Broad v. Rockwell International Corp.
United States Court of Appeals, Firth Circuit (en banc), 1981.
642 F.2d 929, cert. denied, 454 U.S. 965 (1981).
FACTS
Class action brought on behalf of those who held debentures at time of merger.
-Alleged Ds breached terms of indenture, breached fiduciary duties, and violated various provisions of federal securities laws.
-Collins’ Debentures issued in 1967, common stock trading for $60, conversion price $72.50.
-1969: business declined rapidly.
-1971: stock never traded above $21 and sold for as little as $9¾.
-Debentures reached a low of $600.
-1971: Collins on verge of bankruptcy, Rockwell made $35M equity investment to Collins and guaranteed an additional $20M of indebtedness, took control of board.
-1973: Rockwell commenced friendly tender offer for Collins’ stock $25/share, purchased 75%.
-Merged Collins into self (Rockwell).
-Merger Plan: each share of common stock received $25/share.
-Rockwell proposed: right to convert only into amount of cash indenture holders would have been paid under merger plan - unfavorable trade of $72.50 conversion price for $25 cash. (legal uncertainty, but Rockwell eventually assented).
ISSUE: In what form did the conversion rights of the holders of the debentures survive the merger under the terms of the indenture?
HOLDING: The D was correct in the conversion that he gave the P’s, $1000 → $344.75.
ANALYSIS
-There is no provision in indenture agreement which explicitly states debenture holders have a continuing right to convert into common stock.
-Court holds that provision states that company must execute a supplemental indenture that will formally provide for the conversion rights of the holders of the Debentures after the merger (they complied with this).
-Does the conversion afforded to them ($1000 converted into only $344.75 cash) fairly and adequately accord to the holders of the debentures their valid rights under the indenture?
-Can’t convert into Collins Common Stock, there won’t be any after the merger.
→ He can convert into the kind of shares of stock and other securities and property that holders of Collins common stock received as part of the merger plan.
-A purchaser of debentures takes the risks inherent in the equity feature of the security, risks that are shared with common stock.
→ One of those risks is the risk of merger.
Every contract contains an implied-by-law covenant to act fairly and in good faith in course of performance.
-Not the case here, no ambiguity. Where the instrument contains an express covenant in regard to any subject, no covenants are to be implied with respect to the same subject.
-Court strictly reads the contract.
United States Court of Appeals, Firth Circuit (en banc), 1981.
642 F.2d 929, cert. denied, 454 U.S. 965 (1981).
FACTS
Class action brought on behalf of those who held debentures at time of merger.
-Alleged Ds breached terms of indenture, breached fiduciary duties, and violated various provisions of federal securities laws.
-Collins’ Debentures issued in 1967, common stock trading for $60, conversion price $72.50.
-1969: business declined rapidly.
-1971: stock never traded above $21 and sold for as little as $9¾.
-Debentures reached a low of $600.
-1971: Collins on verge of bankruptcy, Rockwell made $35M equity investment to Collins and guaranteed an additional $20M of indebtedness, took control of board.
-1973: Rockwell commenced friendly tender offer for Collins’ stock $25/share, purchased 75%.
-Merged Collins into self (Rockwell).
-Merger Plan: each share of common stock received $25/share.
-Rockwell proposed: right to convert only into amount of cash indenture holders would have been paid under merger plan - unfavorable trade of $72.50 conversion price for $25 cash. (legal uncertainty, but Rockwell eventually assented).
ISSUE: In what form did the conversion rights of the holders of the debentures survive the merger under the terms of the indenture?
HOLDING: The D was correct in the conversion that he gave the P’s, $1000 → $344.75.
ANALYSIS
-There is no provision in indenture agreement which explicitly states debenture holders have a continuing right to convert into common stock.
-Court holds that provision states that company must execute a supplemental indenture that will formally provide for the conversion rights of the holders of the Debentures after the merger (they complied with this).
-Does the conversion afforded to them ($1000 converted into only $344.75 cash) fairly and adequately accord to the holders of the debentures their valid rights under the indenture?
-Can’t convert into Collins Common Stock, there won’t be any after the merger.
→ He can convert into the kind of shares of stock and other securities and property that holders of Collins common stock received as part of the merger plan.
-A purchaser of debentures takes the risks inherent in the equity feature of the security, risks that are shared with common stock.
→ One of those risks is the risk of merger.
Every contract contains an implied-by-law covenant to act fairly and in good faith in course of performance.
-Not the case here, no ambiguity. Where the instrument contains an express covenant in regard to any subject, no covenants are to be implied with respect to the same subject.
-Court strictly reads the contract.
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