Wednesday, May 2, 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.).


FACTS
-After period of expansion, Avon determined to restructure.
-Avon board decided, in effort to conserve cash needed to retire debt, Avon’s annual cash dividend on common stock would be reduced from $2 to $1.  (Advisor: significant decrease in Avon stock would follow.)
-New stock: PERCS, provide shareholders with option of continuing to receive $2/share dividend in exchange for limitation on capital appreciation.
-
PERCS Optional Redemption:  Allowed Avon to redeem PERCS at any time during their term in accordance with fixed schedule of prices known as “call price”.
-Call price would be set at levels significantly above market price of Avon common stock at time PERCS issued and could be paid in either cash or Avon common.
-If Market Price common > call price, avon would be able to effect Optional Redemption prior to end of their term at a value below then current market price of common.
-Concern that PERCS would not appeal to investors if there was the potential that they would be excluded from any large dividend payout made on common while PERCS outstand, or would be excluded from consideration received by common in merger involving Avon.  

Accelerated Redemption Provision: 1) in the event Avon shall pay a common stock dividend at a cumulative rate per year a equal to or greater than $1.50/share; or 2) in event Avon involved in merger/consolidation, or other similar extraordinary transaction during this period, Acc. Redemption provision would be triggered and PERCS holders would be entitled for 1-1 exchange for common (or cash) + special premium and accrued/unpaid cash dividends.
-P, investment banking firm, became substantial investor in PERCS.
Feb 7 1991: Avon declared .35/share payable on March 1.  Declared special dividend of $3/share to be paid on September 16.   Regularly quarterly dividend of .35.
-On June 3, 1991: Avon exercised Optional Redemption of all PERCS.
Issue: did declaration of dividend increase on Feb . 7 and/or payment of Mar. 1st dividend trigger Accelerated Redemption Provision.

Holding:  Yes, there are ambiguities in Accelerated Redemption Provision and/or dividend payment on Mar. 1 trigger Accelerated Redemption Provision.

ANALYSIS
Avon: it is only the payment of a dividend, not the declaration, which is relevant for purposes of determining whether ARP has been triggered.
(language of provision otherwise - Once payment has been made of smaller dividend, it is the method of calculating yearly rate which becomes focus of inquiry)
-A reasonable person could conclude that
cumulative rate per annum is determined by multiplying the last quarterly dividend by four and adding to that any declared special dividends that would be paid prospectively in the 12 month period.
-Court finds ambiguity in contract.
Good Faith and Fair Dealing
P: Purposeful manipulation of dividend to circumvent ARP was a breach of covenant of good faith and fair dealing.
-Covenant of Good Faith violated when a party to a k 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 there are material facts raised here re: breach of covenant of good faith and fair dealing.

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