Opinion ID: 387913
Heading Depth: 1
Heading Rank: 2

Heading: construing the indenture

Text: 38 Because the construction of the Indenture is basically a question of contract law, it is perhaps worthwhile to discuss briefly the way in which this type of contract operates, and the reasons why such contracts must be so long and detailed. Convertible debentures represent one of many means through which business enterprises obtain capital from investors for long periods of time. Most such means can be classified as either debt securities or equity securities, but convertible debentures are something of a hybrid basically a debt security, but with equity features. 39 In part because of the differing treatment of debt and equity securities both by statute and at common law, debt securities are, to a much larger degree than is true of equity securities, creatures of contract law. 10 As a result, the written contracts that govern the rights and obligations of debt securities are often long and complex, for those contracts attempt to anticipate and deal with in advance all possible contingencies that might call into question the operation of those rights and obligations. In the case of debentures, those contractual rights are set forth in a document that is separate from the debt instrument itself. That document, whose terms are incorporated by reference on the face of the debt instrument, is commonly called an indenture. 11 40 The debt represented by the debenture is typically not secured by specific assets of the issuer, 12 and is frequently subordinated to senior indebtedness of the issuer. It is usually the case that the debentures of a given issue are held by a great number of parties, and for this reason it was found desirable, as the modern concept of debentures developed, that the indenture designate a corporate trustee to protect the rights of the many holders of the debentures and to perform certain ministerial tasks connected with the normal operation of the debentures. Thus, 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 of the debentures. 13 In today's usage, then, a security is generally termed a debenture when it is a long-term unsecured debt security, issued pursuant to an indenture and with an indenture trustee. 41 Not all debentures are straight debt securities. The Debentures at issue in this case are examples of convertible debentures, which exhibit characteristics of both debt and equity securities: 42 A convertible debenture is one which gives the holder the right to exchange his debenture for other securities of the (issuing) Company, usually for shares of common stock and usually without payment of further consideration. The conversion right, although set forth in the debenture and in the indenture, is separate and distinct from the debt evidenced by the debenture. As a separate right it has its own ascertainable value. 43 American Bar Foundation, Commentaries on Indentures 522-23 (1971) (footnotes omitted) (hereinafter cited as Commentaries). The fact that a debenture is convertible into equity securities is an important feature, and therefore the terms under which the debenture may be converted are usually summarized on the face of the debenture itself. All convertible debentures, however, purport only to summarize the salient provisions of the conversion terms on the face of the instrument; as is the case with the other complicated provisions that govern the duties of the issuer and trustee, the terms of redemption, and so forth, many of the details concerning the debenture's convertibility must be set forth instead in the governing indenture. 44 The indenture will specify a rate at which the debentures can be converted into equity securities (usually common stock). This is often expressed in terms of a conversion price, which may be conceptualized as the price at which a share of stock may be purchased by the holder of the debenture in exchange for the surrender of indebtedness under the debenture. For example, if the conversion price for a debenture in the principal amount of $1000 is $50, the holder of the debenture is entitled to convert his $1000 debenture into a total of 20 shares of common stock. 45 The discussion above only briefly describes the manner in which convertible debentures function. Given this, 46 it is not surprising that corporate indentures are lengthy and complex. There is much that much be covered by the contract set forth in the indenture. But it is also true that much of what has to be covered is, or could be, virtually the same for all indentures. These are the provisions that are commonly referred to as boiler-plate, e. g., provisions regulating the issuance, authentication, transfer and exchange of securities; provisions establishing the procedures for collective action by the securityholders; and provisions prescribing the duties of the trustee. These, and certain others, are provisions which have been stated in many different ways in various indentures. Since there is seldom any difference in the intended meaning, such provisions are susceptible of standardized expression. The use of standardized language can result in a better and quicker understanding of those provisions and a substantial saving of time not only for the draftsmen but also for the parties and all others who must comply with or refer to the indenture, including governmental bodies whose approval of authorization or the issuance of the securities is required by law. 47 Commentaries at 3. Not least among the parties who must comply with or refer to the indenture are the members of the investing public and their investment advisors. A large degree of uniformity in the language of debenture indentures is essential to the effective functioning of the financial markets: uniformity of the indentures that govern competing debenture issues is what makes it possible meaningfully to compare one debenture issue with another, focusing only on the business provisions of the issue (such as the interest rate, the maturity date, the redemption and sinking fund provisions and the conversion rate) and the economic conditions of the issuer, without being misled by peculiarities in the underlying instruments. 48
49 In the case at bar, there are specific portions of the Indenture that set out the rights of the holders of the Debentures, and the obligations of the Trustee and issuer, in the event that the issuer is merged into another company. Nonetheless, the common law's treatment of conversion rights upon merger is important in this case in two different respects. First, it must be determined whether the common law provides the holders of the Debentures with rights in addition to the rights that are set out in the Indenture. Second, an understanding of the common law's treatment of conversion rights upon merger explains the historical development of boilerplate contractual antidilution provisions of the sort found in the Indenture. 50 The Commentaries explain in brief the possible dangers to the conversion rights of the holders of debentures that might attend certain actions by the issuer of the debentures: 51 The anti-dilution provisions are designed to preserve the value of the conversion privilege against diminution by certain voluntary corporate acts. For example, if the conversion price is $25 a share at a time when the common stock has a market value of $30 a share, the conversion right is clearly valuable. If the Company should then split its stock 3 for 1, the market price of its shares would be reduced to approximately $10 per share. Thus the value of the right to convert at $25 per share would have been virtually destroyed, by that voluntary corporate action, in the absence of appropriate protective provisions. 52 Inasmuch as ownership of a convertible debenture does not give the holder the rights of a shareholder, the holder of a convertible debenture would have almost no protection against acts by the Company which would adversely affect the value of the common stock issuable on conversion, such as a split-up of shares, stock dividends, distribution of assets, issuance or sale of other convertible securities, issuance of options, issuance or sale of common stock at prices below the current conversion or market price, merger, sale of assets or dissolution and liquidation of the Company. Events of this type are customarily described as diluting the value of the conversion privilege, and if protection is desired against such dilution, appropriate provisions must be included in the indenture. 53 Commentaries at 527 (1971) (emphasis added; footnote omitted). As justification for the phrase we have italicized above, the Commentaries cite Parkinson v. West End Street Railway Co., 173 Mass. 446, 53 N.E. 891 (1899) (per Holmes, J.). 54 Justice Holmes' decision in Parkinson was aptly cited by the authors of the Commentaries for the proposition that antidilution protection must be provided by contract if it is to be provided at all, for Parkinson holds that there is no such protection at common law. The plaintiff in Parkinson held Highland Street Railway bonds that were convertible into Highland's preferred stock. When West End Street Railway acquired Highland subject to all (of Highland's) duties, restrictions, and liabilities, id. at 447, 53 N.E. at 891, the existing holders of Highland's preferred stock received West End preferred stock or preemptive rights thereto in exchange for their Highland stock. West End refused, however, to convert the Highland bonds into West End preferred stock. The Massachusetts Supreme Court denied relief: 55 (T)he contract does not prevent the corporation from consolidating with another in such a way as to make performance impossible, any more than it prevents the issue of new stock in such a way as to make performance valueless.... A consolidation which makes no arrangement for furnishing stock in the new company, and which ends the existence of the old ones, as a general rule may be presumed to put an end to the right of bondholders to call for stock, not because the law has not machinery for keeping such a right alive, but because, not being bound to do so, it has made dispositions which manifestly take no account of it. 56 Id. at 448-49, 53 N.E. at 892. Thus, according to Parkinson, mergers may extinguish all conversion rights, absent explicit contractual provisions to the contrary. 14 The same idea is expressed in Lisman v. Milwaukee, Lake Shore & Western Railway Co., 161 F. 472 (C.C.E.D.Wis.1908), aff'd mem., 170 F. 1020 (7th Cir.), cert. denied, 214 U.S. 520, 29 S.Ct. 700, 53 L.Ed. 1065 (1909): 57 (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. 58 ... 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 59 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. 60 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. 61 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. 62 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: 63 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. 64 Commentaries at 528 (emphasis added). 18 Professor and former SEC Chairman Cary makes the same point: 65 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. 66 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 67 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.
68 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: 69 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. 70 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. 71 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). 72 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). 73 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). 74 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. 75 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. 76
77 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. 78 Section 4.11 provides, in pertinent part, as follows: 79 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 .... 80 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. 81 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. 82 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. 83 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. 84 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. 85 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. 86 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. 87 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). 88 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. 89
90 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. 91 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. 92 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. 93 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: 94 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) .... 95 (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. 96 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. 97 Broad makes a similar argument based on the language of Section 4.07, which provides in pertinent part as follows: 98 (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. 99 (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. 100 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. 23 101 3. Arguments based on Article Fourteen. Section 14.01 provides in pertinent part as follows: 102 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 .... 103 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. 104 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. 105 Section 14.02 provides in pertinent part as follows: 106 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) .... 107 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. 108 (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. 109 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: 110 (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: 111 (a) to make provision with respect to the conversion rights of holders of the Debentures pursuant to the requirements of Section 4.11; 112 (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; 113 (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); 114 (d) to cure any ambiguity or to correct or supplement any defective or inconsistent provision contained in this Indenture or in any supplemental indenture; and 115 (e) to make such provisions with respect to matters or questions arising under this Indenture as may be necessary or desirable and not inconsistent with this Indenture; provided that such action shall not adversely affect the interests of the holders of any of the Debentures. 116 The (Trust Company) is hereby authorized to join in the execution of any supplemental indenture authorized or permitted by the terms of this Indenture .... 117 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. 118 (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. 119 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. 120 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. 121 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. 122 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. 123
124 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). 125 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. 126 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. 127 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. 128 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.