Court Opinion

ID: 9467672
Source: CourtListenerOpinion
Date Created: 2023-08-05 01:53:35.052832+00
Date Added: 2024-06-11T17:40:27.482388
License: Public Domain

HENDERSON, Circuit Judge,
concurring in part and dissenting in part:
Despite the majority’s thorough and exhaustive review of the law of contracts, I *964adhere to the conclusion reached by the panel — the indenture is ambiguous. It does not clearly contemplate the plaintiffs’ conversion rights in the event of a cash-out merger.1 I would therefore remand the case for a trial to determine the intent of the parties.2 In all other respects I agree with the majority decision.
Much of the court’s extended opinion relates to matters not in dispute. The part that focuses on the questions we confront does not, in my judgment, rebut the panel’s conclusion. The panel opinion should, and does, stand on its own, and I see no need for extensive reiteration.
The plaintiffs maintain that upon merger Rockwell was required by § 14.01 of the indenture to “expressly assume[]” all of Collins’ obligations, including the § 4.01 duty to exchange the debentures for stock. The majority finds this construction precluded by § 4.11. I see no necessary conflict between § 4.11 and § 4.01.3 A jury could read the indenture to provide that after a merger a debentureholder had conversion rights under at least two sections: a § 4.11 right to convert into what the Collins shareholders received, and a § 4.01 right to convert into the “Common Stock of the Company,” “the Company” being Rockwell, § 14.02. In stock-for-stock mergers these options would be similar, if not the same. Here however they are distinct. The plaintiffs simply insist that the § 4.11 right is not exclusive. This is a fair interpretation of the contract, and the jury might adopt it.4
A brief comment on “the ‘Iowa law’ argument,” ante at 951-952. Iowa did not *965permit cash-out mergers when the debentures were issued, and the plaintiffs suggest that the buyers could have safely assumed that after any merger they would still be entitled to convert into an equity interest in some going business. Gf. ante at 941 (convertible security is a debt-equity hybrid). To be sure, specific provisions of the indenture enabled Collins to force the debentureholders to accept cash at any time, but only through liquidation, in which event the debtholders would have been entitled to receive full compensation prior to any distribution to equityholders, or through redemption, for about three times what the court now holds the debentureholders are due.
The majority notes that in reading the indenture, “Due consideration must be given to the purpose of the parties in making the contract, and fair and reasonable interpretation consistent with that purpose must guide the courts in enforcing the agreement.” Ante at 946.5 The equity kicker, the whole point of a convertible security, was arguably the price insisted upon by buyers willing to accept a substantially reduced rate of interest. See 614 F.2d at 428. It seems unlikely that the debenture buyers, or for that matter the seller, thought this participation would be as short-lived as it turns out to have been. In any case I am not convinced by the court’s treatment of the matter. See 614 F.2d at 429. In fact, to quote the majority opinion, “Had the parties to the contract wished to fashion such a bizarre provision, they certainly would have done so in a more explicit fashion.” Ante at 950; see also at 953.
The few analogous cases, ante at 955-956, may support this view.6 In Broenen v. Beaunit Corp., 440 F.2d 1244 (7th Cir. 1970), which was purportedly followed by the district court in Brucker v. Thyssen-Bornemisza Europe N. V., 424 F.Supp. 679, 688-90 (S.D.N.Y.1976), 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), the challenged merger was legal at the time the parties entered into the indenture, and therefore the court was able to invoke the “ancient principle of contract law that parties are presumed to have contracted with knowledge of and consistent with the law in effect at the time of execution of a contract.” 440 F.2d at 1249 (citing Mandell v. Cole, 244 N.Y. 221, 155 N.E. 106 (1926)). This rule of contract construction, perhaps the only one not mentioned in the court’s opinion, cuts the other way here. While it may not require a judgment for the plaintiffs, it properly focuses attention on the novel facts of this case, and explains why the § 4.11 boilerplate, ante at 962 did not anticipate the substantial change in Iowa law.

. My conclusion is based on what I perceive to be “holes” in the contract not my “instinct for the disposition of equity,” ante at 947. Nonetheless, I cannot agree with the majority’s assessment of the fairness of the outcome of this case, ante at 956-957.
Convertible debentures are a wholly different investment vehicle from common stocks, and are, contrary to the assertion of the majority, presumably purchased by persons with different views of the future. The current price of any security reflects the market’s collective judgment of its prospects, with all possibilities discounted for their probability. Conversion rights will be exercised only if profitable, so the probability that the underlying stock will exceed the conversion price is a determinant of the value of a convertible security. But if the stock price stays down, the debentureholder’s primary concern will be his interest income. The owners of stock, on the other hand, carry the entire burden of any decline in the value of their shares. All equityholders hope for a bright tomorrow, but the convertible debentureholder, who is also a corporate creditor, pays for protection against a gloomy future.
Debentureholders accept low interest precisely because they want upside participation without downside risk. The effect of the court’s decision is to retain the low interest rate payable to the plaintiffs while denying them a right to participate in increases in the value of Collins’ business. And the value of the conversion right has not only been frozen, it has been rendered practically worthless.
The purchase and sale of a convertible debenture, like that of any other security, is at heart an allocation of risks. Presumably the parties to the indenture considered the likelihood that the market interest rate and the market price of Collins shares would fluctuate during the life of the debentures. They supposedly had different expectations. But this case would not be here if all that was involved was the effect of the market. The question we face is whether the contract ordained that the right to convert into equity could be eliminated. Perhaps the parties did consider the possibility and factored that into the price of the debentures. If they did, so be it. I, like the court, do not suggest that we alter anyone’s contract. Were it relevant, however, I would dispute the majority’s statement that this merger treated shareholders and debentureholders identically.

. The court affirms summary judgment on the fair dealing, fiduciary duty and second 10b-5 claims because all contractual obligations were satisfied. This logic is sound, but the holdings stand or fall with their stated premise — that the contract rights of the plaintiffs were respected.

. The majority opinion does not say that § 4.11 is the exclusive operative section in mergers, but only that it controls in event of conflict.

. The court is troubled by the indentures’ failure to provide a formula for the conversion of Collins debentures into Rockwell stock. This might be enough to convince a jury that the defendants have correctly construed the contract. On the other hand, it may be an inadvertent omission to be rectified with a § 13.01(e) supplemental indenture. Cf. ante note 23.

. “We are of the opinion that this question [i. e., interpreting an indenture] is not necessarily to be answered by references to the general law concerning the sale of assets of a corporation. The question before us is the narrow one of what particular language of a contract means and is to be answered in terms of what the parties were intending to guard against or to insure.”
B. S. F. Co. v. Philadelphia Nat’l Bank, 204 A.2d 746, 750 (Del. 1964). See note 1, supra.

. The panel properly distinguished B. S. F. Co. v. Philadelphia Nat’l Bank, 204 A.2d 746 (Del. 1964) as involving a sale of assets and not a merger. The Supreme Court of Delaware emphasized this distinction, 204 A.2d at 749, and also pointed out that the holders of the debentures were still entitled to convert into B.S.F. common stock, 204 A.2d at 751. Similarly, the court upheld the distribution challenged in Wood v. Coastal States Gas Corp., 401 A.2d 932 (Del. 1979), because the indenture specifically provided for distribution of securities to holders of common stock (as opposed to an exchange) without adjusting the conversion ratio of preferred stock. 401 A.2d at 940. Again, the plaintiffs could still convert their preferred into common stock. 401 A.2d at 939-40.