Source: https://m.openjurist.org/642/f2d/929/broad-v-rockwell-international-corporation
Timestamp: 2019-05-25 17:11:31
Document Index: 40685046

Matched Legal Cases: ['§ 78', '§ 240', '§ 14', '§ 4', '§ 4', '§ 4', '§ 4', '§ 4', '§ 4', '§ 14', '§ 4', '§ 4', '§ 27', '§ 78', '§ 1331', '§ 77', '§ 0', '§ 4', '§ 13']

642 F. 2d 929 - Broad v. Rockwell International Corporation
642 F.2d 929
Fed. Sec. L. Rep. P 97,956
(I)t would appear that the (issuer) might, in the interest of its stockholders, go out of existence without giving the holder of a convertible bond any just cause of complaint.
... In the sale and purchase both railway companies were acting within their strict legal rights to promote the interests of their respective stockholders. This change of ownership was only one of several vicissitudes liable to happen during 20 years in the life of the corporation, which might render the outstanding option valueless, and still afford no cause of action to the debenture holder. Nothing has taken place which the debenture holders were not bound to anticipate.... If (as a result of the consolidation) the hope of speculative venture on the stock market was extinguished, it is damnum absque injuria.
Id. at 477-78.15
Broad has cited no persuasive authority which would indicate that the common law of New York or of any other jurisdiction would provide any additional protection for his conversion rights upon merger, other than that protection which might be included in the Indenture.16 But the common law cases cited by the parties do shed light on the origin of and need for boilerplate antidilution provisions of the sort at issue here.
As the Lisman case points out, holders of debentures were charged at common law with the knowledge that various voluntary corporate actions might dilute or even render nugatory the value of their debentures' conversion feature; because dilution was (at least constructively) within their contemplation when they purchased the security, there was no unfairness in denying the holders of debentures any compensation in the event of such dilution. But of course, even before the occurrence of a diluting event, this risk of dilution itself significantly diminished the value of the conversion feature. As Justice Holmes noted in Parkinson, however, the law does have machinery through which, if the parties so choose, the value of the conversion right may be protected. The draftsmen of indentures may guard against dilution through the insertion of any of three types of special contractual provisions.
The first and most drastic type of provision is the outright prohibition of certain types of voluntary corporate conduct. Such prohibitory covenants are more typically used to protect the value of the debt obligation represented by the debenture.17 But prohibitory covenants may also be used to protect the value of the conversion feature e. g., by means of an absolute ban on mergers. The efficacy of this means of antidilution protection must be balanced against the loss of business flexibility it means for the issuer. Some sorts of corporate conduct can be limited with little loss of flexibility, but other restrictions may so hamstring the company that they threaten its continued existence.
Happily, there are two less restrictive means of antidilution protection that do not bear such high costs in terms of business flexibility, as the following excerpt from the Commentaries indicates:
In modern convertible debenture indentures it is virtually universal to provide some anti-dilution protection (that provides for the adjustment of the conversion price upon the taking of specific actions by the issuer that would cause the value of the conversion right to be diluted), usually in combination with provisions (requiring advance notice to the debentureholders of such acts), plus a provision for equitable adjustment in the event of a merger or other reorganization (in which the issuer is the surviving company). However, adjustment of the conversion price by itself cannot provide the debentureholder with protection against all events which might substantially affect the conversion privilege. For example, when the Company is to be merged into another corporation and the Company's common stock is to be replaced by convertible preferred stock or debentures of the surviving corporation, adjustment of the conversion price would not provide adequate protection. Thus it is now customary to provide that the debentureholder will be given the right to convert his debentures into whatever securities are to replace the common stock of the Company.
Commentaries at 528 (emphasis added).18 Professor and former SEC Chairman Cary makes the same point:
As a consequence of cases such as Parkinson, it has been found necessary in the conversion contract to provide for protection in the event of consolidations, mergers, conveyance of substantially all assets, capital reorganizations and reclassifications. If any of these occur the instrument frequently provides that the holder of the convertible security shall have the right thereafter to convert it "into the kind and amount of shares of stock and other securities and property receivable ... by a holder of the number of shares of capital stock into which such (convertible security) might have been converted immediately prior to such reclassification, change, consolidation, merger, sale, or conveyance."
W. Cary & M. Eisenberg, Cases and Materials on Corporations 1155 (5th ed. unabr. 1980) (elipsis and bracketed portion in original). The Commentaries contain a suggested antidilution provision with strikingly similar language to that set out in the above passage.19
While the common law's treatment of conversion rights in the event of merger provides a useful background, and while various antidilution provisions promulgated by the American Bar Foundation and the commentators are useful for purposes of comparison, the resolution of this case ultimately turns upon our construction of the specific language in the Indenture under which the Debentures were issued in 1967.
C. The Applicable Rules of Construction
Though the parties are residents of many different states, and though the events with which we are concerned are national in scope, there is no dispute over which state's law governs in construing the contract. Section 17.12 of the Indenture provides in pertinent part as follows:
This Indenture and each and every provision hereof and of the Debentures shall be deemed to be a contract made under the laws of the State of New York, and for all purposes shall be construed in accordance with the laws of said State.
Thus, we will apply settled principles of New York law in construing the Indenture although those principles of contract construction are very nearly universal throughout the United States.
The process of contract interpretation is the means through which the scope of the parties' agreement and their respective rights thereunder are determined. Under New York law, a written contract is to be interpreted so as to give effect to the intention of the parties as expressed in the unequivocal language they have employed. Breed v. Insurance Co. of North America, 46 N.Y.2d 351, 355, 385 N.E.2d 1280, 1282, 413 N.Y.S.2d 352, 355 (1978). Due consideration must be given to the purpose of the parties in making the contract, and a fair and reasonable interpretation consistent with that purpose must guide the courts in enforcing the agreement. Cromwell Towers Redevelopment Co. v. City of Yonkers, 41 N.Y.2d 1, 6, 359 N.E.2d 333, 337, 390 N.Y.S.2d 822, 826 (1976); Pittsburg Coke & Chemical Co. v. Bollo, 421 F.Supp. 908, 928 (E.D.N.Y.1976) (applying New York law), aff'd, 560 F.2d 1089 (2d Cir. 1977).
The interpretation of an unambiguous contract provision is a function for the court rather than for a jury, and matters extrinsic to the agreement may not be considered when the intent of the parties can be gleaned from the face of the instrument. Teitelbaum Holdings, Ltd. v. Gold, 48 N.Y.2d 51, 56, 396 N.E.2d 1029, 1032, 421 N.Y.S.2d 556, 559 (1979); West, Weir & Bartel, Inc. v. Mary Carter Paint Co., 25 N.Y.2d 535, 540, 255 N.E.2d 709, 711-12, 307 N.Y.S.2d 449, 452 (1969); Mendel-Mesick-Cohen-Architects v. Peerless Insurance Co., 74 A.D.2d 712, 713, 426 N.Y.S.2d 124, 126 (3d Dep't 1980).
A court may not rewrite a term of a contract by "interpretation" when that term is clear and unambiguous on its face. Fiore v. Fiore, 46 N.Y.2d 971, 973, 389 N.E.2d 138, 139, 415 N.Y.S.2d 826, 826 (1979); Rodolitz v. Neptune Paper Products, Inc., 22 N.Y.2d 383, 386-87, 239 N.E.2d 628, 630, 292 N.Y.S.2d 878, 881 (1968). In interpreting the contract, a court must be concerned with what the parties intended, but only to the extent that they evidenced what they intended by what they wrote. Rodolitz, 22 N.Y.2d at 386-87, 239 N.E.2d at 631, 292 N.Y.S.2d at 881. Neither may a court rewrite a contract to accord with its instinct for the dispensation of equity under the facts of a case. DeVanzo v. Newark Insurance Co., 44 A.D.2d 39, 43, 353 N.Y.S.2d 29, 32 (2d Dep't 1974), aff'd, 37 N.Y.2d 733, 337 N.E.2d 131, 374 N.Y.S.2d 619 (1975).
Finally, under New York law, the entire contract must be considered, and, as between possible interpretations of an allegedly ambiguous term, that will be chosen which best accords with the sense of the remainder of the contract, and that interpretation is favored which will make every part of the contract effective. Laba v. Carey, 29 N.Y.2d 302, 308, 277 N.E.2d 641, 644, 327 N.Y.S.2d 613, 618 (1971); National Equipment Rental, Ltd. v. Reagin, 338 F.2d 759, 762-63 (2d Cir. 1964) (applying New York law). Cf. Tandy Corp. v. United States, 626 F.2d 1186, 1190 (5th Cir. 1980) (to correctly interpret a debenture indenture, court must consider the whole document). All parts of the agreement are to be reconciled, if possible, in order to avoid an inconsistency. National Conversion Corp. v. Cedar Building Corp., 23 N.Y.2d 621, 625, 246 N.E.2d 351, 354, 298 N.Y.S.2d 499, 502 (1969). A specific provision will not be set aside in favor of a catch-all clause. William Higgins & Sons, Inc. v. State, 20 N.Y.2d 425, 428, 231 N.E.2d 285, 286, 284 N.Y.S.2d 697, 699 (1967). And the normal rule of construction that any fair doubt as to the meaning of the words chosen by the drafting party should be resolved against that party is inapplicable when there are not two possible and reasonable interpretations.20 National Equipment Rental, Ltd., 388 F.2d at 763. Because courts are to adjudicate the rights of the parties according to the unambiguous terms of the contract, they therefore must give the words and phrases employed in the contract their plain meaning. Laba, 29 N.Y.2d at 308, 277 N.E.2d at 644, 327 N.Y.S.2d at 618.
As a matter of law, be it the law of New York or any other jurisdiction with which we are acquainted, the Indenture either is or is not ambiguous. It either does or does not adequately demonstrate the intent of the parties from its own four corners.21 We cannot emphasize too strongly that the resolution of this issue is for the district court in the first instance, rather than for a jury; and because it is a question of law, we review the district court's decision with the full freedom to substitute our own judgment for that of the court below. The opinions of the many lawyers who have reviewed the Indenture before this litigation reached this court may be quite relevant for some other purposes e. g., for determining the defendants' good faith or the lack thereof. We may, but certainly need not, find the force of their legal reasoning compelling, and adopt it as our own. But on the initial and often determinative question of whether the contract sufficiently demonstrates the intent of the parties so as to be enforceable only by reference to the four corners of the document, it does not matter at all how many lawyers have in the past pronounced this contract to be ambiguous or unambiguous. Neither does it matter in whose behalf, or with what motives, or when, they made such arguments. We note that virtually every case involving the interpretation of a contract comes to us with two sets of lawyers and two sets of clients with sharply differing views of the meaning of the contract. But interpreting contracts is ultimately the business of the courts.
D. The Meaning of Section 4.11 of the Indenture
The structure of the Indenture is fairly typical of convertible debenture indentures generally.22 See American Bar Foundation, Model Debenture Indenture Provisions All Registered Issues 1967, reprinted in Commentaries at 19 & passim (1971). As might be expected, there is an article of the Indenture devoted wholly to the conversion rights of the holders of the Debentures, and a section within that article which addresses the possibility of a merger of Collins with another company: Article Four of the Indenture is entitled "Conversion of Debentures," and the next-to-last section of that Article, Section 4.11, is described in the Indenture's table of contents as governing the "(c)ontinuation of the conversion privilege in case of a consolidation, merger or sale of assets." We note that there is no provision in the Indenture which explicitly mandates that the holders of the Debentures should have a continuing right to convert into common stock after a merger. Aside from his few arguments based on the language of Section 4.11, Broad basically argues his case by implication from more general language that is not specifically addressed to the merger context. But because Section 4.11 is more specifically addressed to the merger context than any other provision of the Indenture, we begin our discussion with that particular provision, to see if the language thereof clearly and unambiguously conveys the intent of the parties.
Section 4.11 provides, in pertinent part, as follows:
In case of any consolidation of (Collins) with, or merger of (Collins) into, any other corporation ..., the corporation formed by such consolidation or the corporation into which (Collins) shall have been merged ... shall execute and deliver to the (Trust Company) a supplemental indenture ... providing that the holder of each Debenture then outstanding shall have the right (until the expiration of the conversion right of such Debenture) to convert such Debenture into the kind and amount of shares of stock and other securities and property receivable upon such consolidation (or) merger ... by a holder of the number of shares of Common Stock of (Collins) into which such Debenture might have been converted immediately prior to such consolidation (or) merger ....
Parsing this section into logical units, we note that it serves two purposes. First, it specifies what the Trust Company and Collins' successor must do in the event of a merger in which Collins is not the surviving company: they must execute a supplemental indenture that will formally provide for the conversion rights of the holders of Debentures after the merger. There is no question in this case but that Rockwell and the Trust Company complied with this directive, for they did execute a supplemental indenture detailing the post-merger conversion rights of the holders of Debentures. Rather, the question is whether the interpretation they have placed on the language of the Indenture and the supplemental indenture that after the merger, the holder of a Debenture would have the right to convert a Debenture in the principal amount of $1000 only into $344.75 in cash fairly and adequately accords to the holders of Debentures their valid rights under the Indenture.
The second part of Section 4.11 provides by its terms that after the merger, the holder of each Debenture shall have the right to convert that Debenture into something but what? It cannot be Collins Common Stock, for there will be no more of that after the merger. It therefore must be something else other than Collins Common Stock. The nature of the "something else" into which the holder of a Debenture can convert his Debenture is specified by reference to what the holders of the Collins Common Stock received in the merger: he can convert into the kind of "shares of stock and other securities and property" that the holders of Collins Common Stock received as part of the Merger Plan. Thus, if the holders of Collins Common Stock had received Rockwell Common Stock in the merger in exchange for giving up their shares of Collins Common Stock, the holders of Debentures would have been entitled, at any time after the merger for so long as their Debentures were outstanding, to convert into Rockwell Common Stock. Alternately, if the holders of Collins Common Stock had received Rockwell debentures in exchange for their Collins Common Stock, the holders of the Debentures would have been entitled to convert into Rockwell debentures.
Broad suggests that the use of the conjunctive "and" in Section 4.11 ("shares of stock and other securities and property") means that in every instance of a merger, the holders of the Debentures would be entitled to receive all three types of property specified above. This might be a plausible construction, but for the fact that it would make meaningless the qualification to that phrase that follows immediately thereafter "receivable upon such consolidation (or) merger ... by a holder of ... shares of Common Stock of (Collins)." We decline to read Section 4.11 as a mandatory directive that any plan of merger between Collins and another company had to include provisions for the receipt by the holders of Collins Common Stock of both stock on the one hand, and other securities and property on the other. Had the parties to the contract wished to fashion such a bizarre provision, they certainly would have done so in a more explicit fashion.
Thus, the plain meaning of Section 4.11 is that after a merger, the nature of that "something else" into which the holders of Debentures are entitled to convert in lieu of Collins Common Stock is exactly equivalent to the nature of the "something" that the holders of Collins Common Stock received in the merger. No substantive limit or mandatory specification is provided in Section 4.11 as to what the holders of Collins Common Stock may receive in the merger; but whatever types of compensation the shareholders may receive in exchange for their Collins Common Stock, the holders of the Debentures are entitled to convert into each and all of those types.
In the case at bar, it is undisputed that the holders of Collins Common Stock received only cash in exchange for their shares; under the terms of the Merger Plan, they did not receive stock or any other type of property. Thus, the nature of the "something else" into which the holders of Debentures are entitled to convert in lieu of Collins Common Stock is cash not Rockwell Common Stock, not other securities, and not other types of property besides cash.
But Section 4.11 also specifies the quantity of the "something else" into which the holders of the Debentures are entitled to convert after the merger. Like the nature of the "something else," the quantity of the "something else" is defined by reference to what the holders of Collins Common Stock received in the merger. Under Section 4.11, each holder of Debentures is entitled to convert each of his Debentures into that amount of the "something else" which was receivable under the terms of the Merger Plan "by a holder of the number of shares of Common Stock of (Collins) into which such Debenture might have been converted immediately prior to such ... merger."
Thus, Section 4.11 gives us a formula for computing the quantity of the "something else." There are two variables in the formula: the conversion price of the Debentures immediately prior to the merger, and the quantity of the "something" received by the holders of Collins Common Stock in exchange for each share they surrendered as part of the Merger Plan. Section 4.11 directs that we first determine the number of shares of Collins Common Stock that a holder of Debentures would have been entitled to receive had he converted his Debentures immediately prior to the merger. As of the date of the merger, nothing had happened to trigger any of the conversion price adjustment provisions set out elsewhere in Article Four of the Indenture. Therefore, the conversion price originally specified when the Debentures were issued $72.50 was still in effect at the time of the merger. At this conversion price, the Debentures were convertible immediately prior to the merger at the rate of 13.79 shares of Collins Common Stock per $1000 in principal amount of the Debentures surrendered.
The formula next provides that we take the quantity of the "something" that was received by the holders of Collins Common Stock in the merger in exchange for each share of Common Stock they surrendered ($25 cash), and multiply that "something" by the number of shares of Collins Common Stock into which the Debentures would have been convertible (13.79 shares per $1000 Debenture). The result is that each $1000 principal amount of Debenture is convertible into $344.75 cash (13.79 X $25).
Under the plain language of Section 4.11, then, we are compelled to the conclusion that Rockwell and the Trust Company correctly fulfilled their duties to execute a supplemental indenture providing for the post-merger conversion rights of the holders of Debentures; further, they correctly calculated those rights as specified by the terms of Section 4.11. Unless there is some compelling reason that we should not give the language of this Section its plain meaning, Broad's breach of contract claim must fail.
E. Reconciling Section 4.11 with the Remainder of the Indenture
1. The "Iowa law" argument. Broad's first argument against giving the language of Section 4.11 its plain meaning is based indirectly on the "and other securities and property" clause. Broad concedes that under New York law, the term "property" includes cash within its scope. But, he argues, the parties could not have intended at the time of the Indenture's execution that the right to convert into cash could be substituted for the right to convert into Collins Common Stock. As support for this argument, he notes that Collins was incorporated under the laws of Iowa, and that as of 1967, when the Indenture was executed, Iowa law did not permit a merger in which the shareholders of the merged company received only cash in exchange for their shares. Rockwell and the Trust Company concede that such a merger was not possible under Iowa law until 1970.
The actual language of Section 4.11, however, is entirely inconsistent with Broad's argument. If the intent of the parties was that the right to convert into Collins Common Stock would be replaced in the event of a merger with a right to convert into only common stock of another company, then the phrase "and other securities and property" would be meaningless surplusage with no effect. Under the New York rules of contract construction discussed above, contracts should be construed so as to give meaning to all provisions. The phrase "and other securities and property" can only have meaning if the contract is interpreted to mean that the parties intended that the holders of Debentures should be entitled to convert into whatever types of compensation the holders of Collins Common Stock could receive under the state law governing mergers at any given point in time.
We note as well that it would be entirely inconsistent with the tone and purpose of the remainder of the Indenture which was drafted to provide, insofar as humanly possible, for every imaginable contingency to impute to the parties an intent to freeze as of the year 1967 the nature of the property into which the Debentures were convertible. If that were in fact their intent, it would have ill served the holders of the Debentures. As our discussion above in part II-B of this opinion indicates, the conversion rights of the holders of Debentures are purely contractual in nature. Absent a contractual provision specifying that the conversion right would be replaced with the right to convert into something other than Collins Common Stock, post-merger holders of Debentures have no right to convert into anything. Thus, if the intent of the parties was that the right of the holders of the Debentures to convert into Collins Common Stock would be replaced with the right to convert into only whatever common stock the holders of Collins Common Stock received under the Merger Plan, the holders of Debentures would be entitled to convert into nothing, since the holders of Collins Common Stock received no common stock. The construction of the Indenture that we instead adopt is by far more flexible and equitable to all concerned.
2. Other arguments based on Article Four. Broad next argues that the Indenture elsewhere provides an absolute, unabridgeable right to convert into Collins Common Stock at any time while the Debentures are outstanding. He first points to Section 4.01, which provides in pertinent part as follows:
Subject to and upon compliance with the provisions of this Article Four, at the option of the holder thereof, any Debenture ... may, at any time (while the Debentures are outstanding) be converted ... into fully paid and non-assessable shares ... of Common Stock of (Collins) ....
(Emphasis added.) Broad would have us read the "at any time" language as precluding the effect we would otherwise give to the language of Section 4.11.
In the first place, if there were any conflict between the above-quoted language of Section 4.01 and Section 4.11, the latter would control under principles of New York contract law, since of the two sections, Section 4.11 is more specifically addressed to the merger context. But in fact there is no conflict. Broad's suggested construction would make sense only if we were to ignore the introductory phrase of Section 4.01 "(s)ubject to and upon compliance with the provisions of this Article Four." Section 4.11 is part of Article Four, and Section 4.01, by its very terms, is explicitly made subject to that article. Thus, the "at any time" language of Section 4.01 is implicitly qualified by reference to Section 4.11 to mean "at any time except in the merger context, at which point Section 4.11 becomes applicable."
Broad makes a similar argument based on the language of Section 4.07, which provides in pertinent part as follows:
(Collins) shall at all times reserve and keep available, free from pre-emptive rights, out of its authorized but unissued Common Stock, for the purpose of effecting the conversion of the debentures, the full number of shares of Common Stock then issuable upon the conversion of all outstanding Debentures.
(Emphasis added.) Again, were there a conflict between this Section and Section 4.11, the latter would control because it is more specifically addressed to the merger context. Nonetheless, we find no conflict. Even though not prefaced by the "subject to ... the provisions of this Article Four" language, Section 4.07 by its terms only applies in those circumstances when the conversion right, if exercised, would result in the issuance of Collins Common Stock. The obligation to maintain sufficient shares of Collins Common Stock can have no meaning when there is no longer a conversion right into that stock. There is no such right after a merger in which Collins is not the surviving company. Under this interpretation, Sections 4.11 and 4.07 mesh perfectly.
It is also noteworthy that Article Four contains lengthy and complex provisions which mandate the adjustment of the conversion price upon specified conditions that would otherwise dilute the value of the conversion feature. Nowhere in Article Four, nor elsewhere within the four corners of the Indenture, is there any formula by which one could determine the ratio at which the Debentures would be converted into the surviving corporation's common stock. It would seem likely that such a formula would have been provided along with all the other conversion price adjustments, had the intent of the parties to the Indenture been that there should be an absolute right to convert into common stock of some sort, even in the event of a merger in which Collins and the Collins Common Stock would disappear.23
3. Arguments based on Article Fourteen. Section 14.01 provides in pertinent part as follows:
Nothing in this Indenture shall prevent any consolidation or merger of (Collins) with or into any other corporation or corporations (whether or not affiliated with (Collins)) ...; provided, however, and (Collins) hereby covenants and agrees, that upon any such ... merger, ... the due and punctual payment of the principal of (and premium, if any) and interest on all of the Debentures, according to their tenor, and the due and punctual performance and observance of all the terms, covenants and conditions of this Indenture to be performed or observed by (Collins), shall be expressly assumed, by indenture supplemental hereto, satisfactory in form to the (Trust Company), executed and delivered to the (Trust Company) by the corporation formed by such consolidation, or by the corporation into which (Collins) shall have been merged ....
We begin by noting that the first phrase of this Section strongly supports the construction of the Indenture proffered by Rockwell and the Trust Company and accepted by the district court: if the Indenture provided an absolute right to convert into Collins Common Stock, there could be no completed merger of Collins into another company. The fact that Section 14.01 qualifies the entire Indenture evidences a strong and compelling intent of the parties that Collins should not be prevented from merging into another company by its obligations to the holders of the Debentures under the Indenture.
Broad's argument is based on the second clause of Section 14.01, which requires that the surviving corporation in a merger expressly assume "the due and punctual performance and observance of all the terms, covenants and conditions of this Indenture." He argues that this requires the surviving company to observe the covenants made by the issuer in Sections 4.01 and 4.07 the "at all times" covenants discussed above in part II-E-2 of this opinion. Unfortunately for Broad, however, we have determined that those sections are not at all inconsistent with the interpretation we have placed on Section 4.11: in effect, Section 4.11 overrides those Sections. It is undisputed that Rockwell and the Trust Company did execute a supplemental indenture providing that Rockwell would observe all of those covenants applicable after the merger; likewise, it is undisputed that Rockwell has abided by those covenants, including the honoring of the debt obligation on the Debentures. Rockwell also stands ready to honor the conversion rights set out in the supplemental indenture, which have been adjusted pursuant to Section 4.11.
Section 14.02 provides in pertinent part as follows:
In case of any such ... merger, ... and upon the execution by the successor corporation of an indenture supplemental hereto, as provided in Section 14.01, and upon compliance by such successor corporation with all applicable provisions of Section 4.11, such successor corporation shall succeed to and be substituted for (Collins) ....
In case of any such ... merger, ... such changes in phraseology and form (but not in substance) may be made in the Debentures thereafter to be issued as may be appropriate.
(Emphasis added.) As stated above, Rockwell and the Trust Company did execute a proper supplemental indenture as provided for in Section 14.01, and they did comply with the applicable provisions of Section 4.11 in executing that supplemental indenture. Rockwell has properly succeeded to Collins' rights and obligations under the Indenture. Broad's arguments under Sections 14.01 and 14.02 must fail.
4. Arguments based on Article Thirteen. Article Thirteen of the Indenture governs the circumstances in which the issuer and the Trustee can execute a supplemental indenture. Section 13.01, which is described in the Indenture's table of contents as specifying the "(p)urposes for which supplemental indentures may be entered into without consent of the Debentureholders," provides in pertinent part as follows:
(Collins), when authorized by a resolution of its Board of Directors, and the (Trust Company), subject to the conditions and restrictions in this Indenture contained, may from time to time and at any time enter into an indenture or indentures supplemental hereto ... for one or more of the following purposes:
(a) to make provision with respect to the conversion rights of holders of the Debentures pursuant to the requirements of Section 4.11;
(b) to evidence the succession of another corporation to (Collins), or successive successions, and the assumption by the successor corporation of the covenants, agreements and obligations of (Collins) pursuant to Article Fourteen;
(c) to add to the covenants and agreements of (Collins) in this Indenture contained such further covenants and agreements thereafter to be observed, and ... to surrender any right or power herein reserved to or conferred upon (Collins);
The (Trust Company) is hereby authorized to join in the execution of any supplemental indenture authorized or permitted by the terms of this Indenture ....
Any supplemental indenture authorized by the provisions of this Section 13.01 may be executed by (Collins) and the (Trust Company) without the consent of the holders of any of the Debentures at the time outstanding, notwithstanding any of the provisions of Section 13.02.
(Emphasis added.) We begin by noting that the first clause of this section reinforces our conclusions in part II-D of this opinion, supra, that Section 4.11 of the Indenture is intended to "make provision with respect to the conversion rights of holders of the Debentures" in the event of merger. Section 4.11, it will be recalled, requires in part that the surviving company in a merger execute a supplemental indenture in which is detailed the precise nature of the post-merger conversion rights of the holders of the Debentures, as calculated by the formula set out in Section 4.11.
Broad and the defendants have argued vigorously the question whether the last phrase in clause (e) of Section 13.01 modifies the entire section, or only clause (e). We agree with the defendants that under the most logical reading of Section 13.01, the phrase "provided that such action shall not adversely affect the interests of the holders of any of the Debentures" logically modifies only clause (e).24 Next, as we have noted before, Section 4.11 is the most specific recitation of the rights of the holders of the Debentures in the event of a merger; clause (a) of Section 13.01 ties in directly, and with equal specificity, to Section 4.11. Were there a conflict between those two provisions and the catch-all last phrase of clause (e) of Section 13.01, the former provisions would govern.
But more fundamentally, the execution of a supplemental indenture that complies with the directives of Section 4.11 does not "adversely affect the interests of the holders of any of the Debentures." The holders of Debentures have a legitimate interest only in those rights that are accorded them under the Indenture. Section 4.11 specifies what those rights are in the event of a merger; therefore, the execution of a supplemental indenture that complies with the requirements of Section 4.11 cannot be adverse to the legitimate interests of the holders of Debentures.
Broad also argues from the language of Section 13.02, despite the specific statement in Section 13.01 that a supplemental indenture required by Section 4.11 and clause (a) of Section 13.01 may be executed notwithstanding anything in Section 13.02. This statement in Section 13.01 should, and does, foreclose any arguments under Section 13.02.
But even under Section 13.02, which is described in the Indenture's table of contents as providing for the "(m)odification of Indenture with consent of holders of 66 2/3 % in principal amount of Debentures," there is no help for Broad. Section 13.02 requires the permission of the holders of two-thirds of the Debentures before the issuer and the Trustee may execute a supplemental indenture that in any manner changes the rights and obligations of the parties to the Indenture or of the holders of the Debentures; certain types of alterations, including alterations of "the right to convert the (Debentures) into (Collins) Common Stock at the prices and upon the terms provided in this Indenture," are prohibited outright unless the Trustee and the issuer can obtain "the consent of the holder of each Debenture so affected." (Emphasis added.) Even were Section 13.02 applicable to those supplemental indentures that are required by Section 4.11 and clause (a) of Section 13.01, Section 13.02 would not prohibit that type of supplemental indenture, and neither would it require the consent of the holders of two-thirds or all of the Debentures: it is indisputable that one of the "terms provided in (the) Indenture" is Section 4.11 itself, and thus such a supplemental indenture does not alter the conversion rights of the holders of the Debentures. Rather, the supplemental indenture required under Section 4.11 merely evidences that all the requisite formalities for the clarification and protection of those rights have been complied with i. e., that the formula set out in Section 4.11 has become applicable, and that the surviving company of the merger has formally accepted all the other obligations of, and been fully substituted for, the original issuer.
F. Our Conclusions With Respect to the Indenture
We conclude, after examining the entire Indenture in addition to those portions discussed specifically above, that the district court was correct in its conclusion that the Indenture is unambiguous. The intent of the parties is clearly evident from the four corners of the document. Section 4.11 fully and unambiguously sets out the conversion rights of the holders of the Debentures in the event of a merger in which Collins is not the surviving corporation: the holder of any outstanding Debenture is entitled to convert his Debenture into only that which he would have received had he converted it into Collins Common Stock immediately prior to the merger. On the facts of this case, that means a converting holder of a Debenture is entitled to receive $344.75 in cash for each $1000 in principal amount of the Debenture. Accord, Brucker v. Thyssen-Bornemisza Europe N. V., 424 F.Supp. 679, 688-90 (S.D.N.Y.1976) (construing virtually identical indenture provisions against similar claims in similar context, and finding no abridgement of the rights of the holders of debentures because "the debenture holders have never had an absolute right (under the indenture) to convert into (the issuer's) stock in a merger"), aff'd mem. sub nom. Brucker v. Indian Head, Inc., 559 F.2d 1202 (2d Cir.), cert. denied, 434 U.S. 897, 98 S.Ct. 277, 54 L.Ed.2d 183 (1977).25 Cf. Broenen v. Beaunit Corp., 440 F.2d 1244, 1248-49 (7th Cir. 1970) (under New York law, provision virtually identical to Section 4.11 of the Indenture mandated that holders of convertible debentures receive conversion right into that which holders of common stock received in a three-cornered merger, which was common stock of surviving company's parent company); Wood v. Coastal States Gas Corp., 401 A.2d 932, 939 (Del.1979) (holder of convertible preferred stock after recapitalization is to receive "not what he would have received before recapitalization; that was the common stock .... Certainly (clause similar to Section 4.11 of the Indenture) is meaningless if the common share remains issuable after recapitalization" (emphasis in original)); B. S. F. Corp. v. Philadelphia National Bank, 204 A.2d 746, 750-51 (Del.1964) (construing virtually identical provisions in the context of a sale of "substantially all" of the issuer's assets).
It is not the function of a court to rewrite a contract's terms in the process of "interpretation" to make them accord with the court's sense of equity. DeVanzo v. Newark Insurance Co., 44 A.D.2d 39, 43, 353 N.Y.S.2d 29, 32 (2d Dep't 1974), aff'd, 37 N.Y.2d 733, 337 N.E.2d 131, 374 N.Y.S.2d 619 (1975). And yet, even were we inclined to do so, we are by no means certain that the outcome would be any different in this case.
Broad's persistent complaint has been that the Debentures' conversion feature was suddenly and arbitrarily liquidated, without permission or compensation. While the conversion feature has not technically been eliminated, since the holders of the Debentures retain the right to convert into $344.75 in cash for each $1000 principal amount of Debentures, it is true that the merger did eliminate the possibility that the holders of the Debentures would benefit as a result of the future profitability of the Collins business, just as the merger eliminated that possibility for the holders of Collins Common Stock. A purchaser of Debentures, however, takes the risks inherent in the equity feature of the security, risks that are shared with the holders of Collins Common Stock. One of those risks is that Collins might merge with another company which is effectively the risk that any individual investor's assessment of the value of Collins Common Stock, based on Collins' prospects for the future, will be replaced by the collective judgment of the marketplace and the other investors in Collins who might vote in favor of the merger. This like the risk that Collins' future operations might be lackluster, with the result that conversion might never be economically attractive is simply a risk inherent in this type of investment.
The terms of the merger necessarily reflected the business prospects of Collins as of 1973. The fact that the initial high hopes that the holders of Debentures had for the equity securities of Collins hopes that were identical to those of the equity shareholders were defeated by the economic setbacks Collins suffered between 1967 and 1973 is not alleged in this lawsuit to be anyone's fault, least of all Rockwell's or the Trust Company's. When the market set the price of Collins Common Stock at less than $20, that price reflected the current aggregate judgment of the marketplace as to Collins' prospects for the future. The tendering shareholders, and those who gave up their shares in the merger, actually received a premium of roughly $5 per share over the market price a bonus of some 25%. The post-merger conversion terms mandated by Section 4.11 accorded the holders of the Debentures the benefit of that premium. They were accorded, as a result of the equity feature of the Debentures, the same treatment that the holders of Collins Common Stock received, and they received value based, in part, on Collins' prospects for the future. Insofar as the debt feature of the Debentures is concerned, they benefited by the merger in that the Debentures are now backed by a financially more secure corporation.
Based upon our interpretation of the Indenture, and without hesitation given the nature of convertible debentures, we affirm the judgment of the district court with regard to Broad's breach of contract claims. We turn next to the other associated state-law claims that were within the pendent jurisdiction of the district court.
III. ASSOCIATED STATE-LAW CLAIMS
A. The Implied Covenant of Fair Dealing
As we understand New York law, every contract governed by the laws of that State necessarily contains an implied-by-law covenant to act fairly and in good faith in the course of performing the contract. E. g., Rowe v. Great Atlantic & Pacific Tea Co., 46 N.Y.2d 62, 68, 385 N.E.2d 566, 569, 412 N.Y.S.2d 827, 830 (1978); Van Gemert v. Boeing Co., 520 F.2d 1373, 1383-85 (2d Cir.), cert. denied, 423 U.S. 947, 96 S.Ct. 364, 46 L.Ed.2d 282 (1975), appeal after remand, 553 F.2d 812, 815 (2d Cir. 1977) (applying New York law). The panel that first heard this case thought the Indenture to be ambiguous on the question of the conversion rights remaining with the holders of Debentures after a merger, and held that the evidence produced by Broad prior to the directed verdict raised a jury question as to whether Broad and the Trust Company had dealt fairly and in good faith with the holders of Debentures in the light of that ambiguity. 614 F.2d at 429-30. Having reached a different conclusion than the panel did on the ambiguity issue, we are compelled to a different result on the good faith and fair dealing issue as well.
We note first that this implied covenant of good faith and fair dealing cannot give the holders of Debentures any rights inconsistent with those explicitly set out in the Indenture. "(W)here the instrument contains an express covenant in regard to any subject, no covenants are to be implied with respect to the same subject ...." Burr v. Stenton, 43 N.Y. 462, 464 (1871). "It is ... well established in New York that, where the expressed intention of contracting parties is clear, a contrary intent will not be created by implication." Neuman v. Pike, 591 F.2d 191, 194 (2d Cir. 1979) (citing and applying New York law). The covenant is breached only when one party to a contract seeks to prevent its performance by, or to withhold its benefits from, the other. Collard v. Incorporated Village of Flower Hill, 75 A.D.2d 631, 632, 427 N.Y.S.2d 301, 302 (2d Dep't 1980). The mere exercise of one's contractual rights, without more, cannot constitute such a breach. See Mutual Life Insurance Co. v. Tailored Woman, Inc., 309 N.Y. 248, 254, 128 N.E.2d 401, 403 (1955).
Broad relies here, as he did in the district court and before the panel, on the Van Gemert case cited above. The issue in that case was whether holders of Boeing debentures received adequate notice of the redemption of the debentures to allow them a meaningful opportunity to exercise the debentures' conversion feature. The Van Gemert I court held that although Boeing had formally complied with the notice provisions in the governing indenture, merely placing those provisions in the indenture was an inadequate means of apprising the holders of debentures of what notice would be given in the event of a redemption call. Absent more specific warning on the face of the debentures or elsewhere that the debentures could be called upon the minimal notice provided in the indenture, the court held that the "reasonable expectations" of the holders of debentures as to notice would be protected. 520 F.2d at 1383-85. The court stressed that "(t)he debenture holder relies on the opportunity to make a proper conversion on due notice. Any loss occurring to him from failure to convert, as here, is not from a risk inherent in his investment but rather from unsatisfactory notice procedures." Id. at 1385. In explaining the basis for its holding in the earlier appeal, the Van Gemert II court described its earlier decision as "merely appl(ying) the settled principle, 'that in every contract there is an implied covenant that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract ....' " 553 F.2d at 815 (quoting Kirke La Shelle Co. v. Paul Armstrong Co., 263 N.Y. 79, 87, 188 N.E. 163, 167 (1933); elipsis inserted by the Second Circuit).
We do not find the Van Gemert opinions of particular relevance to the case at bar.26 The "loss," if any, suffered by the holders of Debentures was certainly not the result of unsatisfactory administrative procedures in the Indenture; rather, this case turns on the question of substantive rights that are basic to the nature of the contract. The risk of merger was inherent in the investment made by the holders of Debentures. Rockwell and the Trust Company did nothing that could be described as "destroying or injuring the right of the other party to receive the fruits of the contract," because under our holding in part II of this opinion, supra, the benefits that the holders of Debentures received were all the rights to which they were contractually entitled. Indeed, had Rockwell conferred on the holders of Debentures rights significantly greater than those set out in the Indenture, it might have faced claims by its own shareholders for waste and corporate mismanagement. We believe this case to be governed by the other New York cases we have cited above. See also Levine v. Chesapeake & Ohio Railroad Co., 60 A.D.2d 246, 248-50, 400 N.Y.S.2d 76, 78-79 (1st Dep't 1977) ("no actionable unfairness" in defendants' conduct, which eliminated public market for railroad's common stock, into which plaintiffs' bonds were convertible). As a matter of law, given our interpretation of the Indenture and the testimony concerning the conduct of the defendants (viewed in the light most favorable to Broad), we hold that the defendants did not violate the covenant of good faith and fair dealing that is implied into the Indenture under New York law. Accordingly, we affirm the judgment of the district court with respect to this claim.
In part IV-C-1 of its opinion, 614 F.2d at 430-31, the panel held that Rockwell owed the holders of Debentures a fiduciary duty of good faith and fair dealing because it controlled both parties to the 1973 merger. But the panel also held that if, on remand, the jury were to find that Rockwell had fully complied with its obligations under the Indenture, its fiduciary obligations also would have been discharged as a matter of law.
We may assume, without deciding, that the panel was correct in its conclusion that Rockwell was charged with a fiduciary duty to the holders of Debentures. But since we have determined in part II of this opinion that Rockwell fully complied with its obligations under the Indenture, there is no need for a jury to hear this claim, even if the panel's analysis is correct: under that analysis, as applied in the light of our holding with respect to the Indenture, Rockwell can have no liability for breach of fiduciary duty. Accordingly, we affirm the judgment of the district court with respect to the breach of fiduciary duty claim against Rockwell.
In part IV-C-2 of its opinion, 614 F.2d at 431-32, the panel held that the Trust Indenture Act did not create any fiduciary obligations in addition to those imposed on the Trust Company under state law. For the reasons stated by the panel, we agree, and so hold. Accord, Browning Debenture Holders' Committee v. DASA Corp., 560 F.2d 1078, 1083 (2d Cir. 1977) (finding such a claim frivolous). There remains the question of the Trust Company's liability for breach of fiduciary duty under applicable state law.
The panel relied on Dabney v. Chase National Bank, 196 F.2d 668 (2d Cir. 1952), and United States Trust Co. v. First National City Bank, 57 A.D.2d 285, 394 N.Y.S.2d 653 (1st Dep't 1977), aff'd mem., 45 N.Y.2d 869, 382 N.E.2d 1355, 410 N.Y.S.2d 580 (1978), for its conclusion that even in the absence of a default, an indenture trustee is cloaked under New York law with a fiduciary duty to the holders of debentures that may extend beyond its strict obligations under the indenture. Both Dabney and City Bank involved conflicts of interest in which the trustee put itself in a position of advantage over the beneficiaries of the trust. Arguably, the Trust Company faced a similar conflict of interest in the case at bar when Rockwell threatened to bring a lawsuit, to withdraw other business it had with the Trust Company, and to force the Trust Company's resignation as Trustee if it refused to execute the supplemental indenture necessary for the merger.
Be that as it may, however, there is no actionable wrong in this case. We assume, without deciding, that the panel was correct in concluding that under New York law, the Trust Company's obligations "exceeded the narrow definitions of its duties in the indenture and encompassed fiduciary duties as well." 614 F.2d at 432. And had we agreed with the panel that the Indenture was ambiguous, there would be a real question whether the holders of Debentures had received in the supplemental indenture all that was contractually due them under the Indenture. Were that question answered in the negative, there would have been the further question whether the Trust Company had adequately discharged its duties to the holders of Debentures with the "absolute singleness of purpose" required by New York law. Dabney, 196 F.2d at 671. The evidence in the record regarding the advice given the Trust Company by its counsel prior to the execution of the supplemental indenture undoubtedly would have been relevant to the Trust Company's defensive claim that it had acted in good faith and on advice of counsel.
But the question of whether the holders of Debentures received in the supplemental indenture all that was contractually due to them is conclusively answered by our holding in part II of this opinion, supra. Regardless of the Trust Company's motives, or its prior opinion as to the meaning of the Indenture, there is no question but that the Trust Company's ultimate action executing the supplemental indenture fully protected what we have determined to be the legitimate rights of the holders of Debentures under the Indenture. Broad has cited no New York authority for the proposition that an indenture trustee has a duty, fiduciary or otherwise, to seek for the holders of debentures any benefits that are greater than those contractually due them; indeed, there is support in the New York cases for the opposite conclusion. See Hazzard v. Chase National Bank, 159 Misc. 57, 287 N.Y.S. 541 (Sup.Ct.1936), aff'd mem., 257 A.D. 950, 14 N.Y.S.2d 147 (1st Dep't 1939), aff'd mem., 282 N.Y. 652, 26 N.E.2d 801, cert. denied, 311 U.S. 708, 61 S.Ct. 319, 85 L.Ed. 460 (1940). We hold that the Trust Company had no duty, as a matter of law, to do anything other than that which it in fact did. Thus, there is no question for a jury as to whether there has been a breach of fiduciary duty. Accordingly, we affirm the judgment of the district court with respect to both the state and federal breach of fiduciary duty claims against the Trust Company.27
IV. THE FEDERAL SECURITIES CLAIMS
We reach at last Broad's federal securities claims, which provided the jurisdictional predicate for the pendent state-law claims we have heretofore discussed. Broad alleges two separate claims under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1976), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1980). We deal with those claims in turn, and though we reach the same ultimate conclusion as did the district court and the panel, we emphasize that we do so on far narrower grounds. We make no new law under Rule 10b-5 today, but merely apply well-settled principles to the facts of this case.
A. The Failure to Disclose the Post-Merger Conversion Terms Set Out in the Indenture
In his first federal claim, Broad essentially alleges that at the time the Debentures were issued in 1967, and thereafter up until the time of the merger in the fall of 1973, the defendants28 omitted to disclose a material fact with regard to the contractual terms under which the Debentures operated specifically, that under the terms of the Indenture, the right to convert into Collins Common Stock could, in the event of a merger, be replaced with the right to convert into only that which the holders of Collins Common Stock received in the merger.29 Broad argues that this constituted a knowing, intentional, and reckless failure to disclose a material fact. The language of Section 4.11, of course, was available to anyone who cared to look at the Indenture, so Broad's claim can only be that the defendants should have made specific reference in the prospectus and other materials to that provision of the Indenture. His claim can alternately be read as a misrepresentation claim i. e., that various statements on the face of the Debentures, in the press releases and advertisements, and in the prospectus (all to the effect that the Debentures were convertible into Collins Common Stock at any time up until 1987) were misleading.
It is a familiar proposition since the Supreme Court's decision in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), that as part of his case a plaintiff must allege and prove that the defendants acted with "scienter" "a mental state embracing an intent to deceive, manipulate, or defraud." Id. at 193-94 n.12, 96 S.Ct. at 1381 n.12. The holding of that case was that mere negligence is insufficient to support liability in a private suit for damages under Rule 10b-5. The Court specifically left open, however, the question of whether recklessness could satisfy the scienter requirement. Id. See also Aaron v. SEC, 446 U.S. 680, 686 n.5, 100 S.Ct. 1945, 1950 n.5, 64 L.Ed.2d 611 (1980) (adopting definition of scienter as "a mental state embracing intent to deceive, manipulate, defraud" in the context of SEC enforcement proceedings, but leaving open the question of whether scienter may also include reckless behavior).
Several other circuits that have considered the question have held that recklessness could satisfy the scienter requirement. E. g., Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017, 1023 (6th Cir. 1979); Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 44 (2d Cir.), cert. denied, 439 U.S. 1039, 99 S.Ct. 642, 58 L.Ed.2d 698 (1978); Sanders v. John Nuveen & Co., 554 F.2d 790, 793 (7th Cir. 1977); Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1039-40 (7th Cir.), cert. denied, 434 U.S. 875, 98 S.Ct. 224, 54 L.Ed.2d 155 (1977). The recklessness described by the Seventh Circuit in Sanders and Sundstrand is limited to
Sundstrand, 553 F.2d at 1045. The Seventh Circuit characterized that sort of recklessness as "equivalent to willful fraud." Id.
The panel opinion in this case agreed with our sister circuits that recklessness, properly defined and adequately distinguished from mere negligence, could satisfy the scienter requirement. The panel adopted the definition of recklessness that was articulated by the Seventh Circuit in Sundstrand and Sanders. 614 F.2d at 439-40. During the period that this case was pending before the en banc court, several other panels also addressed the topic in varying degrees.30 In particular, while noting that the en banc court had not yet spoken on this question, a panel of this court explicitly held in G. A. Thompson & Co. v. Partridge, 636 F.2d 945, 961-62 & nn. 32-34 (5th Cir. 1981), that "severe recklessness" was sufficient to satisfy the scienter requirement. Accordingly, we hold that in the context of a private action for money damages brought under section 10(b) and Rule 10b-5, the requirement that the plaintiff prove scienter i. e., a mental state embracing intent to deceive, manipulate, or defraud is satisfied by proof that the defendants acted with severe recklessness. Severe recklessness is limited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and that present a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it.
Applying this standard to the case at bar, we note that there is precious little testimony in the record concerning the events at the time the Debentures were issued. The creators of and original parties to the Indenture were Collins on the one hand, and a team of underwriters on the other. The underwriters were managed by Kidder, Peabody & Co. Incorporated and White, Weld & Co. Both sides were represented by counsel: Collins by Lynch, Dallas, Smith & Harman of Cedar Rapids, Iowa, and the underwriters by Sullivan & Cromwell of New York. C. J. Lynch of the Lynch, Dallas firm testified by deposition that the basic form of the Indenture was lifted from indentures that Collins and these underwriters had used in prior convertible debenture offerings by Collins; those indentures from the prior offerings had been drafted in the first instance by Kidder, Peabody's counsel, Sullivan & Cromwell.
The Indenture that emerged for the 1967 offering was only partially the result of actual negotiation between the parties. In the normal course of events, the issuer and the lead underwriter actively negotiate the business portions of an indenture, which deal with such provisions as the aggregate principal amount of the debentures, their maturity date, the interest rate they bear, the subordination of the debt they represent to any senior indebtedness, the rate at which they may be converted into common stock, the redemption prices and dates, and so forth. The remainder of the indenture is invariably made up of boilerplate provisions that typically are not discussed at all by either the representatives of the issuer or those of the lead underwriter; indeed, most of those provisions are not even discussed by counsel for the respective parties, and many of them are required by federal law to be inserted into the indenture verbatim. Mr. Lynch's testimony in this case indicates that the drafting of the Indenture for the 1967 Collins Debenture issue was absolutely typical of industry practice: the boilerplate provisions, including those upon which this lawsuit turns, were never specifically discussed.
Such testimony as there is indicates that no party specifically considered at that time the possibility that Section 4.11 of the Indenture would be called into play at some future date, although Mr. Lynch testified that he had at some point "reviewed" the language of that section on Collins' behalf and found it satisfactory. There is no indication in the record that anyone acting for either Collins or the underwriters considered the inclusion in the prospectus and other sales materials of a detailed description of the operation of Section 4.11. Indeed, the testimony in the record overwhelmingly indicates that the parties thought themselves to be under no legal duty to disclose in detailed fashion in the prospectus and other sales materials any of the Indenture's provisions for more remote future contingencies. Neither is there evidence to raise a jury question on whether the defendants engaged in a continuing course of conduct to deceive subsequent purchasers after the Debentures were issued. Counsel for Broad even conceded, in arguing against the defendants' motions for a directed verdict in the trial court, that there was insufficient evidence to raise a jury question of scienter on this count.
Given all of this, we conclude that Broad's evidence on this count could support no more than a finding of simple negligence by the defendants in failing to disclose the workings of Section 4.11 in the prospectus and other sales materials. Accordingly, we affirm the judgment of the district court with regard to this claim under Rule 10b-5.
B. The Scheme to Deprive the Holders of Debentures of Their Right to Convert into Common Stock
In his second claim under Rule 10b-5, Broad alleges that the defendants collectively schemed to defraud the holders of Debentures of their right to convert the Debentures into common stock, substituting therefor a right to convert into cash. The panel opinion affirmed the district court's directed verdict on this claim on the ground that there had been no purchase or sale of the Debentures at the time of the merger because the supplemental indenture did not so substantially change the underlying security as to fall within the forced or constructive sale doctrine. 614 F.2d at 435-39.
We agree that the directed verdict on this count was proper as a matter of law, but we base our decision on a different ground.31 We have concluded in part II of this opinion, supra, that as a matter of law, the holders of Debentures received in the supplemental indenture all to which they were contractually entitled under the Indenture. There is no doubt but that there was concerted, intentional conduct by the defendants to bring about that result. But as a matter of law, there was no violation of section 10(b) or Rule 10b-5 because there was no fraud. "Section 10(b) is aptly described as a catch-all provision, but what it catches must be fraud." Chiarella v. United States, 445 U.S. 222, 234-35, 100 S.Ct. 1108, 1118, 63 L.Ed.2d 348 (1980) (criminal prosecution under section 10(b) and Rule 10b-5). It is elementary that section 10(b) and Rule 10b-5 reach only conduct involving manipulation or deception. E. g., Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 97 S.Ct. 54, 50 L.Ed.2d 74 (1977); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). The defendants' conduct involved neither; they merely carried out their contractual obligations. As a conceptual matter, they could not have fraudulently schemed to deprive the holders of Debentures of a right that those holders did not in fact have. Accordingly, we affirm the judgment of the district court with regard to this claim under Rule 10b-5.32
The district court correctly interpreted the Indenture to provide unambiguously that upon a merger between Collins and another corporation in which Collins was not the surviving company, the sole conversion right of the holders of Debentures was to convert into the kind and amount of property (be it stock, other securities, cash, or other property) that would have been received by a holder of Debentures had he exercised his conversion right immediately prior to the merger. Because there was no question but that the defendants have properly recognized this right, the district court correctly directed a verdict for the defendants on the state-law breach of contract, breach of implied covenant of fair dealing, and breach of fiduciary duty claims. The district court also properly directed a verdict on the first federal securities claim that the defendants omitted to disclose the workings of Section 4.11 at the time the Debentures were marketed because Broad's evidence failed to raise a jury question on scienter. Finally, the court properly directed a verdict on the second federal securities claim that the defendants had schemed to defraud the holders of Debentures of their right to convert into common stock because as a matter of law, given the correct interpretation of the Indenture, there was no fraudulent conduct and hence no violation of section 10(b) and Rule 10b-5. Accordingly, the judgment of the district court is
HENDERSON, Circuit Judge, concurring in part and dissenting in part:
Despite the majority's thorough and exhaustive review of the law of contracts, I adhere to the conclusion reached by the panel the indenture is ambiguous. It does not clearly contemplate the plaintiffs' conversion rights in the event of a cash-out merger.1 I would therefore remand the case for a trial to determine the intent of the parties.2 In all other respects I agree with the majority decision.
Much of the court's extended opinion relates to matters not in dispute. The part that focuses on the questions we confront does not, in my judgment, rebut the panel's conclusion. The panel opinion should, and does, stand on its own, and I see no need for extensive reiteration.
The plaintiffs maintain that upon merger Rockwell was required by § 14.01 of the indenture to "expressly assume( )" all of Collins' obligations, including the § 4.01 duty to exchange the debentures for stock. The majority finds this construction precluded by § 4.11. I see no necessary conflict between § 4.11 and § 4.01.3 A jury could read the indenture to provide that after a merger a debentureholder had conversion rights under at least two sections: a § 4.11 right to convert into what the Collins shareholders received, and a § 4.01 right to convert into the "Common Stock of the Company," "the Company" being Rockwell, § 14.02. In stock-for-stock mergers these options would be similar, if not the same. Here however they are distinct. The plaintiffs simply insist that the § 4.11 right is not exclusive. This is a fair interpretation of the contract, and the jury might adopt it.4
A brief comment on "the 'Iowa law' argument," ante at 951-952. Iowa did not permit cash-out mergers when the debentures were issued, and the plaintiffs suggest that the buyers could have safely assumed that after any merger they would still be entitled to convert into an equity interest in some going business. Cf. ante at 941 (convertible security is a debt-equity hybrid). To be sure, specific provisions of the indenture enabled Collins to force the debentureholders to accept cash at any time, but only through liquidation, in which event the debtholders would have been entitled to receive full compensation prior to any distribution to equityholders, or through redemption, for about three times what the court now holds the debentureholders are due.
The majority notes that in reading the indenture, "Due consideration must be given to the purpose of the parties in making the contract, and fair and reasonable interpretation consistent with that purpose must guide the courts in enforcing the agreement." Ante at 946.5 The equity kicker, the whole point of a convertible security, was arguably the price insisted upon by buyers willing to accept a substantially reduced rate of interest. See 614 F.2d at 428. It seems unlikely that the debenture buyers, or for that matter the seller, thought this participation would be as short-lived as it turns out to have been. In any case I am not convinced by the court's treatment of the matter. See 614 F.2d at 429. In fact, to quote the majority opinion, "Had the parties to the contract wished to fashion such a bizarre provision, they certainly would have done so in a more explicit fashion." Ante at 950; see also at 953.
The few analogous cases, ante at 955-956, may support this view.6 In Broenen v. Beaunit Corp., 440 F.2d 1244 (7th Cir. 1970), which was purportedly followed by the district court in Brucker v. Thyssen-Bornemisza Europe N. V., 424 F.Supp. 679, 688-90 (S.D.N.Y.1976), aff'd mem. sub nom Brucker v. Indian Head, Inc., 559 F.2d 1202 (2d Cir.), cert. denied, 434 U.S. 897, 98 S.Ct. 277, 54 L.Ed.2d 183 (1977), the challenged merger was legal at the time the parties entered into the indenture, and therefore the court was able to invoke the "ancient principle of contract law that parties are presumed to have contracted with knowledge of and consistent with the law in effect at the time of execution of a contract." 440 F.2d at 1249 (citing Mandell v. Cole, 244 N.Y. 221, 155 N.E. 106 (1926)). This rule of contract construction, perhaps the only one not mentioned in the court's opinion, cuts the other way here. While it may not require a judgment for the plaintiffs, it properly focuses attention on the novel facts of this case, and explains why the § 4.11 boilerplate, ante at 962 did not anticipate the substantial change in Iowa law.
The liability Broad would seek to impose on each of these controlling persons appears to be purely derivative in nature. We therefore refer to only the corporate defendants throughout the remainder of the opinion, and our disposition of the claims against the corporate defendants necessarily includes within its scope the claims against the individual defendants
We held in Boeing as follows:
411 F.2d at 374-75 (footnote omitted). Accord, Dwoskin v. Rollins, Inc., 634 F.2d 285, 289 (5th Cir. 1981) (employing this standard in reviewing directed verdict granted on ground that plaintiff had failed to raise a jury question on scienter in suit based on Rule 10b-5). Almost all of the material facts in this case are undisputed, although the parties differ considerably in the legal characterization they would have us place on those facts.
In our discussion of the facts, we draw to some extent on the language of the panel opinion, 614 F.2d at 422-24
Mr. Barnes, a rural mail carrier from Welder, Texas, admitted that in saving Collins from bankruptcy, Rockwell had performed a "verified miracle." He also conceded that as of July 1977, his Debentures were trading at about $775 per $1000 in principal amount, providing him with a net paper profit of more than $50,000 in addition to the roughly $15,000 in interest from the Debentures that he had received. The interest, of course, was paid on the face value of the Debentures rather than on their discounted market value
This letter touched off a wave of inquiries by holders of Debentures about the status of their conversion rights. Some apparently were of the impression that Rockwell's October 11 letter did not foreclose the possibility that the Debentures would be convertible at the holders' option into either cash or Rockwell Common Stock. Others contended that Rockwell could not "eliminate" their right to convert into Collins Common Stock without paying them new consideration or providing a conversion right into Rockwell Common Stock. Many holders of Debentures requested copies of the Indenture, which were provided. Some requested copies of the opinions from the respective counsel for Rockwell, Collins, and the Trust Company, but those requests were refused. The Trust Company did, however, initially indicate to a number of holders of Debentures that it disagreed with Rockwell's interpretation of the Indenture without indicating to Rockwell that it was doing so. When Rockwell accused the Trust Company of "fomenting litigation," Campbell replied that the Trust Company had withheld from Rockwell its answers to the letters on the basis of his advice as to the Trust Company's fiduciary obligation to represent the holders of debentures
These claims were within the district court's subject-matter jurisdiction under § 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa (1976), and under 28 U.S.C. §§ 1331 and 1337 (1976)
Broad has from time to time resisted the characterization of his Rule 10b-5 claims as being in the alternative, but we see no way in which they can logically be reconciled
These claims were within the district court's subject-matter jurisdiction under the pendent jurisdiction doctrine of United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966)
The claim that the Indenture was ambiguous was actually not included in Broad's complaint, and neither did it appear in the summary of the parties' contentions that was filed in lieu of a pretrial order. Nonetheless, since the district court did not specifically hold that such an argument had been waived, but instead reached the merits of the ambiguity argument, and since the panel opinion has reviewed the district court's ruling on that argument, we too will include it in our discussion of the case
The American Bar Foundation's Commentaries on Indentures make the following comments on the distinctions between long-term debt financing and equity financing:
In general, funds needed for financing private corporate enterprises are obtained in exchange for interests of two essentially different kinds: (1) those of the "equity" owners or shareholders, whose securities represent certain rights of ownership, control and profit accompanied by a relatively greater risk of loss, and (2) those of the "lenders," who classically forego control and profit in return for periodic payments (interest and often sinking fund) without regard to profits and for repayment of principal at a fixed date, ahead of the equity owners.
The most obvious and important characteristic of long-term debt financing is that the holder ordinarily has not bargained for and does not expect any substantial gain in the value of the security to compensate for the risk of loss. This is not true of a debt security which is convertible into an equity security, and it is not entirely true of a debt security purchased for much less than its principal amount. With these exceptions, however, the significant fact, which accounts in part for the detailed protective provisions of the typical long-term debt financing instrument, is that the lender (the purchaser of the debt security) can expect only interest at the prescribed rate plus the eventual return of the principal. Except for possible increases in the market value of the debt security because of changes in interest rates, the debt security will seldom be worth more than the lender paid for it, provided he bought it at approximately its face amount. It may, of course, become worth much less. Accordingly, the typical investor in a long-term debt security is primarily interested in every reasonable assurance that the principal and interest will be paid when due.
The second fundamental characteristic of long-term debt financing is that the rights of the holders of the debt securities are largely a matter of contract. There is no governing body of statutory or common law that protects the holder of unsecured debt securities against harmful acts by the debtor except in the most extreme situations. Short of bankruptcy, the debt security holder can do nothing to protect himself against actions of the borrower which jeopardize its ability to pay the debt unless he takes a mortgage or other collateral or establishes his rights through contractual provisions set forth in the debt agreement or indenture.
Finally the long-term debt may be held by many holders, all of whom expect to be treated on a parity. Here, again, there is no body of law governing the procedures by which the holders of debt securities may take collective action. These procedures, as well as the mechanics of transfer and exchange of the securities, are matters of contract which are usually set out in the indenture and sometimes in the debt instrument. Thus the situation is quite unlike that involved in the issuance of stock where various substantive rights and procedural matters are in effect incorporated in the certificate of incorporation of the issuer by operation of the applicable corporation laws.
American Bar Foundation, Commentaries on Indentures 1-2 (1971) (emphasis added).
The modern form of debenture indenture was originally adapted from a different form of negotiable security:
The first debt securities termed "debentures" did not involve a trustee. They were, in effect, promissory notes issued in quantity with no underlying indenture or comparable agreement. Prior to World War I, draftsmen were challenged with the task of creating debentures as to which all holders would be on a parity and protected by adequate covenants and which would nevertheless be negotiable. The solution was to take the corporate mortgage indenture form, delete the conveyancing and other provisions relating to the collateral, and insert covenants designed to protect the debentureholders. These protective covenants were designed to prevent the borrower from placing other creditors in a position senior to the debentureholders, indulging in excessive borrowing or otherwise jeopardizing its ability to meet the obligations on the debentures. Other provisions of an administrative nature remained much the same in a debenture indenture as those in a mortgage indenture. The result is a form of instrument which offers great flexibility for adaption to a particular transaction.
This feature distinguishes debentures from corporate bonds:
There is no inherent or clearly established distinction between "bonds" and "debentures." ... The terms "bond" and "debenture" came into use in the United States without any definite or consistent legal connotation and to some extent are still intermingled. Financial men refer to the "bond market" as including all forms of long-term debt securities.... (Under preferred usage), "debenture" means a long-term debt security which is not secured, and "bond" (except with respect to governmental or other public corporation securities) means a long-term debt security which is secured by a lien on some or all of the assets of the borrower. Most recent issues conform to this usage.
Id. at 7 n.3 (emphasis added). Debentures are also distinguishable from long-term notes:
There is no basic or historically established distinction between "debentures" and "notes." There has emerged, however, a clear and useful distinction in modern usage. According to this usage, in the area of long-term debt securities, a security is properly termed a "note" when it is not issued pursuant to an indenture and there is no indenture trustee. However, it may be, and usually is, issued to one or a few purchasers pursuant to a purchase or loan agreement which, in addition to provisions dealing with the terms of purchase, includes many of the contractual rights found in an indenture. In today's nomenclature the security is properly termed a "debenture" when it is issued pursuant to an indenture and there is an indenture trustee.
Id. at 8 (emphasis added). These distinctions are, of course, merely generalizations; as such, they do not hold true in all cases. For example, long-term notes may be issued pursuant to an indenture, but without a trustee because they are to be purchased by a comparatively small number of institutional investors.
The function of the trustee is explained by the historical context through which debentures developed:
Even though the debenture indenture creates no lien, it was found desirable to retain the trustee. In fact, since 1939 a trustee has been required by the Trust Indenture Act for issues subject to registration under the Securities Act of 1933. The fact that the debenture indenture trustee does not hold title to, or have possession of, any property has caused some persons to regard its position as an anomally and the title "trustee" a misnomer. As a matter of law, however, it is well established that the corpus of a trust may consist of contractual rights and that one who holds contractual rights for the benefit of others may be a trustee. Accordingly, the title "trustee" is appropriate in this situation because, although the debts created by the debentures run directly from the issuer to the holders, the contractual rights conferred by the indenture run from the issuer to the trustee for the benefit of the holders.
Apart from legal semantics, the role performed by the debenture identure trustee is a practical necessity whenever there are any substantial number of holders of the debt securities. Some of the most useful functions customarily performed by the trustee are not performed in its capacity as trustee, but rather as transfer agent and paying agent. Nevertheless, the protection to debentureholders accorded by the pure trustee functions is of significant value.
As Justice Holmes indicated in Parkinson, 173 Mass. at 449, 53 N.E. at 892, his two previous opinions in John Hancock Mutual Life Ins. Co. v. Worcester, Nashua & Rochester Railroad Co., 149 Mass. 214, 21 N.E. 364 (1889), and Day v. Worcester, Nashua & Rochester Railroad Co., 151 Mass. 302, 23 N.E. 824 (1890), were not inconsistent with the general principle announced in Parkinson, but were instead exceptions to that principle based on peculiar facts, none of which are present in the case at bar
See also Kessler v. General Cable Corp., 92 Cal.App.3d 531, 539-40, 155 Cal.Rptr. 94, 99-100 (1979); H. Henn, The Law of Corporations 288-89 & n.32 (2d ed. 1970), and sources cited therein. Cf. Helvering v. Southwest Consolidated Corp., 315 U.S. 194, 200-01, 62 S.Ct. 546, 550-51, 86 L.Ed. 789 (1942) (citing Parkinson with approval for the propositions that warrantholders' rights are wholly contractual, and that those contractual rights may expire upon consolidation of obligor corporation with another company, in deciding whether warrants exercisable into common stock constituted "voting stock" within the meaning of federal statute providing for tax-free reorganizations); Welles v. Chicago & Northwestern Railway Co., 175 F. 562, 563-64 (2d Cir. 1910) (per curiam) (while option to convert could be exercised within 10 days of payment of common stock dividend, after consolidation neither common stock nor dividend existed and hence option could not be exercised)
We leave aside for the moment the question of whether Broad can claim such protection from an implied covenant of fair dealing, as suggested by the panel opinion, 614 F.2d at 429-30. We deal with this issue in part III-A of this opinion, infra
For example, the issuer may be prohibited from exceeding negotiated limits on the funded (long-term) debt it incurs. This preserves a margin of safety for the holders of debentures by "preventing a dilution of the debentureholders position and a weakening of the Company's financial structure through the creation of what is considered in the particular case to be an excessive amount of additional debt." Commentaries at 370
Although the quoted text refers only to providing a right to convert into the securities of the surviving company, the actual antidilution provision suggested in the Commentaries is of broader scope. See note 19, infra
The sample provision in the Commentaries reads as follows:
If any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation, shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, the Company or such successor or purchasing corporation, as the case may be, shall execute with the Trustee a supplemental indenture providing that the Holder of each Debenture then Outstanding shall have the right thereafter and until the expiration of the period of convertibility to convert such Debenture into the kind and amount of stock, securities or assets receivable upon such reorganization, reclassification, consolidation, merger or sale by a holder of the number of shares of Common Stock into which such Debenture might have been converted immediately prior to such reorganization, reclassification, consolidation, merger or sale, subject to adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article Thirteen.
Commentaries at 549-50.
Broad has argued in the district court and on appeal that any ambiguities in the Indenture should be construed against Rockwell, since its predecessor company, Collins, drafted the Indenture. Given our holding infra in parts II-D and II-E of this opinion that the Indenture is unambiguous, we need not reach this issue
We note, however, that the record in this case does not necessarily support Broad's logic. An equally plausible argument could be made that any ambiguities in the Indenture should be construed against Broad rather than against Rockwell, for the underwriters' counsel drafted the provisions at issue in this litigation. See part IV-A of this opinion, infra. Broad, as a purchaser from an underwriter (at least indirectly), succeeded to the contractual rights and stands in the shoes of the underwriter who originally purchased those Debentures.
That such arguments, pro and con, can be made at all is itself instructive. While as a matter of abstract contract law it is proper to construe ambiguities against the drafter of a contract, that tenet of contract law has only limited practical significance in the context of construing an indenture. To the extent the rule is practicable at all, it can only be readily applied to those terms that were actually discussed and thought about by the parties which is almost never the case with boilerplate provisions such as the ones at issue here. On these facts, it is difficult to fathom how even the most diligent, attentive, and intelligent jury could reach a rational conclusion as to the intent of the parties at the time the contract was executed, even were they instructed to construe any ambiguities in the Indenture (the written embodiment of the parties' intent) against the drafter of that document. They would have little on which to base their decision other than the language of the Indenture itself.
Further, given that many other indentures contain language identical to that found in the Indenture at issue here, there is a significant likelihood that other courts would feel bound by a finding by this court that as a matter of law this language is ambiguous. Thus, there is a significant likelihood as well that different juries, construing identical indentures in an attempt to divine "the intent of the parties," would reach different conclusions. This would indeed be anomalous, since the principal goal of using boilerplate language in such contracts is that there be uniform construction of those provisions.
In a different case, construing an indenture with different terms, we might be compelled to direct that a jury attempt such a difficult feat if we found the indenture to be ambiguous as a matter of law. In the case at bar, however, our holding infra that the Indenture is unambiguous spares any jury the obligation of undertaking that unenviable task.
Broad has argued from time to time in this litigation that we should look to various documents other than the Indenture e. g., the face of the Debentures, the prospectus under which the Debentures were marketed, and various advertisements and press releases published by the defendants as alternate sources of contractual rights. With regard to the Debentures and the prospectus, those documents specifically and repeatedly incorporate the Indenture by reference, and warn the investor that the contractual obligations and rights that attend the Debentures are governed solely by the Indenture. The suggestion that the press releases and advertisements constitute enforceable contract provisions in this situation is patently absurd. Those documents may be highly relevant, of course, to Broad's federal securities claims; but they are not a source of contractual rights
The negotiated "business" portions of the Indenture are largely interspersed through the first six articles. Article One contains defined terms. Article Two provides for the form of the Debentures and for certain ministerial processes connected with their issue, registration, and exchange. Article Three sets out the extent to which the debt represented by the Debentures is subordinated to senior indebtedness of Collins. Article Four sets out the conversion privileges. Article Five provides for the redemption of Debentures, and Article Six for the sinking fund mechanism used to redeem a portion of the issue each year. Article Seven contains formal covenants of the issuer (e. g., duly to pay principal, premium, and interest on the Debentures, to maintain corporate offices and a corporate existence) as well as certain special provisions that were negotiated by the issuer and the lead underwriter (e. g., restrictions on incurring funded debt and on paying especially large dividends)
The remainder of the Indenture is largely boilerplate. Article Eight provides certain bookkeeping details. Article Nine defines events of default and the remedies therefor. Article Ten provides for the duties of the Trustee, which are largely governed by the Trust Indenture Act of 1939, 15 U.S.C. §§ 77aaa-77bbbb (1976). Article Eleven contains rules for determining the ownership of Debentures and for determining what constitutes collective action by the holders of Debentures. Article Twelve provides for meetings of the holders of Debentures. Article Thirteen authorizes the execution in certain circumstances of supplemental indentures. Article Fourteen comprises provisions intended to apply in the event of a consolidation, merger, or sale of assets of Collins. Article Fifteen contains the procedures for satisfaction and discharge of the Indenture. Article Sixteen limits the personal liability of certain of the company's controlling persons. Article Seventeen, the final article, contains miscellaneous provisions, including a choice of law provision specifying that the Indenture shall be governed by the laws of New York State.
Many of the provisions of the Indenture that are pertinent to this lawsuit are set out in an appendix to the panel opinion, 614 F.2d at 441-47.
Such a formula could have been drafted with little difficulty, had the parties intended that there be an absolute right to convert into the surviving company's common stock. For example, the drafters could have provided that a post-merger holder of Debentures would have the right to convert into that number of shares of the surviving company's common stock which had an aggregate market value immediately prior to the merger that was equal to the aggregate market value of the number of shares of Collins Common Stock into which the holder of Debentures could have converted immediately prior to the merger
Clause (e) is as close to being an "openended" provision as anything in the Indenture; it would only make sense to limit the broad grant of the power to "make such provisions ... as may be necessary or desirable" to those situations in which the interests of the holders of Debentures would not be adversely affected, lest the issuer's and Trustee's rights become so vague and unlimited as to render the entire contract unenforceable. The fact that this phrase is appended to the end of clause (e), rather than being set out after clauses (a) through (e) on a separate line beginning at the left margin, is also indicative of an intent that the phrase modify only clause (e). Further, elsewhere in the document, where the context clearly indicates that modifying phrases are intended to apply to several sequentially numbered clauses, those phrases are set out on separate line which begins at the left margin, or in introductory segments that precede all of the numbered clauses
The Second Circuit's decision in Brucker was an "(o)ral opinion delivered in open court in the belief that no jurisprudential purpose would be served by a written opinion. An oral opinion or a summary order is not citable as precedent. (Second Circuit) Local Rule § 0.23." 559 F.2d at 1202 n.*
There is some indication that the Van Gemert I court was not entirely comfortable with its application of New York law. See 520 F.2d at 1382 n.19 (Oakes, J., indicating that he would have preferred to grant relief on the ground that the indenture's terms were implicitly modified by a listing agreement with the New York Stock Exchange). And we are by no means certain that the principles of New York law cited by the Van Gemert II court, although themselves indisputable, actually support the result the court reached
Given our holdings on the liability issues under each of Broad's state-law claims, we find it unnecessary to reach the district court's alternate ground for the directed verdict i. e., that no damages had been sustained as a matter of state law. We also find it unnecessary to reach Rockwell's argument that the panel erred in holding that the filing of a class action by Broad was adequate notice of default under the terms of the Indenture, 614 F.2d at 433
Broad apparently seeks to hold Rockwell liable on this count under the theory that it is responsible as Collins' successor for Collins' alleged violations of Rule 10b-5 at the time the Debentures were issued. The involvement of the Trust Company in this count is less clear, since the Trust Company had no connection with the Debentures until it succeeded Chase as Trustee in May 1970. Presumably, Broad would impose on the Trust Company the duty to notice that the workings of Section 4.11 had not been detailed to the holders of Debentures in the prospectus or other sales materials, and to remedy that omission. We express no opinion on this theory
Rockwell has argued that the duty to disclose material facts imposed under the Securities Exchange Act of 1934 had been met as a matter of law in this case. While the face of the Debentures, the prospectus, and the advertisements and press releases issued in connection with the marketing of the Debentures did not specifically detail the operation of Section 4.11 of the Indenture, those communications by their nature must be relatively short and direct in comparison with the Indenture itself; it is both unwise and impractical, Rockwell argues, to require that these materials set out in detail the many provisions in the Indenture that might be called into play upon the happening of some future, uncertain contingency. The best that can realistically be expected of an issuer and, according to Rockwell, the only legal obligation is to indicate generally that the precise contractual rights attending the Debentures are specified in the Indenture, and to incorporate that document by reference into the prospectus and other marketing materials. Broad's counter-argument, of course, is that the terms upon which the Debentures may be converted are so material so essential to the making of an informed investment decision that the effect of even somewhat remote contingencies on the conversion terms should be explained in the prospectus and other materials
This is certainly a difficult question of law and policy. Although we base our disposition of this claim on different grounds entirely, we do not wish to be read as implying an answer to that question by our failure to base our decision thereupon. Rather, we leave this question for some future case in which the answer thereto makes a difference in the outcome.
Croy v. Campbell, 624 F.2d 709, 715-16 (5th Cir. 1980), relied upon the panel's now-vacated adoption of the Sundstrand standard, but concluded, as did the panel in this case, that the record evidence could support no more than a finding of simple negligence. In SEC v. Southwest Coal & Energy Co., 624 F.2d 1312, 1321 & n.17 (5th Cir. 1980), Judge Reavley first pointed out that most courts which have considered the degree of recklessness necessary to satisfy the scienter requirement have set a very high standard, and accordingly held that the SEC had not demonstrated clear error in the district court's finding that recklessness had not been proved. Dwoskin v. Rollins, Inc., 634 F.2d 285, 289-90 & n.1, 291 (5th Cir. 1981), noted that this circuit's position on this question was at that time unsettled, but affirmed a directed verdict on the ground that the evidence in that case did not present a jury question on scienter even assuming the Sundstrand standard applied
Our prior cases do not clearly answer the question of whether the execution of a supplemental indenture in this context satisfies the requirement of section 10(b) of the Securities Exchange Act of 1934, see Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975), that the complained-of fraud be in connection with a purchase or sale of a security. We specifically reserve this question for some future case in which a decision thereupon is necessary to the disposition of the case, and we express no opinion as to whether the panel's reasoning and conclusions were correct as an abstract matter
Given our holdings on the liability issues in Broad's two claims under Rule 10b-5, we need not reach the district court's alternate ground for the directed verdict that the holders of Debentures had sustained no actual damages
My conclusion is based on what I perceive to be "holes" in the contract not my "instinct for the disposition of equity," ante at 947. Nonetheless, I cannot agree with the majority's assessment of the fairness of the outcome of this case, ante at 956-957
Convertible debentures are a wholly different investment vehicle from common stocks, and are, contrary to the assertion of the majority, presumably purchased by persons with different views of the future. The current price of any security reflects the market's collective judgment of its prospects, with all possibilities discounted for their probability. Conversion rights will be exercised only if profitable, so the probability that the underlying stock will exceed the conversion price is a determinant of the value of a convertible security. But if the stock price stays down, the debentureholder's primary concern will be his interest income. The owners of stock, on the other hand, carry the entire burden of any decline in the value of their shares. All equityholders hope for a bright tomorrow, but the convertible debentureholder, who is also a corporate creditor, pays for protection against a gloomy future.
Debentureholders accept low interest precisely because they want upside participation without downside risk. The effect of the court's decision is to retain the low interest rate payable to the plaintiffs while denying them a right to participate in increases in the value of Collins' business. And the value of the conversion right has not only been frozen, it has been rendered practically worthless.
The purchase and sale of a convertible debenture, like that of any other security, is at heart an allocation of risks. Presumably the parties to the indenture considered the likelihood that the market interest rate and the market price of Collins shares would fluctuate during the life of the debentures. They supposedly had different expectations. But this case would not be here if all that was involved was the effect of the market. The question we face is whether the contract ordained that the right to convert into equity could be eliminated. Perhaps the parties did consider the possibility and factored that into the price of the debentures. If they did, so be it. I, like the court, do not suggest that we alter anyone's contract. Were it relevant, however, I would dispute the majority's statement that this merger treated shareholders and debentureholders identically.
The court affirms summary judgment on the fair dealing, fiduciary duty and second 10b-5 claims because all contractual obligations were satisfied. This logic is sound, but the holdings stand or fall with their stated premise that the contract rights of the plaintiffs were respected
The majority opinion does not say that § 4.11 is the exclusive operative section in mergers, but only that it controls in event of conflict
The court is troubled by the indentures' failure to provide a formula for the conversion of Collins debentures into Rockwell stock. This might be enough to convince a jury that the defendants have correctly construed the contract. On the other hand, it may be an inadvertent omission to be rectified with a § 13.01(e) supplemental indenture. Cf. ante note 23
"We are of the opinion that this question (i. e., interpreting an indenture) is not necessarily to be answered by references to the general law concerning the sale of assets of a corporation. The question before us is the narrow one of what particular language of a contract means and is to be answered in terms of what the parties were intending to guard against or to insure."
B. S. F. Co. v. Philadelphia Nat'l Bank, 204 A.2d 746, 750 (Del.1964). See note 1, supra.
The panel properly distinguished B. S. F. Co. v. Philadelphia Nat'l Bank, 204 A.2d 746 (Del.1964) as involving a sale of assets and not a merger. The Supreme Court of Delaware emphasized this distinction, 204 A.2d at 749, and also pointed out that the holders of the debentures were still entitled to convert into B.S.F. common stock, 204 A.2d at 751. Similarly, the court upheld the distribution challenged in Wood v. Coastal States Gas Corp., 401 A.2d 932 (Del.1979), because the indenture specifically provided for distribution of securities to holders of common stock (as opposed to an exchange) without adjusting the conversion ratio of preferred stock. 401 A.2d at 940. Again, the plaintiffs could still convert their preferred into common stock. 401 A.2d at 939-40