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

Heading: The Factual Background to This Litigation

Text: 6 In reviewing the trial court's grant of a directed verdict at the close of Broad's case-in-chief, we use the familiar standard articulated in Boeing Co. v. Shipman, 411 F.2d 365 (5th Cir. 1969) (en banc). 2 Viewed in the light most favorable to Broad, the following is a general outline of the relevant facts adduced prior to the directed verdict; more detail is provided as necessary throughout the opinion. 3 7 In January 1967, Collins issued and sold to the public $40,000,000 aggregate principal amount of Debentures. The Debentures bore interest at the rate of 4 7/8% per year and matured on January 1, 1987, unless sooner redeemed by Collins. They were convertible, at the option of the holders thereof, into the common stock of Collins (Collins Common Stock), which had a par value of $1 per share. The Debentures were offered to the public through an underwriting syndicate managed by two New York investment banking firms Kidder, Peabody & Co. Incorporated and White, Weld & Co. 8 At the time the Debentures were marketed in 1967, Collins was a prosperous enterprise chiefly engaged in the development and production of radio communications and aircraft navigation equipment. The proceeds of the public offering, like the proceeds of previous offerings of debentures by Collins in the 1960s, were to be used to finance capital additions and to increase working capital for the expansion of Collins' business. During the period immediately before the offering of the Debentures, Collins Common Stock had traded on the New York Stock Exchange for approximately $60 per share. If a holder of Debentures were to choose to exercise his conversion privilege, Collins would issue to him, in exchange for his Debentures, one share of Collins Common Stock for every $72.50 principal amount of Debentures. This meant that conversion might become economically attractive if the market price of Collins Common Stock rose more than $12.50 over its market price of $60 per share at the time of the offering of the Debentures. 9 Beginning in its 1969 fiscal year, however, Collins suffered a series of economic reversals, manifested by declining sales and reduced income. In the midst of a generally declining stock market, Collins' fading fortunes did not go unnoticed: during the 1971 calendar year, Collins Common Stock never traded on the New York Stock Exchange at more than $21 per share, and in the fourth quarter of that year it was selling for as little as $9.75 per share. Collins was on the verge of bankruptcy. It was at that point, however, that Collins became affiliated with Rockwell. 10 In August 1971, Collins shareholders overwhelmingly approved the terms of an agreement by which Rockwell invested $35,000,000 in Collins, receiving in return two new series of Collins securities: preferred stock that was convertible into Collins class A common stock, and warrants to purchase additional class A common stock. As sole holder of the new issue of preferred stock, Rockwell also received, and soon exercised, the right to elect a majority of Collins' board of directors. In addition to the $35,000,000 investment, Rockwell provided some managerial assistance to Collins and guaranteed up to $20,000,000 in borrowings by MCI Leasing, Inc., a customer of Collins, so that MCI could order up to $33,000,000 worth of equipment from Collins. Rockwell indicated that while it did not, as of July 1971, propose that there be a merger between the two companies, it would not rule out the possibility that future events might make such a proposal attractive to it. 11 By 1973 such a proposal had evidently become attractive. In August of that year, Rockwell made a tender offer for Collins Common Stock, offering the shareholders $25 cash per share tendered. As part of the offer, Rockwell disclosed that if the offer were successful, it intended to propose a merger of Collins into Rockwell at that same figure of $25 per share. The tender offer was successful, and by October 1, 1973, Rockwell had acquired approximately 75% of the outstanding Collins Common Stock. 12 In accordance with the intentions it had stated prior to the tender offer, Rockwell with Collins duly entered into an Agreement and Plan of Merger dated as of October 8, 1973 (the Merger Plan), which provided that on the effective date of the merger, each holder of Collins Common Stock (other than Rockwell itself, of course) would receive $25 per share in cash upon surrender of the certificates evidencing such stock. Under Iowa law (which was applicable because Collins was an Iowa corporation), the approval of a majority of the Collins board of directors and of the holders of two-thirds of the outstanding shares of each class of Collins stock was required for a merger. As a result of the tender offer, Rockwell itself controlled more than two-thirds of the outstanding Collins Common Stock; but it did not hold the 90% needed under Iowa law to effect a short-form merger in which no vote of the shareholders would be necessary. As a result, a vote of the Collins shareholders was taken on November 2, 1973, and the Merger Plan was approved by the vote of the holders of approximately 84.5% of the Collins Common Stock. The merger was effected on November 14, 1973, and from that date until the present Collins has operated only as an internal division of Rockwell. 13 These events, of course, were not without effect upon the Debentures. After they were first offered to the public in 1967, Debentures in the principal amount of $1000 at times traded at almost $60 above face value. Later, however, as Collins' business fortunes diminished and the price of Collins Common Stock slumped dramatically, the market price of the Debentures fell as well. The only class member to testify at trial, William E. Barnes, testified that from 1969 through August 1973 he invested $194,000 in Debentures with an aggregate principal amount of $320,000; though the first Debentures he purchased were selling at well above their principal amount, the Debentures he later purchased were discounted to well below $600 per $1000 principal amount, and his average purchase price for all of his Debentures was about $606 for each $1000 principal amount of Debentures. 4 14 The first significant activities of the Trust Company, other than its performance of routine administrative duties as substitute Trustee under the Indenture, came in the fall of 1973 when the Trust Company was called upon to consider whether the terms of a proposed supplemental indenture to be executed by Rockwell, as successor by merger to the obligations of Collins under the Indenture, complied with the terms of the Indenture. Under that supplemental indenture, Rockwell would assume in full all of the obligations of Collins under the Indenture, including the obligation to pay interest, and eventually to repay the principal, on the outstanding Debentures until they either were redeemed or matured in 1987. With regard to the conversion feature of the Debentures, the proposed supplemental indenture provided that each holder of a Debenture would have the right to convert his Debenture into the amount of cash that would have been payable to him under the Merger Plan had he converted his Debenture into Collins Common Stock immediately prior to the merger. In other words, a holder of Debentures could, at any time while his Debentures were outstanding, choose to convert them into exactly that which he would have received had he converted immediately before the merger and participated therein as a holder of Collins Common Stock. Because the holders of Collins Common Stock received no common stock in the merger, the holders of Debentures would have no right to convert into common stock either of Collins (who would have no more common stock) or of Rockwell after the merger. Rockwell's view of its post-merger obligations under the Indenture was shared by its counsel (the New York firm of Chadbourne, Parke, Whiteside & Wolff), and by Collins and Collins' counsel (the Los Angeles firm of Gibson, Dunn & Crutcher). 15 In order to determine whether the proposed terms of the supplemental indenture complied with the terms of the Indenture, the Trust Company engaged the New York law firm of Curtis, Mallet-Prevost, Colt & Mosle. Two partners in that firm John P. Campbell and John N. Marden undertook a review of the Indenture and the applicable law. Campbell and Marden took the position in September 1973 that a court might in the future find that the intent of the parties at the time the Indenture was executed was that the right to convert into common stock would survive a merger of Collins into another company, and that every holder of Debentures would have the right to convert his Debentures into common stock of the surviving company as long as the Debentures remained outstanding. Since the Indenture required that Rockwell assume all of Collins' obligations under the Indenture in the event of a merger, Campbell and Marden contended that Rockwell would be bound to agree in a supplemental indenture with terms providing for a conversion right of the Debentures into the common stock of Rockwell (Rockwell Common Stock), unless Rockwell could obtain the consent of each holder of Debentures that such a right could be extinguished. Furthermore, they contended, Rockwell's voting control of Collins prior to the merger imposed upon Rockwell and the directors of Collins a fiduciary obligation to the holders of Debentures. 16 The record indicates that discussions and exchanges of memoranda and drafts of opinions between counsel for Rockwell and Collins on the one hand, and counsel for the Trust Company on the other hand, continued for several weeks, and their disagreement was heated. There is also evidence in the record indicating that Rockwell exerted considerable pressure on the Trust Company to change its position, threatening the withdrawal of certain other business from the Trust Company and possible litigation if the Trust Company blocked the merger by refusing to execute a supplemental indenture. At something of an impasse with counsel for Rockwell, Campbell advised the Trust Company on September 18, 1973, that it could follow any of four alternative courses of action: (1) the Trust Company could decline to execute a supplemental indenture (thus blocking the Collins-Rockwell merger) unless the supplemental indenture provided for a right to convert into Rockwell Common Stock; (2) the Trust Company, as a policy decision, could refuse to take a position as to the rights of the holders of the Debentures after the merger, relying on the provisions in the Indenture and in the supplemental indenture by which Rockwell would indemnify the Trust Company from liability in any lawsuits that might later be brought; (3) the Trust Company could resign as Trustee under the Indenture; or (4) the Trust Company could seek a declaratory judgment with respect to the conversion rights of the holders of Debentures after the merger. Campbell recommended alternative (2), and the Trust Company ultimately followed that recommendation. 17 Thus, on October 11, 1973, Rockwell sent a letter to the holders of the Debentures to notify them of the proposed merger between Rockwell and Collins. The text of the letter read as follows: 18 Rockwell International Corporation (Rockwell) has proposed the merger of Collins Radio Company (Collins) into Rockwell. Pursuant to the terms of the proposed merger Rockwell would assume all of Collins obligations, including Collins obligations under the Indenture, dated as of January 1, 1967, relating to Collins 4 7/8 Convertible Subordinated Debentures due January 1, 1987 (respectively the Indenture and the Debentures). 19 Rockwell and United States Trust Company of New York, the Successor Trustee under the Indenture (the Trustee), intend to execute a Supplemental Indenture to the Indenture on or about November 1, 1973. This Supplemental Indenture is to be effective on the effective date of the merger of Collins into Rockwell and will provide for the assumption by Rockwell of the due and punctual payment of the principal of and interest on the Debentures and the due and punctual performance and observance by Rockwell of all the terms, covenants and conditions of the Indenture. The Supplemental Indenture does not alter or impair the rights accorded under the Indenture to holders of the Debentures and does not change the provisions of the Indenture. 20 With regard to the conversion rights of holders of the Debentures, counsel for Rockwell and counsel for Collins have each advised that under Section 4.11 of the Indenture, the Section that provides for the adjustment of conversion rights upon a merger or similar event, a holder of a Debenture, upon effectiveness of the proposed merger, would have the right, until the expiration of the conversion right of such Debenture, to convert the Debenture into the amount of cash that would have been payable with respect to the number of shares of Collins Common Stock into which the Debenture could have been converted immediately prior to effectiveness of the proposed merger. The current conversion price of $72.50 entitles the holder of a $1,000 Debenture to convert it into 13.79 shares of Collins Common Stock. Pursuant to the merger each share of Collins Common Stock outstanding immediately prior to the merger (other than those held by Rockwell) is to be converted into $25. Thus, after the merger, a $1,000 Debenture will be convertible into $344.75 in cash. 21 The Trustee has advised that it does not take a position with regard to this letter or the statements herein, and that it has consulted with its counsel who confirmed that as Trustee it should not take a position with regard thereto. 22 Neither the proposed merger nor the proposed Supplemental Indenture requires action by the Debentureholders. Upon effectiveness of the merger, the Debentures will represent indebtedness of Rockwell. You will not need to surrender or exchange your Debentures for new debentures. 23 (Emphasis added.) The letter was signed by both the president and the chairman of the board of Rockwell. 5 24 According to Campbell's testimony by deposition, at some point prior to the merger he abandoned his interpretation of the Indenture in favor of the interpretation advanced by counsel for Rockwell and Collins. When asked to explain why he had abandoned his earlier position, Campbell answered as follows: 25 It started out with a premise that we must find law to support the position which (Broad) now assert(s). I made, I thought, a very good try and had almost convinced myself by starting with the conclusion and working back to get the authority. It was a good dog, but it wouldn't hunt. I fell down. 26 Other evidence in the record, however, indicates that as late as January 1974, Campbell continued to see some validity in his earlier view. 27 Nonetheless, on November 14, 1973, the merger was effected, and a supplemental indenture between Rockwell and the Trust Company was executed, effective as of November 1, 1973. The supplemental indenture provided that Rockwell would assume Collins' obligations on the Debentures. Specifically, it provided that after the merger, the holders of the Debentures had the right to convert the debentures into that which they would have received in the Merger Plan had they converted immediately before the merger's effective date. In accordance with the October 11 letter, Rockwell has consistently interpreted this to mean that the Debentures could be converted into cash, but not into the common stock of either Rockwell or Collins; the conversion rate was $344.75 in cash for each $1000 in principal amount of Debentures surrendered.