personal right that can be waived or shortened].)

The Zalkinds and Quest do not contend the shorter limitations period of section 14 of the Asset Purchase Agreement is unreasonable.[4] As an agreement to shorten the statute of limitations does not violate public policy under California Supreme Court authority, we do not agree that section 14 must be "`construed with strictness'" against Ceradyne and decline to follow Lewis. Even if we would construe that contract provision with "strictness," we would still enforce it under the Supreme Court authority cited in the prior paragraph.

(10) The Zalkinds and Quest also argue that interpreting section 14 of the Asset Purchase Agreement to encompass direct breach of contract claims is contrary to Civil Code section 2778, which sets forth rules for interpreting contracts of indemnity.[5] True, each situation identified in section 2778 1031*1031 addresses indemnification of third party claims. But, as Ceradyne points out, section 2778 expressly states its rules of interpretation apply, "unless a contrary intention appears." (Italics added.) Here, we conclude, a contrary intention appears from reading together the various parts of section 14 of the Asset Purchase Agreement. Further, as Ceradyne points out, the Asset Purchase Agreement does not refer to Civil Code section 2778, but does refer to other statutes when they are controlling.

III.

CONCLUSION

(11) Claims for indemnification under section 14 of the Asset Purchase Agreement include direct claims between the parties. As a consequence, the 24-month limitations period of section 14.4 of the Asset Purchase Agreement applies to such direct claims. The Zalkinds and Quest did not file their complaint against Ceradyne within 24 months of the closing date; therefore, the complaint is time-barred and the trial court did not err by granting Ceradyne's motion for summary judgment. Because we are affirming on the ground the complaint was time-barred, we do not address Ceradyne's contention the trial court erred by rejecting Ceradyne's other grounds for summary judgment without specifying reasons.

DISCUSSION: CERADYNE'S APPEAL

Ceradyne's cross-complaint alleged the Zalkinds violated Corporations Code section 25401 by making false statements and omissions in connection with the purchase and sale of the stock consideration under the Asset Purchase Agreement. Ceradyne sought damages and rescission of the Asset Purchase Agreement pursuant to Corporations Code section 25501. The trial court granted the Zalkinds and Quest's motion for summary judgment on the ground Ceradyne suffered no damages under section 25501 from the alleged violations of section 25401.

Ceradyne argues (1) the trial court misinterpreted Corporations Code section 25501 in concluding Ceradyne suffered no damages, and (2) Ceradyne may rescind the Asset Purchase Agreement despite the fact none of the parties to it can restore the consideration.

1032*1032 We conclude, based on the evidence presented in the moving and opposition papers and pertinent legal authorities:

1. The term "the complaint" as used in the formula for calculating a seller's damages under Corporations Code section 25501 means the pleading by which the seller of the security asserts the violation of Corporations Code section 25401.

2. Ceradyne (the seller of the security) asserted a violation of Corporations Code section 25401 in the cross-complaint; therefore, in this case, the term "the complaint" under Corporations Code section 25501 refers to Ceradyne's cross-complaint, not the complaint filed by the Zalkinds and Quest.

3. Because "the complaint" refers to Ceradyne's cross-complaint under Corporations Code section 25501's formula for calculating a seller's damages, Ceradyne suffered negative damages or no damages based on the undisputed facts.

4. Under the express provisions of Corporations Code section 25501, Ceradyne is not entitled to rescission because the undisputed facts are that the Zalkinds and Quest no longer own the security (the stock consideration) and Ceradyne cannot tender the consideration paid for the security.

I.

CERADYNE SUFFERED NO DAMAGES UNDER CORPORATIONS CODE SECTION 25501.

A.

The Issue: In Calculating a Seller's Damages Under Corporations Code Section 25501, Does the Term "the Complaint" Include a Seller's Cross-complaint Alleging Securities Fraud?

(12) Corporations Code section 25401 makes it unlawful to offer or sell a security by means of a written or oral communication that includes an untrue statement of material fact or omits a material fact. (13) Corporations Code section 25501 provides that a seller of a security who violates section 25401 is liable to the purchaser of the security, who may sue for either rescission or damages.

Corporations Code section 25501 permits recovery of damages by a seller of a security, as follows: "Damages recoverable under this section by a seller 1033*1033 shall be an amount equal to the difference between (1) the value of the security at the time of the filing of the complaint plus the amount of any income received by the defendant on the security and (2) the price at which the security was sold plus interest at the legal rate from the date of sale." (Italics added.)

In this case, Ceradyne is the seller of the security — the stock consideration — and the Zalkinds are the buyers of the security. Ceradyne, the seller, asserted its securities fraud claim against the Zalkinds and Quest by cross-complaint. The issue is, does the term "the complaint" in Corporations Code section 25501 include a seller's cross-complaint, or is the term limited to the complaint, whether filed by the buyer or the seller?

Whether the term "the complaint" includes a seller's cross-complaint directly affects the amount, if any, of Ceradyne's damages. A seller's damages under Corporations Code section 25501 are the difference between "(1) the value of the security at the time of the filing of the complaint plus the amount of any income received by the defendant on the security and (2) the price at which the security was sold plus interest at the legal rate from the date of sale."

The Zalkinds and Quest filed the complaint on June 11, 2008. The value of the security on that date is calculated as follows: $38.43 per share × 107,095 shares = $4,115,661. (All numbers are rounded up or down to the nearest dollar.)

Ceradyne filed its cross-complaint on May 8, 2009. The value of the security on that date is calculated as follows: $19.94 per share × 107,095 shares = $2,135,474.

The Zalkinds received $223,800 in net income from selling 106,500 shares of Ceradyne stock between March 31 and April 12, 2005.[6] It is undisputed the Zalkinds paid $2,127,870 for the 106,500 shares of the stock consideration that they sold and received $2,351,670.

1034*1034 Based on the Asset Purchase Agreement, the price of the Ceradyne stock sold to the Zalkinds was $2.14 million.[7] Interest on that amount at the legal rate of 7 percent per annum[8] for the period from May 15, 2004 (the date of sale), to June 11, 2008 (the date the complaint was filed by the Zalkinds and Quest), is $610,692.[9] Interest on $2.14 million at the legal rate of 7 percent per annum for the period from May 15, 2004 (the date of sale), to May 8, 2009 (the date the cross-complaint was filed), is $746,127.[10]

The damages formula in Corporations Code section 25501 produces this result if "the complaint" in this case means the complaint filed by the Zalkinds and Quest:

(1) $4,115,661 (value of the stock when the complaint was filed) + $223,800 (income earned on the stock) = $4,339,461

minus

(2) $2,140,000 (sale price of the stock consideration) + $610,692 (interest to date the complaint was filed)

= 1,588,769 in damages. =========

The damages formula in Corporations Code section 25501 produces this result if "the complaint" in this case means Ceradyne's cross-complaint:

(1) $2,135,474 (value of stock when the cross-complaint was filed) + $223,800 (income earned on the stock) = $2,359,274

minus

1035*1035 (2) $2,140,000 (sale price of the stock consideration) + $746,127 (interest to date the cross-complaint was filed)

= Negative $526,853 thus, no damages. ========

The trial court concluded the valuation date for the stock pursuant to Corporations Code section 25501 was the date the seller's (Ceradyne's) cross-complaint was filed and, apparently accepting the later calculations, found Ceradyne suffered no damages.

B.

The Legislature Typically Will Say Expressly Whether the Term "Complaint" Includes a Cross-complaint.

(14) The fundamental task of statutory interpretation is to ascertain the Legislature's intent to effectuate the statute's purpose. (Smith v. Superior Court (2006) 39 Cal.4th 77, 83 [45 Cal.Rptr.3d 394, 137 P.3d 218].) In ascertaining the Legislature's intent, we first consider the language of the statute itself, giving the words used their ordinary meaning. (Ibid.) The statutory language must be construed in the context of the statute as a whole and the overall statutory scheme, giving significance to every word, phrase, sentence, and part of the statute. (Ibid.) If the statutory language is unambiguous, the plain meaning controls and consideration of extrinsic sources to determine the Legislature's intent is unnecessary. (Kavanaugh v. West Sonoma County Union High School Dist. (2003) 29 Cal.4th 911, 919 [129 Cal.Rptr.2d 811, 62 P.3d 54].) "When the words are susceptible to more than one reasonable interpretation, we consider a variety of extrinsic aids, including the statutory context and the circumstances of the statute's enactment, in determining legislative intent." (Levy v. Superior Court (1995) 10 Cal.4th 578, 582 [41 Cal.Rptr.2d 878, 896 P.2d 171].) We read the statute as a whole in order to harmonize and give effect to all parts. (Ste. Marie v. Riverside County Regional Park & Open-Space Dist. (2009) 46 Cal.4th 282, 289 [93 Cal.Rptr.3d 369, 206 P.3d 739].)

When the Legislature intends the word "complaint" to include "cross-complaint," it says so. (E.g., Code Civ. Proc., §§ 425.115, subd. (a) ["As used in this section: [¶] (1) `Complaint' includes a cross-complaint"], 425.16, subd. (h) ["For purposes of this section, `complaint' includes `cross-complaint'"], 426.10 ["As used in this article: [¶] (a) `Complaint' means a complaint or cross-complaint"], 429.30, subd. (a) ["As used in this section: [¶] (1) `Complaint' includes a cross-complaint"], 430.10 [demurrer or answer may be filed by the "party against whom a complaint or cross-complaint has been filed"], 435, subd. (a) ["As used in this section: [¶] 1036*1036 (1) The term `complaint' includes a cross-complaint"], 438, subd. (a) ["As used in this section: [¶] (1) `Complaint' includes a cross-complaint"], 481.060 ["`Complaint' includes a cross-complaint"], 581, subd. (a) ["As used in this section: [¶] ... [¶] (2) `Complaint' means a complaint and a cross-complaint"], 583.110, subd. (b) ["As used in this chapter, unless the provision or context otherwise requires: [¶] ... [¶] ... `Complaint' includes a cross-complaint or other initial pleading"], 1032, subd. (a) ["As used in this section, unless the context clearly requires otherwise: [¶] (1) `Complaint' includes a cross-complaint"].)

Similarly, the Legislature will expressly say when "plaintiff" includes "cross-complainant" and "defendant" includes "cross-defendant." (E.g., Code Civ. Proc., §§ 386, subd. (c), 389, 425.115, subd. (a), 425.16, subd. (h), 438, subd. (a), 481.180, 581, subd. (a)(4) & (5), 1031, 1032, subd. (a)(2) & (3), 583.110, subds. (d) & (e).)

In Yao v. Superior Court (2002) 104 Cal.App.4th 327, 329 [127 Cal.Rptr.2d 912], the Court of Appeal concluded the word "plaintiff" in Code of Civil Procedure section 1030, subdivision (a) does not include a cross-complainant because the statute makes no reference to a cross-complainant. "In sum, the Legislature clearly knows how to indicate when it wants a statutory provision to apply to both a plaintiff and a cross-complainant. It also clearly knows how to indicate that a reference to `plaintiff' must be construed as including a cross-complainant. The Legislature chose not to adopt either option in this case." (Yao v. Superior Court, supra, at p. 332.)

C.

But the Language and Purpose of Corporations Code Section 25501 Establish the Term "the Complaint" Must Mean a Cross-complaint when That Is the Means by Which a Seller Alleges Securities Fraud.

(15) Those principles are inconclusive, however, in interpreting Corporations Code section 25501. In setting forth the amount of the seller's damages, section 25501 does not say "a complaint" or "complaint" but "the complaint" (italics added). To whose complaint does this refer? We must interpret "the complaint" in terms of the context of the statute as a whole, and in that context, "the complaint" must refer to the seller's complaint for violations of Corporations Code section 25401; in other words, in calculating damages, the stock is valued as of the time the seller files a pleading alleging the securities fraud claim. We know that because in calculating the amount of the seller's damages, section 25501 considers "the amount of any income received by the defendant on the security" (italics added). Thus, the defendant 1037*1037 in section 25501 must be the defendant buyer, who would have received income on the security purchased. Because the buyer is the defendant, the term "the complaint" must refer to the complaint filed by the seller. The term "the complaint" cannot refer, as in this case, to the buyer's complaint because then the phrase "the amount of any income received by the defendant on the security" (italics added) would make no sense.

A leading treatise on California securities laws, in explaining a seller's damages under Corporations Code section 25501, also treats the seller as the plaintiff initiating the action and the buyer as the defendant: "In the case of a purchase in violation of these provisions, a plaintiff seller is given a cause of action for damages (when the defendant no longer owns the security) for an amount equal to the difference between (1) the value of the security at the time of the filing of the complaint plus the amount of any income received by the defendant on the security and (2) the price at which the security was sold by the plaintiff plus interest at the legal rate from the date of sale. In such a case, the plaintiff would have been entitled to recover the security itself (and therefore its value at the time of the lawsuit) except for the action of the defendant in disposing of it before the plaintiff brings the action. This action by the defendant, over which the plaintiff had no control, should not result in the plaintiff being entitled to recover less. Therefore, this section provides that the plaintiff may recover the value of the security at the time of the filing of the complaint." (1 Marsh & Volk, Practice Under the Cal. Securities Laws (2010) § 14.03[8][b], p. 14-43 (rel. 38-7/2010).)

(16) Corporations Code section 25501, in setting forth a seller's damages, thus contemplates only the situation in which the seller as the plaintiff files a complaint against the buyer as the defendant for securities fraud, and does not expressly address the situation in which the seller files a cross-complaint in response to the buyer's complaint. What happens when, as here, the seller files a cross-complaint asserting violations of Corporations Code section 25401?

Interpreting the term "the complaint" in Corporations Code section 25501 to include a seller's cross-complaint for securities fraud is consistent with the purpose for valuing the stock at the time "the complaint" is filed. That purpose is explained as follows: "[I]t was believed that the proper time at which to value the security for the purpose of computing damages when rescission was unavailable was the time the action was commenced. By that action, the plaintiff has indicated his or her election to repudiate the transaction, and future market changes in the price of a security no longer owned by the defendant should not affect the amount of his or her recovery. If it did, then delays in litigation, perhaps beyond the control of either party, would determine to some extent the substantive rights of the parties." (1 Marsh & Volk, Practice Under the Cal. Securities Laws, supra, § 14.03[8][b], p. 14-43.)

1038*1038 Ceradyne, the seller in this case, indicated its election to repudiate the transaction when it filed the cross-complaint against the Zalkinds and Quest for securities fraud. Valuing the stock for the purpose of calculating Ceradyne's damages at the time the Zalkinds and Quest filed the complaint would be inconsistent with the purpose of Corporations Code section 25501 because that act did not demonstrate Ceradyne's election to repudiate the transaction.

(17) Ceradyne argues that interpreting the term "the complaint" in Corporations Code section 25501 to include a seller's cross-complaint would encourage sellers to "maximize damages by rushing to file a cross-complaint as soon as possible." Section 25501 intends that result by valuing stock for purposes of calculating the seller's damages at the time the seller files the complaint. Section 25501 permits a seller to control the amount of its damages by filing the complaint when the stock price is high. The so-called "perverse incentive[s]" feared by Ceradyne are inherent in section 25501.

(18) Ceradyne posits hypothetical situations in which valuing the stock when the seller's cross-complaint is filed would deny the seller damages, while valuing the stock when the buyer's complaint is filed would permit recovery. Of course, hypothetical situations producing opposite results are also possible. Under the undisputed facts of this case, application of Corporations Code section 25501 produces no damages, and that result is consistent with the statutory purpose. "The [Corporate Securities Law of 1968 (Corp. Code, § 25000)] ... demonstrates a legislative intent to afford victims of securities fraud a remedy without the task of proving common law fraud. Because it has eased the requirements for victims to recover successfully, the Legislature has also imposed certain restrictions on them, such as shortening the statute of limitations for bringing a statutory action and limiting the damages available." (Boam, supra, 6 Cal.App.4th at pp. 743-744.)

D.

The Relation-back Doctrine Does Not Apply to Corporations Code Section 25501.

(19) The cross-complaint does not "relate back" to the date the buyer's complaint was filed for purposes of calculating a seller's damages under Corporations Code section 25501. The code section itself says nothing to suggest it incorporates the relation-back doctrine. The relation-back doctrine has been applied in only two contexts: (1) "to determine the time of commencement of an action for the purpose of the statute of limitations" (Barrington v. A. H. Robins Co. (1985) 39 Cal.3d 146, 150 [216 Cal.Rptr. 405, 702 P.2d 563]) and (2) to a statute requiring dismissal of an action for failure to serve a summons within three years of its commencement (id. at pp. 152, 1039*1039 157). In the latter situation, the California Supreme Court has concluded the relation-back doctrine applies because the nature and purpose of the statute of limitations and the failure-to-serve statute were "virtually identical" in that both statutes "were designed to move suits expeditiously toward trial." (Id. at p. 152.)

The relation-back doctrine does not extend to Corporations Code section 25501 because its nature and purpose are not the same as or similar to those of a statute of limitations. Ceradyne's cross-complaint therefore does not relate back to the date the complaint was filed for purposes of determining damages.

E.

Ceradyne Failed to Raise a Triable Issue as to Whether the "Price" of the Ceradyne Stock Was Less than the Price Stated in the Asset Purchase Agreement.

Ceradyne argues the "price" of the stock consideration was less than $2.14 million because the value of Quest's assets had been inflated by the Zalkinds' fraud. As a result, Ceradyne argues, there is a triable issue of material fact as to whether it suffered damages under Corporations Code section 25501.

Undisputed fact No. 1 in the separate statement in support of the Zalkinds and Quest's motion for summary judgment was: "The assets of Quest sold to Ceradyne were valued by Quest and Ceradyne at $2,440,000, as reflected in Exhibit A to the Asset Purchase Agreement.... Ceradyne agreed to pay for these assets by giving Stanley Zalkind, Elizabeth Zalkind and Quest ... $300,000 cash and common stock of Ceradyne valued at $2,140,000." The evidence cited in support of that fact was the declaration of Stanley Zalkind and relevant portions of the Asset Purchase Agreement. Stanley Zalkind's declaration confirmed undisputed fact No. 1. Exhibit A to the Asset Purchase Agreement valued the Quest assets at $2.44 million and confirmed Ceradyne purchased those assets by paying the Zalkinds $300,000 in cash and common stock of Ceradyne valued at $2.14 million. Thus, the Zalkinds established the "price" of the stock consideration was $2,440,000 - $300,000 = $2,140,000.

Ceradyne, in its response to undisputed fact No. 1, stated: "To the extent Ceradyne ... `valued' Quest Technology LP's ... assets at $2,440,000, 1040*1040 Ceradyne's valuation in the A[sset] P[urchase] A[greement] was based upon Stanley Zalkind's false and misleading statements of Quest's business." In support of that assertion, Ceradyne cited the declaration of Ceradyne's chairman of the board and chief executive officer, Joel Moskowitz, who declared: "By 2007, after review of the 2006 calendar year financials of the Quest unit and the significant efforts to make the Quest unit work, it became readily apparent to me that the Quest business that Ceradyne purchased was not the Quest that Mr. Zalkind promised. Furthermore, the molded tooth that Mr. Zalkind touted never materialized. The sales projections, the expansion of the customer base, and entry into untapped markets were so grossly off that there was no possible way Mr. Zalkind's representations in 2004 and the sales projections before the transaction could have been accurate. There simply could not have been any reasonable basis for many of Mr. Zalkind's statements and projections of sales revenue."

Ceradyne argues the Moskowitz declaration "creates a material issue of fact as to the `price of the security' and affecting the damages calculation under the statutory formula." We disagree. The Moskowitz declaration speaks entirely in generalities. Drawing the inference from the declaration the value of Quest's assets was inflated, the Moskowitz declaration does not state the amount by which the value of those assets was inflated. Even if the Moskowitz declaration raised a triable issue, the issue is not material because Ceradyne failed to show the value of the Quest assets was inflated to a degree sufficient to create damages under the required statutory formula. To establish damages, Ceradyne had to show Quest's assets were inflated by at least $826,853, thereby reducing their value from $2,440,000 (the value set forth in the Asset Purchase Agreement) to $1,613,147[11] (the price at which Ceradyne would have incurred damages under the formula in Corp. Code, § 25501).

We conclude Ceradyne failed to produce sufficient evidence in opposition to the Zalkinds and Quest's motion for summary judgment to create a triable issue of material fact as to the price at which the Ceradyne stock was sold.

1041*1041 II.

CERADYNE CANNOT OBTAIN RESCISSION OF THE ASSET PURCHASE AGREEMENT BECAUSE THE CONSIDERATION CANNOT BE RESTORED.

In granting the Zalkinds and Quest's motion for summary judgment, the trial court concluded Ceradyne could not obtain rescission of the Asset Purchase Agreement because "the parties cannot be returned to the status quo." Ceradyne argues the trial court erred and rescission is permissible because, to the extent the consideration cannot be restored, the court can balance the equities with cash transfers.

(20) To effect a rescission, Civil Code section 1691, subdivision (b) requires the rescinding party to "[r]estore to the other party everything of value which he has received from him under the contract or offer to restore the same upon condition that the other party do likewise, unless the latter is unable or positively refuses to do so." Ceradyne argues the inability to restore the status quo is not a bar to rescission because the Zalkinds and Quest are unable to restore the stock consideration (they sold nearly all of the stock consideration) and because the court has broad powers to fashion relief by "adjusting the equities between the parties." (Lobdell v. Miller (1952) 114 Cal.App.2d 328, 344 [250 P.2d 357].)

(21) Ceradyne did not sue for common law fraud: Instead, Ceradyne sued for violation of Corporations Code section 25401, and, therefore, Ceradyne's remedies, both legal and equitable, are limited to those afforded by Corporations Code section 25501. (Boam, supra, 6 Cal.App.4th at p. 744.) Section 25501 provides that a person who has suffered from a violation of section 25401 may sue "either for rescission or for damages (if the plaintiff or the defendant, as the case may be, no longer owns the security)." (Italics added.) As of April 2005, the Zalkinds had sold 106,500 shares out of 107,095 shares of the stock consideration. Because the Zalkinds no longer owned the security, Ceradyne is limited under section 25501 to recovering damages.

In addition, Corporations Code section 25501 provides that "[u]pon rescission, a seller may recover the security, upon tender of the consideration paid for the security plus interest at the legal rate, less the amount of any income received by the defendant on the security." Ceradyne cannot tender the consideration (the Quest assets) received in exchange for the stock consideration.

1042*1042 All of Quest's operational assets were sold to Ceradyne under the Asset Purchase Agreement. Quest's tangible personal property sold to Ceradyne included machinery, office equipment, product equipment, quality control equipment, furniture, and office supplies. Quest's intangible property included a proprietary process for manufacturing ceramic injection-molded components that could be expanded to include the capability to produce translucent components, such as ceramic orthodontic braces. Quest had been conducting its business at a location in San Diego under a year-to-year lease.

In November 2007, Ceradyne moved what had been Quest's tangible personal property from Quest's former San Diego office to Ceradyne's offices in Costa Mesa. Much of the office equipment and property have since been sold, used up, or given away. Also in November 2007, Ceradyne declined to renew the lease on the former Quest offices in San Diego, and the landlord has entered into a lease with a different tenant. Other personal property leases held by Quest have expired. Former Quest employees, who became Ceradyne employees, taught Ceradyne personnel over a period of several months how to use Quest's proprietary process to form and prepare orthodontic brackets. Quest's inventories of finished goods and work in process are long gone. Of Quest's former employees, one remains employed by Ceradyne, and Ceradyne has terminated the employment of the others.

In summary, Quest has been fully absorbed into Ceradyne; Quest's tangible assets have been sold or dissipated; its office lease has expired; its employees have been dispersed; and its proprietary information has been learned by Ceradyne. Ceradyne cannot tender the consideration and therefore cannot obtain rescission as a remedy under Corporations Code section 25501.

Because none of the parties can restore the consideration for the Asset Purchase Agreement, the rescission sought by Ceradyne is really no rescission. Ceradyne proposes adjusting the equities by balancing the value of the assets purchased by Ceradyne against the value of the Ceradyne shares sold to the Zalkinds and Quest to produce a net balance that can be reduced to a money judgment. Ceradyne alleges the value of Quest's assets was inflated, so the hoped-for result of this adjusting of equities would be a net monetary recovery in Ceradyne's favor in the amount of the difference between the value of the Quest assets purchased and the value of the Ceradyne shares sold to the Zalkinds and Quest. What Ceradyne is seeking by "adjusting the equities" is therefore nothing less than a form of monetary recovery that would be inconsistent with the damages limitations of Corporations Code section 25501.

1043*1043 DISPOSITION

The judgment is affirmed. Because each party prevailed in part, no party shall recover costs incurred on appeal.

O'Leary, Acting P. J., and Moore, J., concurred.

[1] In the remainder of the opinion, we will use 107,095 as the number of Ceradyne shares owned by the Zalkinds following the stock split. Ceradyne uses 107,095 in making its damages calculations in the respondent's brief. Using 107,095 instead of 107,095.5 makes no material difference in any of the calculations and has no effect on the outcome of the appeals.

[2] In the trial court, the Zalkinds and Quest submitted the declaration of Stanley Zalkind, in which he expressed his subjective understanding of the meaning of section 14 of the Asset Purchase Agreement. The trial court correctly sustained Ceradyne's objections to those parts of Stanley Zalkind's declaration. We have stated, "California recognizes the objective theory of contracts [citation], under which `[i]t is the objective intent, as evidenced by the words of the contract, rather than the subjective intent of one of the parties, that controls interpretation' [citation]. The parties' undisclosed intent or understanding is irrelevant to contract interpretation. [Citations.]" (Founding Members of the Newport Beach Country Club v. Newport Beach Country Club, Inc. (2003) 109 Cal.App.4th 944, 956 [135 Cal.Rptr.2d 505].)

[3] The sixth edition of Black's Law Dictionary defines "indemnify" as: "`To restore the victim of a loss, in whole or in part, by payment, repair, or replacement. To save harmless; to secure against loss or damage; to give security for the reimbursement of a person in case of an anticipated loss falling upon him. To make good; to compensate; to make reimbursement to one of a loss already incurred by him.'" (Atari Corp. v. Ernst & Whinney, supra, 981 F.2d at pp. 1031-1032, quoting Black's Law Dict. (6th ed. 1990) p. 769.)

[4] "Reasonable" means the shortened period "provides sufficient time to effectively pursue a judicial remedy." (Moreno v. Sanchez, supra, 106 Cal.App.4th at p. 1430.)

[5] Civil Code section 2778 reads: "In the interpretation of a contract of indemnity, the following rules are to be applied, unless a contrary intention appears: [¶] 1. Upon an indemnity against liability, expressly, or in other equivalent terms, the person indemnified is entitled to recover upon becoming liable; [¶] 2. Upon an indemnity against claims, or demands, or damages, or costs, expressly, or in other equivalent terms, the person indemnified is not entitled to recover without payment thereof; [¶] 3. An indemnity against claims, or demands, or liability, expressly, or in other equivalent terms, embraces the costs of defense against such claims, demands, or liability incurred in good faith, and in the exercise of a reasonable discretion; [¶] 4. The person indemnifying is bound, on request of the person indemnified, to defend actions or proceedings brought against the latter in respect to the matters embraced by the indemnity, but the person indemnified has the right to conduct such defenses, if he chooses to do so; [¶] 5. If, after request, the person indemnifying neglects to defend the person indemnified, a recovery against the latter suffered by him in good faith, is conclusive in his favor against the former; [¶] 6. If the person indemnifying, whether he is a principal or a surety in the agreement, has not reasonable notice of the action or proceeding against the person indemnified, or is not allowed to control its defense, judgment against the latter is only presumptive evidence against the former; [¶] 7. A stipulation that a judgment against the person indemnified shall be conclusive upon the person indemnifying, is inapplicable if he had a good defense upon the merits, which by want of ordinary care he failed to establish in the action."

[6] We will assume for these purposes the term "any income received by the defendant on the security" includes net proceeds from the sale of the security. The Zalkinds and Quest argue they received no income on their Ceradyne stock because Ceradyne paid no dividends. We do not address Ceradyne's argument that income received by the Zalkinds and Quest on the security includes any recovery of damages in this lawsuit because we have affirmed the judgment against the Zalkinds and Quest on the complaint.

[7] The price for the stock consideration was the value of the Quest assets, less $300,000 paid in cash. The Asset Purchase Agreement valued the Quest assets at $2.44 million. Ceradyne argues the value of Quest's assets was far less than $2.44 million, and, hence, the price for the stock consideration was less than $2.14 million.

[8] Unless the contract specifies differently, interest under Corporations Code section 25501 is 7 percent per annum. (Boam v. Trident Financial Corp. (1992) 6 Cal.App.4th 738, 743, fn. 4 [8 Cal.Rptr.2d 177] (Boam).)

[9] Interest is calculated by applying the 7 percent rate to the price at which the stock consideration was sold to the Zalkinds ($2.14 million) from the date the stock consideration was sold (May 15, 2004) to the filing of the Zalkinds and Quest's complaint on June 11, 2008. Seven percent interest for four years (May 15, 2004, to May 14, 2008) is .07 × $2,140,000 × 4 = $599,200. Seven percent interest for the 28 days from May 15, 2008 to June 11, 2008, is (28 ÷ 365) × $2,140,000 × .07 = $11,492. The sum of $599,200 and $11,492 is $610,692.

[10] As explained in the previous footnote, 7 percent interest for four years (May 15, 2004, to May 14, 2008) is .07 × $2,140,000 × 4 = $599,200. Seven percent interest for the 358 days from May 15, 2008, to May 8, 2009, is (358 ÷ 365) × $2,140,000 × .07 = $146,927. The sum of $599,200 and $146,927 is $746,127.

[11] Of the $2.44 million price of the Quest assets, $300,000 was paid in cash and the remainder paid with the stock consideration. We have calculated Ceradyne's damages under the correct interpretation of Corporations Code section 25501 to be negative $526,853 based on a price of $2.14 million for the stock consideration. To eliminate the negative damages, the price of the stock consideration would have to be reduced to $1,613,147 ($2,140,000 minus $526,853). As a consequence, the value of the Quest assets would have to be reduced by $826,853 ($2,440,000 minus $826,853 = $1,613,147).