Opinion ID: 2266393
Heading Depth: 1
Heading Rank: 3

Heading: Interpretation of the Certificate

Text: The preferences and conversion rights of the PRIDES are governed by the Certificate. Wood v. Coastal States Gas Corp., Del.Supr., 401 A.2d 932, 937 (1979); Jedwab v. MGM Grand Hotels, Inc., Del.Ch., 509 A.2d 584, 593 (1986). The Certificate is interpreted using standard rules of contract interpretation which require a court to determine from the language of the contract the intent of the parties. Waggoner, 581 A.2d at 1134. In discerning the intent of the parties, the Certificate should be read as a whole and, if possible, interpreted to reconcile all of the provisions of the document. Warner Communications Inc. v. Chris-Craft Indus., Inc., Del.Ch., 583 A.2d 962, 967, aff'd, Del. Supr., 567 A.2d 419 (1989). If no ambiguity is present, the Court must give effect to the clear language of the Certificate. Johnston v. Tally Ho, Inc., Del.Super., 303 A.2d 677, 679 (1973). A contract is not rendered ambiguous simply because the parties do not agree upon its proper construction. Rather, a contract is ambiguous only when the provisions in controversy are reasonably or fairly susceptible of different interpretations or may have two or more different meanings. Rhone-Poulenc Basic Chems. Co. v. American Motorists Ins. Co., Del.Supr., 616 A.2d 1192, 1196 (1992) (insurance contract). In this case, as in the context of the insurance contract under consideration in Rhone-Poulenc, [t]he true test is not what the parties to the contract intended it to mean, but what a reasonable person in the position of the parties would have thought it meant. Id. (citing Steigler v. Insurance Co. of N. America, Del.Supr., 384 A.2d 398, 401 (1978) (contracts should be read to accord with the reasonable expectations of a reasonable purchaser)). Where, as here, the ultimate purchaser of the securities is not a party to the drafting of the instrument which determines her rights, the reasonable expectations of the purchaser of the securities must be given effect. The PRIDES are a convertible security. Accordingly, the Certificate sets forth detailed language broadly referred to as antidilution adjustments. [5] Such provisions protect the value of the conversion feature in the case of certain events which could otherwise reduce the value of that into which the PRIDES convert, namely the Common Stock of Kaiser. The provision at issue is section 3(d)(i) of the Certificate, which states: (d) Common Equivalent Rate and Optional Conversion Rate Adjustments.       (i) If the Corporation shall either: (1) pay a dividend or make a distribution with respect to Common Stock [6] in shares of Common Stock, (2) subdivide or split its outstanding shares of Common Stock into a greater number of shares, (3) combine its outstanding shares of Common Stock into a smaller number of shares, or (4) issue by reclassification of its shares of Common Stock any shares of common stock of the Corporation then, in any such event, [the conversion rates] in effect immediately prior thereto shall each be adjusted so that the holder of a share of PRIDES shall be entitled to receive, on the conversion of such share of PRIDES, the number of shares of Common Stock of the Corporation which such holder would have owned or been entitled to receive after the happening of any of the events described above had such share of PRIDES been converted ... immediately prior to the happening of such event ... (Emphasis supplied.) Kaiser contends that the provision contemplates that the PRIDES holders will receive on conversion whatever new securities the holders of the underlying security received in the corporate transactions covered by those adjustment provisions. The Plaintiffs contend that the use of upper case (Common Stock) and lower case (common stock) in different parts of 3(d)(i)(4) compels the result reached below: Section 3(d)(i)(4) clearly differentiates between two kinds of stock: (1) the Common Stock that is being reclassified and (2) the common stock that is newly issued as a result of the reclassification. The operative language of the then clause of the anti-dilution provision states that after such a reclassification the PRIDES still converts into the Common Stock that was reclassified  whatever it is  rather than the new common stock. Kaiser's explanation for the use of Common Stock in the then clause of the Certificate is less than satisfying. Kaiser explains the use of Common Stock as follows: Why then is the term lower case common stock used at all in the if clause? The drafter was simply distinguishing between the old and the new. Prior to the effectiveness of a reclassification, the new common stock would not yet have been substituted into the conversion rate; accordingly, it would have been inappropriate to use the specific defined term from Section 3(a)(i), which dealt only with the conversion rate. The capitalized term in the then clause refers to the same stock, but only after it has been substituted for the old stock in the conversion rate. The Certificate could have stated clearly the result for which Kaiser contends by drawing from the Certificate itself. It did not clearly so state. As the plaintiffs point out, section 3(e) contains the traditional language employed to achieve such a result. It states: (e) Adjustment for Certain Mergers and Other Transactions. In case of any consolidation or merger ... each share of PRIDES shall, after consummation of such transaction, be subject to ... conversion ... into the kind and amount of securities, cash, or other property receivable upon consummation of such transaction by a holder of the number of shares of Common Stock into which such share of PRIDES might have been converted immediately before consummation of such transaction.... Other examples also illustrate the ease with which the documents governing convertible securities can express such an intent. The Model Debenture Indenture specifically treats a reclassification in such a manner: If any ... reclassification of the capital stock of the Company ... 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, ... the Company ... shall execute ... 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 ... reclassification... by a holder of the number of shares of Common Stock into which such Debenture might have been converted immediately prior to such ... reclassification.... American Bar Foundation, Commentaries on Model Debenture Indenture Provisions, Article Thirteen, Conversion  Sample Provisions § 13-6 (Alternate 1) (1971). Unlike the Model Debenture Indenture, the more recent Model Simplified Indenture (the MSI) adjusts the conversion rate in the case of a reclassification in a manner more similar to the Certificate. In fact, the Certificate bears a striking resemblance, in certain respects, to the analogous MSI provision. The MSI provides: Section 10.06. Adjustment for Change in Capital Stock. If the Company: (1) pays a dividend or makes a distribution on its Common Stock [7] in shares of its Common Stock; (2) subdivides its outstanding shares of Common Stock into a greater number of shares; (3) combines its outstanding shares of Common Stock into a smaller number of shares; (4) makes a distribution on its Common Stock in shares of its capital stock other than Common Stock; or (5) issues by reclassification of its Common Stock any shares of its capital stock, then the conversion privilege and the conversion price in effect immediately prior to such action shall be adjusted so that the Holder of a Security thereafter converted may receive the number of shares of capital stock of the Company which he would have owned immediately following such action if he had converted the Security immediately prior to such action. The adjustment shall become effective immediately after the record date in the case of a dividend or distribution and immediately after the effective date in the case of a subdivision, combination or reclassification. If after an adjustment a Holder of a Security upon conversion of it may receive shares of two or more classes of capital stock of the Company, the Company shall determine the allocation of the adjusted conversion price between the classes of capital stock. After such allocation, the conversion privilege and the conversion price of each class of capital stock shall thereafter be subject to adjustment on terms comparable to those applicable to Common Stock in this Article. Model Simplified Indenture, 38 BUS.LAW. 741, 765-766 (Feb.1983). The MSI employs the term capital stock in the then clause. [8] If the Certificate used common stock, instead of Common Stock, in the then clause, the capitalization would match the MSI. Such a choice of capitalization would more clearly yield the result for which Kaiser argues since Plaintiffs could not argue that they are entitled to the existing Common Stock. They would receive upon conversion whatever common stock was issued in the reclassification. Noticeably absent, as well, is a paragraph similar to the last paragraph of section 10.06 of the MSI, which specifically contemplates a dual-class reclassification. Had such a provision been present, an interpretation of the Certificate which did not allow the company to convert the PRIDES into two classes of common stock would leave that section as surplusage. Our consideration of these alternative formulations does not mean, of course, that issuers must follow model provisions. Such models are an aid to drafting and construction. If they are borrowed verbatim by the drafters, interpretation may be enhanced, but interpretation may become problematic if the drafter excludes key language from the model provision. Reference to such models also does not imply that the Plaintiffs' interpretation is necessarily correct or completely satisfying. The Certificate is hopelessly unclear on the very point at issue. Other efforts at antidilution provisions indicate, however, that the Certificate could have clearly stated the intent for which Kaiser now argues. That much is evident from widely available models and other provisions of the Certificate. When a contract is ambiguous, a court normally relies upon extrinsic evidence of the parties' intent. Such a course is not appropriate in this case for two reasons. First, such an investigation would reveal information about the thoughts and positions of, at most, the issuer and the underwriter. Whether these parties can legitimately be viewed as negotiating indenture provisions is a subject of some dispute. Compare Prescott, Ball & Turben v. LTV Corp., S.D.N.Y., 531 F.Supp. 213, 217 (1981), with Morgan Stanley & Co., Inc. v. Archer Daniels Midland Co., S.D.N.Y., 570 F.Supp. 1529, 1541 (1983); see also Martin Riger, The Trust Indenture as Bargained Contract: The Persistence of Myth, 16 J.CORP.L. 211, 216 (1991); Dale B. Tauke, Should Bonds Have More Fun? A Reexamination of the Debate Over Corporate Bondholder Rights, 1989 COLUM.BUS.L.REV. 1, 23-24 (1989). Since these sorts of provisions are ... not the consequence of the relationship of particular borrowers and lenders and do not depend upon particularized intentions of the parties to an indenture, evidence of the course of negotiations would not be helpful. Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 2d Cir., 691 F.2d 1039, 1048 (1982); see also Tauke, 1989 COLUM.BUS.L.REV. at 82 (the search for expectations is complicated by the fact that investors constitute a diverse group). Second, we are reluctant to risk disuniformity by adverting to evidence of the course of negotiation in a setting in which the same language can be found in many different contracts. A leading case in the interpretation of indenture provisions remarks: Whereas participants in the capital markets can adjust their affairs according to a uniform interpretation, whether it be correct or not as an initial proposition, the creation of enduring uncertainties as to the meaning of boilerplate provisions would decrease the value of all debenture issues and greatly impair the efficient working of capital markets. Such uncertainties would vastly increase the risks and, therefore, the costs of borrowing with no offsetting benefits either in the capital market or in the administration of justice. Just such uncertainties would be created if interpretation of boilerplate provisions were submitted to juries sitting in every judicial district in the nation. Sharon Steel Corp., 691 F.2d at 1048; accord Broad v. Rockwell Int'l Corp., 5th Cir., 642 F.2d 929, 943 (1981). While future adjudications in the Court of Chancery do not pose the same risk of inconsistent interpretations, individual factual determinations about who drafted what would introduce a similar degree of inconsistency between identically worded documents. We are left then with a hopelessly ambiguous contract and a reluctance to rely upon extrinsic evidence.