Opinion ID: 387913
Heading Depth: 2
Heading Rank: 5

Heading: Reconciling Section 4.11 with the Remainder of the Indenture

Text: 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