Broad v. Rockwell Intern. Corp., 77-2963

Decision Date24 March 1980
Docket NumberNo. 77-2963,77-2963
Citation614 F.2d 418
PartiesFed. Sec. L. Rep. P 97,326 David BROAD et al., Plaintiffs-Appellants, v. ROCKWELL INTERNATIONAL CORPORATION et al., Defendants-Appellees.
CourtU.S. Court of Appeals — Fifth Circuit

John Andrew Martin, Dallas, Tex., Hugo L. Black, Jr., Thomas H. Seymour of Kenny, Nachwalter & Seymour, P.A., Miami, Fla., for plaintiffs-appellants.

Ernest E. Figari, Jr., David P. Seikel, Dallas, Tex., for Rockwell Intern. Corp., Collins Radio Co., Anderson, Bateman, Booth, Willard F. Rockwell, Jr., Roodhouse, Beall, Cattoi, Fulgham, Martin, Erickson, Drick and Raff.

William F. Carroll, William B. West, III, Dallas, Tex., John F. Egan, New York City, for U. S. Trust Co. of New York.

Donald L. Strauber, Terry Thompson, Edwin Scott, New York City, for Rockwell Intern. Corp.

Appeal from the United States District Court for the Northern District of Texas.

Before COLEMAN, Chief Judge, KRAVITCH, and HENDERSON, Circuit Judges.

COLEMAN, Chief Judge.

I Facts

In January 1967 Collins Radio Company (Collins) was a prosperous enterprise, engaged in the development and production of radio communication and aircraft navigation equipment. It offered and sold to the public $40,000,000 in 47/8% Convertible Subordinated Debentures, due January 1, 1987. Chase Manhattan Bank, N.A., was the Trustee under the terms of the indenture agreement. By a supplemental indenture executed in May 1970 the United States Trust Company of New York (Trust Company) was substituted for Chase Manhattan.

Beginning in fiscal 1969 Collins suffered a series of economic reversals which resulted in declining sales and reduced income. In 1971 defendant Rockwell International purchased $35,000,000 of Collins' convertible preferred stock and obtained the right to elect a majority of the Collins Board of Directors. Rockwell soon exercised this right of control, electing Robert C. Wilson, also a Rockwell Director, as President and Chief Executive Officer of Collins.

In August 1973, Rockwell made a tender offer of $25.00 per share for all of the outstanding common stock of Collins and indicated its intent, if the offer succeeded, to merge Collins into Rockwell. By October 1, 1973, Rockwell had acquired approximately 75 percent of the outstanding common stock of Collins, which enabled it to effect a short-form merger upon the non-tendering minority shareholders of Collins. The Collins-Rockwell Agreement and Plan of Merger provided that each holder of Collins stock (other than Rockwell) would receive a cash payment of $25 per share, producing a "cash merger."

The 1967 Collins 47/8% Convertible Subordinated Debentures are at the heart of this lawsuit. The debentures entitled the holders to convert into Collins common stock at a prescribed ratio. Rockwell took, and stands by, the position that under the debenture indenture agreement and as a result In connection with the planned merger, Rockwell had its regular counsel review all of the agreements relating to Collins' outstanding debt and sought advice of counsel as to Rockwell's obligation under those agreements.

of the merger Rockwell and Collins were required to execute a supplemental indenture which would entitle the debentureholders to convert into the same thing which the holders of Collins common stock received in the merger. In other words, the stockholders received cash, hence the debentureholders had the right to convert into cash, but only cash. To put it succinctly, the debentureholders could not convert to stock in the merged corporation even though the original debenture agreement of 1967 had language which could be construed as providing for it.

Counsel advised Rockwell that a debentureholder "would have the right . . . 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," that no further conversion right was required. Rockwell received essentially the same advice from counsel for Collins.

The Trust Company, as trustee, engaged outside counsel to advise it in connection with the merger and any supplemental debenture. John Campbell and John Marden, partners in the outside law firm, reviewed the documents. They concluded (in September 1973) that at the time the 1967 debenture contract was executed the intent of the parties was that the right to convert into common stock would survive a merger and would remain as a right of conversion into securities of the surviving corporation as long as the debentures remained outstanding. Since Rockwell should assume upon the merger the same obligations to the Collins debentureholders as Collins had prior to the merger, Rockwell would be bound to agree to an amendment providing that the debentures were convertible until 1987. According to Campbell & Marden's preliminary analysis, without the consent of each debentureholder Rockwell could not alter or impair the right to convert into common stock. Finally, these attorneys concluded that Rockwell's control of Collins imposed upon Rockwell and the directors of Collins a fiduciary obligation to the debentureholders. Campbell and Marden informed United States Trust of their initial opinion and also informed Rockwell's counsel of their general views. According to Campbell's deposition testimony, he subsequently changed his mind and accepted the analysis enunciated by Rockwell's counsel. 1 A formal opinion, concurring in the opinion offered by Rockwell and Collins counsel, was delivered on November 14, 1973.

However, on September 18, 1973, Campbell had advised the Trust Company that it had four alternative courses of action if Rockwell refused to assume the equity conversion rights after the merger: (1) the Trust Company could decline to execute a supplemental indenture unless it provided for a right to convert into Rockwell shares; or (2) the Trust Company, as a policy decision, could take no position as to the rights of the Collins debentureholders, then obtain a special and total indemnification from Rockwell for staying out of the controversy; or (3) the Trust Company could resign as indenture trustee; or (4) the Trust Company could seek a declaratory judgment with respect to the conversion rights. Campbell recommended Alternative 2, the course that was ultimately followed.

On October 11, 1973, Rockwell notified the debentureholders of the proposed merger and informed them that Rockwell and the Trust Company intended to execute a Supplemental Indenture which would provide for the assumption by Rockwell of the

due and punctual performance and observance by Rockwell of all the terms The letter further informed the debentureholders that conversion provisions provided that the holders

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.

would have the right . . . to convert 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 letter then calculated that after the merger, a $1000 debenture would be convertible into $344.75 cash.

Another paragraph stated that 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 hereto.

Rockwell's letter precipitated letters from anxious debentureholders, inquiring about the status of their conversion rights. Rockwell responded with a form letter stating that Rockwell and Collins were relying upon the opinions of their counsel, but refused requests for copies of those opinions. The Trust Company likewise declined to furnish counsel's opinions to the debentureholders.

On November 14, 1973, Rockwell consummated the cash merger which had been announced on October 11, 1973. Pursuant to the terms of the merger agreement, a supplemental indenture was executed by Rockwell and the Trust Company as of November 1. Rockwell was substituted for Collins, and the conversion provisions were amended to allow each debentureholder to convert into cash.

II Procedural Background

Plaintiffs, representing a class consisting of all holders of the debentures on the date of the merger, challenged defendants' actions with respect to the conversion provisions. Plaintiff contends that by the terms of the indenture the right to convert into Collins common stock survived the merger and that the debentureholders should be able to convert into the common stock of Collins' successor, Rockwell. Defendants deny any right to convert into Rockwell common stock, asserting that the right to convert into cash provided by the Supplemental Indenture satisfies the conversion terms of the original indenture.

Plaintiff debentureholders sued Rockwell, Collins, the control persons of both, and the Trust Company, seeking on behalf of the class either (a) restoration of the option to convert into common stock, (b) a judgment for the redemption price, or (c) acceleration of the obligation to pay the $1000 face amount of each debenture. They alleged (1) violations of § 10(b) of the Securities Exchange Act of 1934, as amended (15 U.S.C. § 78j(b)), and rule 10b-5 promulgated thereunder (17 C.F.R. § 240.10b-5); (2) employment of deception, scheme or artifice to defraud; and (3) engaging in a practice or course of business which operates as a fraud. They contend that the defendants breached fiduciary duties owed to the plaintiffs and that defendants breached the debenture contract.

At the close of plaintiffs' case on the third day of trial, defendants moved for a directed verdict. The...

To continue reading

Request your trial
35 cases
  • In re North Am. Acceptance Corp. Securities Cases
    • United States
    • U.S. District Court — Northern District of Georgia
    • March 30, 1981
    ...plaintiffs must show that defendants intentionally or recklessly failed to disclose material information." Broad v. Rockwell International Corp., 614 F.2d 418, 440 (5th Cir. 1980) (emphasis added). The court also noted, however, that proof of recklessness would require a showing that the de......
  • Kirkland v. EF Hutton and Co., Inc.
    • United States
    • U.S. District Court — Western District of Michigan
    • March 4, 1983
    ...does not automatically result in a violation of the antifraud provisions of the federal securities laws. See Broad v. Rockwell International Corp., 614 F.2d 418 (5th Cir.1980), cert. denied, 454 U.S. 965, 102 S.Ct. 506, 70 L.Ed.2d 380 (1981); Fenstermacher v. Philadelphia National Bank, 493......
  • Huddleston v. Herman & MacLean
    • United States
    • United States Courts of Appeals. United States Court of Appeals (5th Circuit)
    • March 9, 1981
    ...reckless behavior is sufficient to establish scienter is presently uncertain because the panel decision in Broad v. Rockwell International Corp., 614 F.2d 418 (5th Cir. 1980), was vacated by the granting of a rehearing en banc in that case, 618 F.2d 396 (5th Cir. 1980). See Dwoskin v. Rolli......
  • G. A. Thompson & Co., Inc. v. Partridge
    • United States
    • United States Courts of Appeals. United States Court of Appeals (5th Circuit)
    • February 9, 1981
    ...not argue that a knowing misrepresentation would not constitute scienter. 32 We are aware that Croy relied on Broad v. Rockwell International Corp., 614 F.2d 418 (5th Cir. 1980), rehearing en banc granted, 618 F.2d 396 (5th Cir. 1980), a vacated case. See Dwoskin v. Rollins, Inc., No. 78-36......
  • Request a trial to view additional results
7 books & journal articles
  • SECURITIES FRAUD
    • United States
    • American Criminal Law Review No. 58-3, July 2021
    • July 1, 2021
    ...“sale” under the 1933 Act), with 15 U.S.C. § 78c(a)(14) (def‌ining “sale” under the 1934 Act). 214. Compare Broad v. Rockwell Int’l Corp., 614 F.2d 418, 437–38 (5th Cir. 1980) (omitting consideration from the factors used to analyze the “purchase or sale” requirement under the 1934 Act), Mi......
  • Securities fraud.
    • United States
    • American Criminal Law Review Vol. 42 No. 2, March 2005
    • March 22, 2005
    ...but did not directly pertain to securities, and finding not actionable under Rule 10b-5). (233.) See Broad v. Rockwell Int'l Corp., 614 F.2d 418, 437-38 (5th Cir. 1980) (omitting consideration from factors used to analyze "purchase or sale" requirement); Int'l Controls Corp. v. Vesco, 490 F......
  • Securities fraud.
    • United States
    • American Criminal Law Review Vol. 44 No. 2, March 2007
    • March 22, 2007
    ...securities, and finding not actionable under Rule 10b-5). (148.) 15 U.S.C. [section] 77b(a)(3). (149.) See Broad v. Rockwell Int'l Corp., 614 F.2d 418, 437-38 (5th Cir. 1980) (omitting consideration from factors used to analyze "purchase or sale" requirement); Int'l Controls Corp. v. Vesco,......
  • Securities fraud.
    • United States
    • American Criminal Law Review Vol. 46 No. 2, March 2009
    • March 22, 2009
    ...Act), with 15 U.S.C. [section] 78c(a)(14) (2006) (defining "security" under the 1934 Act). (148.) Compare Broad v. Rockwell Int'l Corp., 614 F.2d 418, 437-38 (5th Cir. 1980) (omitting consideration from factors used to analyze "purchase or sale" requirement under the 1934 Act), Miller v. Sa......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT