Thursday, March 29, 2012

Wertheim Schroder & Co. Incorporated v. Avon Products, Inc. case brief

Wertheim Schroder & Co. Incorporated v. Avon Products, Inc.
United States District Court, Southern District of New York, 1993.

1993 WL 126427 (S.D.N.Y.)

Subject: Dividends

-After a period of expansion, Avon determined to retreat and develop a restructuring program.
-In an effort to conserve cash needed to retire debt, Avon’s annual cash dividend on common stock would be reduced from $2 to $1.  
-Avon’s financial advisor advised that a significant decrease in Avon’s stock price would follow (a result of the “signal” of the lower dividend).
-Avon would issue a new class of stock, PERCS, which would provide shareholders with option of continuing to receive $2/share dividend in exchange for limitation on capital appreciation.
-PERCs had an
optional redemption provision which allowed Avon to redeem PERCS at any time during their term according to fixed price schedule.  
-In order to alleviate some of the concern that common stockholders would possibly receive some kind of benefit that PERCS holders would not, Avon incorporated an Accelerated Redemption Provision into PERCS (if Avon shall pay common stock dividend at a cumulative rate/year greater than 1.50/share or in event Avon is merged, etc., all PERCS holders would be entitled to one-one exchange for common stock plus payment of specified premium and accrued/unpaid dividends).  
-P, Wertheim Schroder, an investment banking firm, became a substantial investor in PERCS
-On February 7, 1991, Avon declared a first quarter common stock dividend of 0.35/share.  At same time, Avon declared a special dividend of $3.00/share to be paid on September 16, 1991 to common stockholders of record on September 4, 1991.
Avon also indicated that in the future it would continue to declare and pay a special dividend quarterly at $0.35.  
-On June 3, 1991, Avon exercised the Optional Redemption of all PERCS (not the better Accelerated Provision).
-P claims that either Avon’s special dividend or dividend increase should have triggered the Accelerated Provision and that Avon has failed to honor the terms of the provision.  P also claims violation of duty of good faith.

D argues: it is clear from language of provision that it is the payment of the dividend, not the declaration of the dividend, which is relevant for determination of the accelerated provision.
-Court says that what matters is not the payment of a dividend of $1.50 or more, but the payment of a smaller dividend (the .35 dividend) that, at an annual rate, would be $1.50 or more.  
Once the payment has been made, it is the method of calculating the rate per annum which becomes the pivotal focus on the inquiry.
D argues
: Payment of quarterly dividend must be treated separately from the declared, but unpaid, special dividend of $3.00, for purposes of calculating the “cumulative rate per annum”.  A declared special dividend is a separate consideration that does not become part of the cumulative calculation until it is paid.
P argues: there is no basis for allowing projected but undeclared and unpaid quarterly dividends to be included in the “cumulative rate per annum” while a simultaneous declared but unpaid dividend is not included.
-Court says that after the Feb. 7 declaration of the special dividend on the common stock, Avon had a legally binding obligation to pay the special dividend.

-Give that once Avon declared the special dividend on Feb. 7, it had a legal obligation to pay that dividend on the announced future date, an investor could reasonably conclude that, at the time Avon made its first quarterly dividend payment on March 1, 1991, that the payment was being made at a “cumulative rate” for 1991, which now included not only future quarterly dividends for 1991, but also the mandatory special dividend to be paid out on September 16.  
-One could interpret the annual dividend rate, as of March 1, to be $4.40 a share. 

P Argues: Purposeful manipulation of dividend by D to circumvent Accelerated Redemption provision = breach of covenant of good faith and fair dealing.
-Court states covenant of good faith and fair dealing is implied in all contracts and is violated when a party to a contract acts in a manner that, although not expressly forbidden by any contractual provision,
would deprive the other of the right to receive the benefits under the agreement.
-Court says, that according to inferences in P’s favor, P has raised genuine issues of material fact.  

-When board of directors declare a dividend and makes a public announcement of that fact, it can not thereafter rescind the dividend.
-The relationship between a corporation and a stockholder w/ respect to the latter’s share of a dividend declared by the corporation is that of a debtor and creditor.  At any time after the date fixed for payment of each dividend, a holder of stock may maintain an action at law to recover the sum due.

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