Court Opinion

ID: 8915310
Source: CourtListenerOpinion
Date Created: 2022-11-27 04:46:24.109659+00
Date Added: 2024-06-11T17:08:55.491167
License: Public Domain

ADAMS, Circuit Judge,
dissenting.
The Supreme Court recently has made clear that liability for nondisclosure of material information under the federal securities laws cannot be imposed absent a duty to speak. Chiarella v. United States, 445 U.S. 222, 235, 100 S.Ct. 1108, 1118, 63 L.Ed.2d 348 (1980). Aware of this precept, Judge Gibbons has pointed to no fewer than four possible sources from which to derive a duty, on the part of The Baltimore and Ohio Railroad, to notify its convertible debenture holders prior to the declaration of the MAC dividend. Judge Garth, concurring, has limited the duty analysis solely to the provisions of Rule 10b-17; the holding of the Court, therefore, rests on that narrow ground. Unlike my two colleagues, I conclude that B&O was under no legal obligation — pursuant to Rule 10b-17 or otherwise — to provide plaintiffs with advance notice of the MAC dividend. I therefore respectfully dissent.
I.
Convertible debentures frequently are characterized as “hybrids,” embodying the attributes of both debt and equity securities. See, e.g., Broad v. Rockwell International Corp., 642 F.2d 929, 940 (5th Cir.) (en banc), cert. denied, 454 U.S. 965, 102 S.Ct. 506, 72 L.Ed.2d 380 (1981); American Bar Foundation, Commentaries on Indentures 523 (1971); Note, Hoff and Harff: Does the Convertible Debenture Holder Have Standing to Maintain a Shareholder Derivative Action?, 26 Syracuse L.Rev. 730, 751 (1975). As such, they have proven to be an attractive and effective means of corporate financing. Like most debt securities, convertible debentures provide a fixed rate of return and assure the investor priority, over common shareholders, in. claims on the issuer’s assets. Should the market price of the common stock rise, however, the debentureholder may exercise an option to convert the debt security into shares of common stock. “Thus there is the opportunity to benefit from a rise in stock prices from the comparative safety of a debt . .. position.” Katzin, Financial and Legal Problems in the Use of Convertible Securities, 24 Bus.Law. 359, 361 (1969).
From the corporation’s standpoint, the issuance of convertible debentures can be similarly advantageous. Primarily, the convertible securities provide a way to raise new capital indirectly — by permitting management “ ‘to raise funds today at tomorrow’s higher common stock prices.’ ” Fleischer & Cary, The Taxation of Convertible Bonds and Stock, 74 Harv.L.Rev. 473, 474 (1961) (quoting Pilcher, Raising Capital with Convertible Securities 61, 138 (1955)). In addition,
the new funds will be contributing to income by the time the debentures are converted. In the interim, while the company is putting the new money effectively to work, the charge takes the form of interest — deductible for tax purposes— rather than a reduction in income per share. Thus the dilution of earnings which traditionally accompanies an equity issue is deferred until the firm is making more money.
Id. (footnote omitted). Finally, because the conversion feature is so attractive to investors, the issuer can often offer the debentures at an interest rate lower than that required on other debt securities. Katzin, supra, at 362. But see Klein, The Convertible Bond: A Peculiar Package, 123 U.Pa.L. Rev. 547, 558-59 (1975) (referring to this rationale as “flimflam”).
*947Whatever financial advantages attach to the issuance or purchase of convertible debentures, the legal status of these hybrid securities remains inherently complex. As debt securities, the debentures impose a specific set of obligations on the corporation —namely, the regular payment of interest and the repayment of principal upon maturity. As equity securities, in contrast, the debentures may require a broader range of duties from the issuer. The difficulty lies not in the characterization of the debenture as either debt or equity — for it is both — but in determining, in each case, the extent to which the investor is owed rights and remedies beyond those commonly accorded debt holders.1
The traditional view is that the convertible debenture holder is a mere creditor until conversion, whose relationship with the issuing corporation is governed by contract and statute. In an early Massachusetts decision, for example, the court rejected a convertible note holder’s claim that he had an equitable interest in newly-issued shares of stock. Pratt v. American Bell Telephone Co., 141 Mass. 225, 5 N.E. 307 (1886). The plaintiff was “in no sense a stockholder,” declared the court; his “rights and interest as a stockholder of the corporation were postponed to the time when he made his option and demanded his stock. Pending this time, the contract gave him the right to payment of the coupons attached to the notes, and nothing more.” 5 N.E. at 311.
Several years later, Justice Holmes expanded upon this principle, holding for the Supreme Court of Massachusetts that the debenture holder had no right, apart from contract, to object to corporate actions that dilute or destroy the value of the conversion option:
[the option] imposes no restriction upon the obligor in regard to the issue of new stock, although the issue may be upon such terms as to diminish the value of the right. It leaves the management of the company in accordance with its other interests unhampered. It is simply an option to take stock as it may turn out to be when the time for choice arrives. The bondholder does not become a stockholder, by his contract, in equity any more than at law....
.. . [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.
Parkinson v. West End St. Ry. Co., 173 Mass. 446, 53 N.E. 891, 892 (1899). See also Gay v. Burgess Mills, 30 R.I. 231, 74 A. 714 (1909). And in Lisman v. Milwaukee, L. S. & W. Ry. Co., 161 F. 472 (E.D.Wis.1908), aff’d. 170 F. 1020 (7th Cir. 1909), the court held that convertible debenture holders could not complain when the railroad company in which they had invested merged with another railroad. The fact that the parties “were bound to” have anticipated such a consolidation when they entered into the option contract was dispositive.
The rights and remedies of convertible debenture holders have expanded since the turn of the century. Most notably, the Securities Exchange Act of 1934 accords convertible debenture holders the federal statutory rights of “equity security holders,” 2 able, for example, to employ section 10(b) of the Act to protect against fraud or manipulative devices. 15 U.S.C. § 78j. Congress’s explicit recognition of converti*948bles as equity, as well as debt, securities has had significant consequences. In Kusner v. First Pennsylvania Corp., 531 F.2d 1234 (3d Cir. 1976), for instance, this Court held that a convertible debenture holder, who alleged that he had purchased the securities in reliance on a false and misleading prospectus, had standing to sue under section 10(b). Kusner depicts the precise sort of situation in which a section 10(b) remedy is appropriate for debenture holders in their role as equity investors. As the Court explained, in such a case, the debenture holder’s need for accurate information about the corporation was as pressing as any shareholder’s:
If during the conversion period the value of the common stock (a function of its market price and dividend position) greatly exceeds the value of the fixed payment and interest obligation, a holder probably will exercise the conversion privilege. The possibility that the value of common stock will increase to a point where it exceeds the value of the bond is the sales feature with which the issuer obtained a lower-than-market interest rate on the bond. Thus ... a misrepresentation in the prospectus that would be material to a stock purchaser would be material to a convertible bond purchaser. The convertible bond purchaser may well have been defrauded of the interest differential.
531 F.2d at 1238 (footnote omitted).
The mere availability of a securities act remedy for fraud, however, does not answer the question whether the common law rule of Parkinson remains the applicable standard by which to judge whether or not a corporation has, indeed, acted fraudulently. That question was addressed and analyzed perceptively in a recent en banc Fifth Circuit decision, Broad v. Rockwell International Corp., 642 F.2d 929 (5th Cir.), cert. denied, 454 U.S. 965, 102 S.Ct. 506, 72 L.Ed.2d 380 (1981). There, the plaintiff debenture holders complained that when the company in which they had invested was acquired by another entity in a cash merger, they lost their right to convert into common stock. The Court concluded that the plaintiffs had “received ... all to which they were contractually entitled under the Indenture” and that, as a result, no violation of section 10(b) could have occurred:
There is no doubt but that there was concerted, intentional conduct by the defendants to bring about [the] result [about which plaintiffs complain]. But as a matter of law, there was no violation of section 10(b) or Rule 10b-5 because there was no fraud. “Section 10(b) is aptly described as a catch-all provision, but what it catches must be fraud.” Chiarel-la v. United States, 445 U.S. 222, 234 — 35 [100 S.Ct. 1108, 1117-1118, 63 L.Ed.2d 348], .. . (1980) (criminal prosecution under section 10(b) and Rule 10b-5). It is elementary that section 10(b) and Rule 10b-5 reach only conduct involving manipulation or deception. E.g., Santa Fe Industries, Inc. v. Green, 430 U.S. 462 [97 S.Ct. 1292, 51 L.Ed.2d 480], ... (1977); Ernst & Ernst v. Hochfelder, 425 U.S. 185 [96 S.Ct. 1375, 47 L.Ed.2d 668], . . . (1976). The defendants’ conduct involved neither; they merely carried out their contractual obligations. As a conceptual matter, they could not have fraudulently schemed to deprive the holders of Debentures of a right that those holders did not in fact have.
642 F.2d at 963.
Virtually every modern commentator appears to agree with the Broad court that convertible debenture holders have no cause to complain about legal corporate conduct that adversely affects the value of the conversion option unless such conduct has been explicitly proscribed or otherwise addressed in the debenture indenture.3 As explained by the American Bar Foundation:
*949Inasmuch 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 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.
Commentaries, supra, at 527 (emphasis added) (footnote omitted). See also Broad v. Rockwell International Corp., supra at 943; Kessler v. General Cable Corp., 92 Cal.App.3d 531,155 Cal.Rptr. 94, 99-100 (1979); 6A W. Fletcher Cyclopedia of the Law of Private Corporations §§ 2694-2694.1 (perm, ed. 1981). Such so-called “anti-dilution clauses” are thus among the most important of the various contract provisions that can be negotiated between the issuing corporation and the debenture holders or their representatives.4 Commonly, they require the corporation to give the debenture holder advance notice of specific acts that may erode or destroy the conversion option, so that the investor can convert, if he so chooses, prior to the act in question. Alternatively, the anti-dilution clause can provide for the adjustment of the conversion price to reflect the change in value. See Irvine, Some Comments Regarding “Anti-Dilution” Provisions Applicable to Convertible Securities, 13 Bus.Law. 729 (1958). Less frequently, the anti-dilution provision is drafted to prohibit the corporation from taking certain actions that may cause diminution in the value of the conversion option. See Commentaries, supra, at 527-28.
The conduct at issue in the present case— namely, the transfer of B&O’s non-rail assets to MAC and the distribution of the MAC stock to B&O’s common shareholders — is clearly of the sort that could have been addressed by the inclusion of an appropriate anti-dilution provision within the indenture. Such a provision could have taken any number of forms. In its Commentaries on the Model Debenture Indenture provisions, for instance, the American Bar Foundation noted that “[wjhen dividends are declared and paid other than in shares of common stock or as normal cash dividends,” the debenture holder’s conversion rights can be protected against dilution “by providing for a reduction of the conversion price to reflect the diminution of the corporate assets resulting from such dividends.” Commentaries, supra, at 529. Moreover, the Bar Foundation continued, “[i]t is sometimes provided that, upon exercise of his conversion rights, the debenture-holder shall receive, in addition to the shares to which he is entitled, the amount of assets (or a sum equal to the value thereof) which would have been distributed to him if he had exercised his right to convert immediately prior to the record *950date for such distribution.” Id.5 And at least one commentator has suggested that it is advisable to insert in the indenture a provision giving holders of convertible securities adequate notice in the event that “the Company shall propose ... to pay any dividend payable in stock of any class to the holders of its Common Stock or to make any other distribution to the holders of its Common Stock (other than a cash dividend payable out of earnings or earned surplus legally available for the payment of dividends . . . ).” Kaplan, supra note 4, at 13 n.24 (emphasis added). Such a notice provision would clearly encompass the kind of arrangement against which Pittsburgh Terminal has complained in the case at bar.
Significantly, although the commentators have been careful to consider the situation in which a corporation distributes its assets in forms other than ordinary cash or stock dividends, the indenture at issue here contains no such provision. While the indenture does address a variety of potentially diluting acts — including a change in the par value of the outstanding common stock; a change of outstanding common stock from par to no par; and a possible consolidation, merger, or sale of the company — we have been directed to no provision in the indenture here that addresses the situation in which the company spins off a portion of its assets to a subsidiary and distributes those assets, in the form of a stock dividend, to its common shareholders. Plaintiffs are able to point to only one section in the indenture that is even arguably apposite. That provision, entitled “Notice to be Given of Record Date for Stock Dividend, etc.,” provides that:
The Company covenants and agrees that it will not declare and/or pay any dividend on its common stock payable in stock or create any rights to subscribe for stock or securities convertible into stock unless in any such case notice of the taking of a record date for the determination of the stockholders entitled to receive such dividend, distribution or right is given at least ten days prior thereto by at least one publication in an Authorized Newspaper.
Indenture Article 5, Section 12 (appendix at 357a) (emphasis added).
Plaintiffs assert that the term “stock dividend” in the table of contents, as well as the words “payable in stock,” which are found in the body of the provision, suggest that the clause is “in no way limited to the common stock of the B&O,” but, rather, applies to distributions of MAC stock as well. Brief of Appellant at 34. Plaintiffs also contend that, even assuming the phrase “payable in stock” refers only to B&O common stock, the provision violates the New York6 requirement of fair dealing. I find neither of these two arguments convincing.
*951It is a well-established principle of New York corporate law that a “stock dividend” is “any dividend payable in stock of the corporation declaring or authorizing such dividend.” In re Fosdick’s Trust, 4 Misc.2d 1003,147 N.Y.S.2d 509, 514 (1955) (emphasis added), aff’d., 3 App.Div.2d 1000, 165 N.Y. S.2d 429 (1957), aff’d., 4 N.Y.2d 646, 176 N.Y.S.2d 966,152 N.E.2d 228 (1958); 11 W. Fletcher Cyclopedia of the Law of Private Corporations § 5359 (perm. ed. 1971). The declaration of such a dividend generally is conceived of as a capitalization of surplus, which neither depletes the assets of the corporation nor increases the holdings of the stockholder. See Gibbons v. Mahon, 136 U.S. 549, 559-60, 10 S.Ct. 1057, 1058-1059, 34 L.Ed. 525 (1890); Equitable Trust Co. v. Prentice, 250 N.Y. 1, 164 N.E. 723, 725 (1928) (Cardozo, C. J.) (“When a dividend is paid in cash, the ownership of the corporate assets is changed; the company owns less, and the shareholder owns more, or something essentially different, though its value be no greater. Upon the distribution of a stock dividend, ownership of the assets is precisely as it was. ‘A stock dividend does not distribute property, but simply dilutes the shares as they existed before.’ ”). Thus stock dividends traditionally have been distinguished “from [dividends] payable in the stock of a subsidiary” or another independent corporation. Id.; see also Kellogg v. Kellogg, 166 Misc. 791, 4 N.Y.S.2d 219, 221, aff’d., 254 App.Div. 812, 5 N.Y.S.2d 506 (1938). The latter sort of dividend — stock in subsidiaries or other corporations — is considered the equivalent of a cash dividend — ■ “diminishpng] the property of the corporation by exactly the amount paid out and correspondingly increaspng] the property of the individual stockholders... . ” 11 W. Fletcher Cyclopedia of the Law of Private Corporations § 5355 (perm. ed. 1971) (footnote omitted).
Applying these precepts to the case at hand, it is clear that the distribution of the MAC stock was not a “stock dividend,” as that term traditionally has been defined. B&O was not capitalizing surplus; it was divesting itself of a considerable portion of its assets. In practical terms, the effect of the MAC dividend was no different than if B&O had sold its non-rail assets for cash and then distributed an extraordinary cash dividend to its shareholders.7 See Venner v. Southern Pac. Co., 279 F. 832, 840 (2d Cir.), cert, denied, 258 U.S. 628,42 S.Ct. 461, 66 L.Ed. 799 (1922). Had the B&O indenture contained a more broadly inclusive notice clause, B&O might have been required to inform the debenture holders prior to the declaration of the MAC dividend. The sample provision quoted above, for example, requires notice both for dividends “payable in stock of any class” and for “any other distribution,” excluding normal cash dividends. Kaplan, supra note 4, at 13 n.24. But the fact remains that the B&O indenture contains no such clause. Accordingly, the plaintiffs cannot rely upon the terms of the indenture as a source of B&O’s purported duty to speak.
Apparently mindful of the limited protection afforded to them by the indenture, the plaintiffs maintain that, notwithstanding any lack of an adequate notice provision within the indenture, New York’s law of fair dealing required that in any event notice be given prior to the declaration of the MAC dividend. Judge Gibbons credits this argument, concluding that, in failing to give notice, B&O violated the principle “that in every contract there is an implied covenant that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract. ... ” At 941 (quoting Kirke La Shelle Co. v. Paul Armstrong Co., 263 N.Y. 79, 87, 188 N.E. 163, 167 (1933)).
Such an analysis is clearly inappropriate. By its terms, the principle of fair dealing expressed in Kirke and quoted by Judge Gibbons applies only when one party in*952fringes the other’s rights “to receive the fruits of the contract.” Here, under the well-settled Parkinson doctrine, Pittsburgh Terminal had no right, under the contract, to receive advance notice of the MAC dividend because no anti-dilution provision to that effect had been included in the indenture. Thus, the risk of dilution was “inherent in the investment made by the holders of Debentures.... [B&O] did nothing that could be described as ‘destroying or injuring the right of the other party to receive the fruits of the contract,’ because .. . the benefits that the holders of Debentures received were all the rights to which they were contractually entitled.” Broad v. Rockwell International Corp., supra at 958.
Van Gemert v. Boeing Co., 520 F.2d 1373 (2d Cir.), cert. denied, 423 U.S. 947, 96 S.Ct. 364, 46 L.Ed.2d 282 (1975), appeal after remand, 553 F.2d 812 (2d Cir. 1977), a Second Circuit case relied upon by Judge Gibbons, does not support a contrary result. In Van Gemert, debenture holders complained that Boeing had provided inadequate notice of its intention to redeem the debentures, thereby depriving the investors of the opportunity to convert prior to redemption. The Second Circuit agreed. Observing that the newspaper notice that was provided “may have conformed to the requirements of the Indenture,” the court nonetheless concluded that such notice “was simply insufficient” under New York’s fair dealing law “to give fair and reasonable notice to the debenture holders.” 520 F.2d at 1383. In its decision after remand, the court clarified its earlier decision:
We did find significant ... the fact that the debentures did not explicitly set forth the type of notice which appellants could expect if Boeing decided to call the bonds. Without such a declaration, we held as a matter of law that appellants were entitled to expect that Boeing would employ a method of notification reasonably calculated to inform the debenture holders of the call.
553 F.2d at 815.
Van Gemert thus stands for the narrow proposition that, if the debenture holders are contractually entitled to notice, such notice must be “fair and reasonable.” But Van Gemert in no way addresses the question posed to us today: namely, whether the B&O debenture holders were entitled to any notice at all. That question, as has already been suggested, can be answered only by reference to the language of the indenture itself.
II.
The conclusion that B&O was under no contractual obligation to provide advance notice of the MAC dividend to its convertible debenture holders does not, of course, end the inquiry. For while it is clear that, as a general rule, the debenture holders’ rights are limited to those specified in the indenture, the Court today has determined that SEC Rule 10b-17 furnishes an independent statutory source from which to derive a duty, on the part of B&O, to provide notice of the MAC dividend. I turn, therefore, to an examination of this issue.
Rule 10b-17 provides that
(a) It shall constitute a “manipulative or deceptive device or contrivance” as used in section 10(b) of the Act for any issuer of a class of securities ... to fail to give notice in accordance with paragraph (b) of this section of the following actions relating to such class of securities:
(1) A dividend or other distribution in cash or in kind, except an ordinary interest payment on a debt security, but including a dividend or distribution of any security of the same or another issuer;
17 C.F.R. § 240.10b-17 (1981) (emphasis added). Judge Gibbons has concluded that Rule 10b-17 applies to the situation at hand because “B&O is the issuer of the convertible debentures, the MAC distribution is a dividend of a security, and that dividend related to the convertible debentures since it was material to a decision about exercising the conversion option.” At 941. Judge Garth, concurring exclusively on this ground, stresses that, in his view, “a divi*953dend ‘relates to’ a security if the declaration of that dividend makes the security significantly more or less valuable.... ” At 945. Because the B&O debentures were of considerably less value after the declaration of the MAC dividend, Judge Garth has concluded that the declaration of the dividend “is an action which clearly ‘relates to’ ” that class of securities.
I do not disagree that the MAC dividend may have been “material” to the debenture holders’ decision whether or not to convert their securities into shares of common stock. Nor do I take issue with Judge Garth’s determination that the debentures were less valuable after the declaration of the dividend. Nonetheless, in my view, these considerations are not sufficient to establish that the dividend declaration “related to” the class of debenture securities as that term is used in Rule 10b-17. Put simply, Rule 10b-17 never was meant to deal with a situation similar to that before us today.
Nothing in the Commission’s “Notice of Proposed Rule Making” or in the language of the rule itself suggests that Rule 10b-17 was intended to override the common law and accord debenture holders significant additional substantive rights. When the Rule was proposed by the Securities Exchange Commission in 1971, it was described as a rule “to require companies whose securities are publicly traded to furnish public investors with timely advance notice of the right to receive dividend^] and other rights which accrue to holders of record of a specified class of securities as of a specialized date (‘the record date’).” 36 Fed.Reg. 3430 (1971). In other words, the Rule was designed to ensure that purchasers of securities receive all the fruits of the transaction to which they legally are entitled —namely, distributions made after the sale but before the change in ownership is reflected in the corporation’s record books.8 Detailing the circumstances that had prompted the proposal, the Commission explained:
When an issuer establishes a record date it is, in general, obligated to furnish the cash, securities, or other property or property rights that are the subject of the distribution only to those persons owning the underlying security as reflected in the issuer’s records. However, not all transactions occurring prior to that cut-off date can be settled and appropriate changes effected on the issuer’s records to provide assurance that the distributions of the rights will actually be made by the issuer to purchasers. Since during this period purchasers pay a price for the underlying security which indicates the value of the asset to be distributed, it has therefore been the practice and custom of the trade for brokers and dealers to render the purchaser as the person entitled to the distribution which is made by the issuer to the seller as record owner. If the participating brokers have notice of the cut-off date, they can take necessary steps at settlement ... to protect the right of the purchaser to the distribution and at the same time alert the seller to his obligation to turn over the distributed property to the purchaser.
Id. at 3430-31 (emphasis added). The failure of publicly held corporations to provide such notice.
has had a misleading and deceptive effect on both the broker-dealer community and the investing public. As a direct result of such failure, purchasers and their brokers may have entered into and settled securi*954ties transactions without knowledge of the accrual of such rights and were thus unable to take necessary steps to protect their interests. Further, sellers who have received the benefits of such rights as recordholders on the specified record date after having disposed of their securities, have also disposed of the cash or stock dividends or other rights received as such recordholders without knowledge of possible claims of purchasers of the underlying security to those rights.
Id. at 3430.
The differences between the scenario depicted by the SEC and the present case could not be more obvious. In the situation described by the SEC, the purchaser — independent of Rule 10b-17 — has accrued the right to receive certain benefits. In such a case, the Rule acts simply to assure that these rights will not be impeded because of the inadequacies inherent in corporate bookkeeping. Here, in- contrast, the debenture holders have a right to convert their debentures into shares of common stock. That right has not been defeated. Under well-established common law principles, however, they have no right — unless otherwise specified in the debenture — to notice of corporate actions that may affect the value of the conversion option.
Ill.
Had the debenture holders foreseen the possibility that B&O would spin off its non-rail assets, arguably they may have bargained for — and paid for — the right to advance notice of the event.9 Despite the well-settled precedent of Pratt and Parkinson, however, the B&O indenture did not require such notice to the debenture holders and the price of the debenture presumably reflected this fact. For this Court today— almost thirty years after the drafting of the indenture — to ignore what was set forth as the intent of the parties and fundamentally to alter the terms of the contract is, in my view, not only legally erroneous but improvident.10
I therefore respectfully dissent.11

. See Green v. Hamilton Int’i. Corp., No. 76 Civ. 5433 (S.D.N.Y. July 14, 1981) (“If the wrongs alleged in this case impacted upon the securities so as to undermine the debtor-creditor relationship, a contract analysis is appropriate, and plaintiffs ... were owed no special duty outside the bounds of the contract. If the wrongs alleged impinged upon the equity aspects, then the analysis would more properly treat plaintiffs like shareholders to whom the majority shareholders and directors of a corporation owe a duty of ‘honesty, loyalty, good faith and fairness.’ ”).

. The Act defines the term “equity security” broadly to include “any stock or similar security; or any security convertible, with or without consideration, into such a security....” 15 U.S.C. § 78c(11). See Chemical Fund, Inc. v. Xerox Corp., 377 F.2d 107, 110 (2d Cir. 1967); In re Will of Migel, 71 Misc.2d 640, 336 N.Y. S.2d 376, 379 (1972).

. The “indenture” is the document that sets forth the terms under which the debenture has been issued, including the redemption rights of the issuer, the conversion rights of the investor, and any number of administrative or procedural provisions. The indenture is usually conceived of as a contract between the issuer and a trustee for the benefit of the debenture holders. See generally Commentaries, supra at 7-8. Since 1939, debenture holders have been protected by federal law against breaches of fiduciary duty by the trustee. Trust Indenture *949Act of 1939, 15 U.S.C. §§ 77aaa et seq. (1976). See Zeffiro v. First Penn. Banking and Trust Co., 473 F.Supp. 201 (E.D.Pa.1979), aff'd., 623 F.2d 290 (3d Cir. 1980).

. See Hills, Convertible Securities — Legal Aspects and Drattsmanship, 19 Calif.L.Rev. 1, 1-2 (1930) (“Poor draftsmanship and a disregard of possible corporate changes, rather than a general misunderstanding of the conversion privilege, may be set down as the principal causes of litigation on this subject. The decisions resulting from such litigation have acted as danger signals, attorneys have become more careful and litigation has been reduced to a minimum.”); Kaplan, Piercing the Corporate Boilerplate: Anti-Dilution Clauses in Convertible Securities, 33 U.Chi.L.Rev. 1, 29 (1965) (“The anti-dilution clause is an integral and necessary part of any convertible security. The clause is a complex, difficult and intriguing exercise in corporate draftsmanship. It requires the draftsman to protect against the whole gamut of potential corporate rearrangement or manipulation which might adversely affect the rights of the holders of the convertible securities. So intricate and precise an instrument should be prepared with the greatest care and diligence.”).

. The model indenture discussed in the Commentaries includes at least two provisions that address this point. One stipulates, for example, that:
In the event that the Company shall make any distribution of its assets upon or with respect to its Common Stock, as a liquidating or partial liquidating dividend, or other than as a dividend payable out of earnings or any surplus legally available for dividends under the laws of the state of incorporation of the Company, each Holder of any Debenture then Outstanding shall, upon the exercise of his right to convert after the record date for such distribution, or, in the absence of a record date, after the date of such distribution, receive, in addition to the shares subscribed for, the amount of such assets (or, at the option of the Company, a sum equal to the value thereof at the time of distribution as determined by the Board of Directors in its sole discretion) which would have been distributed to such Holder if he had exercised his right to convert immediately prior to the record date for such distribution, or, in the absence of a record date, immediately prior to the date of such distribution.
Commentaries, supra, at 547 (emphasis added) (footnote omitted). An alternate provision, addressing the situation in which the corporation distributes to its shareholders “evidences of its indebtedness or assets” excluding dividends paid out of earned surplus, declares that “in each such case the Conversion Price shall be adjusted” to compensate for the distribution of the corporation’s assets to its shareholders. Id. at 553.

. As Judge Gibbons notes, the B&O indenture was entered into in New York and must be construed under the laws of that state. At 941.

. Because it is the equivalent of an extraordinary cash dividend, the distribution of the MAC stock is not governed by the provisions of Article 5, Section 2 of the Indenture, which apply only to “regular dividends” and exclude “extraordinary dividends of every character.” Appendix at 348a-49a.

. The Rule presumably provides a remedy for sellers as well. See Lutgert v. Vanderbilt Bank, 508 F.2d 1035 (5th Cir. 1975). In Lutgert — the only case to my knowledge that has discussed the intended scope of Rule 10b-17 — the court described “the type of claim for which Rule 10b-17 was intended to provide relief”:
For example, if the owner of ... stock prior to the record date were to sell his stock within the ten-day disclosure period referred to in Rule 10b-l 7 unaware, due to defendants’ nondisclosure, that the record date had been set, it is conceivable that he might make out a claim for relief under Rule 10b-17. Plaintiff in such a case would have been a seller of . .. stock and would have been defrauded in connection with that sale.
508 F.2d at 1038-39.

. Concededly, the debenture holders themselves do not, in the average case, bargain individually with the issuing corporation. See Note, Convertible Securities: Holder Who Fails to Convert Before Expiration of the Conversion Period, 54 Cornell L.Rev. 271, 272 (1969). But attorneys or investment bankérs normally perform this function on behalf of the debenture holders as a class, see e.g., Hills, supra note 4; Kaplan, supra note 4, and there is no suggestion in this case that those persons who bargained on behalf of the B&O debenture holders did so other than with diligence and vigor.

. In this regard it is instructive to consider the views expressed by Judge Tyler in Entel v. Guilden, 223 F.Supp. 129, 131-32 (S.D.N.Y. 1963):
One of the chief economic functions of a corporation, obviously, is to facilitate aggregations of capital. To further this function, there has developed a broad range of modes of investment within the corporate framework. Each such mode is a bundle of legal rights and duties; the market price for each bundle is no doubt determined at least in part by what the. bundle contains. Thus, courts should act with conservatism in changing the content of any of these bundles in ways which would give the holders of some bundles less, and holders of other bundles more, than was bargained for in the marketplace.

. Judge Gibbons has posted two additional sources from which he derives a duty to speak —namely, the New York Stock Exchange Listing Agreement and the Maryland law of fiduciary obligations. While the court’s holding does not rest on either of these alleged sources. I note that, for essentially the reasons stated in parts I and II of this opinion, I find that neither the listing agreement nor the Maryland law creates the asserted duty to provide notice in this context.