Opinion ID: 387913
Heading Depth: 2
Heading Rank: 4

Heading: The Meaning of Section 4.11 of the Indenture

Text: 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