Pittsburgh Terminal Corp. v. Baltimore & Ohio R. Co.
| Decision Date | 03 June 1982 |
| Docket Number | 81-1675,Nos. 81-1674,s. 81-1674 |
| Citation | 680 F.2d 933 |
| Parties | Fed. Sec. L. Rep. P 98,706 PITTSBURGH TERMINAL CORPORATION, Appellant, v. The BALTIMORE AND OHIO RAILROAD COMPANY, W. James Price, Alonzo G. Decker, Jr., James Parker Nolan, Frederick Deane, Jr., James L. O'Keefe, Gregory S. Devine, Fay A. Le Favre, Nicholas T. Camicia, Dr. Milton S. Eisenhower, Steven Muller, John K. Stevenson, Hays T. Watkins, Howard E. Simpson and Cyrus S. Eaton, all Directors or former Directors of The Baltimore and Ohio Railroad, The Chesapeake and Ohio Railroad and/or the Chessie System, The Chesapeake and Ohio Railway Company and Chessie System, Inc. Monroe GUTTMANN, Loretta Guttmann, Janet Rees and Evelyn Bittner, Appellants, v. The BALTIMORE AND OHIO RAILROAD COMPANY, W. James Price, Alonzo G. Decker, Jr., James Parker Nolan, Frederick Deane, Jr., James L. O'Keefe, Gregory S. Devine, Fay A. Le Fevre, Nicholas T. Camicia, Dr. Milton S. Eisenhower, Steven Muller, John K. Stevenson, Hays T. Watkins, Howard E. Simpson and Cyrus S. Eaton, all Directors or former Directors of The Baltimore and Ohio Railroad, The Chesapeake and Ohio Railroad and/or the Chessie System, the Chesapeake and Ohio Railway Company and Chessie System, Inc. |
| Court | U.S. Court of Appeals — Third Circuit |
Michael P. Malakoff (argued), Berger, Kapetan, Malakoff & Meyers, P. C., Pittsburgh, Pa., for appellants, Pittsburgh Terminal Corp. and Monroe Guttmann, Loretta Guttmann, Janet Rees and Evelyn Bittner.
Richard T. Wentley (argued), Anthony J. Basinski, Reed, Smith, Shaw & McClay, Pittsburgh, Pa., for appellees, The Baltimore & O. R. Co., The Chesapeake & O. R. Co. and Chessie System, Inc.
John J. Repcheck (argued), Gary F. Sharlock, David P. Helwig, Sharlock, Repcheck, Engel & Mahler, Pittsburgh, Pa., for appellees, W. James Price, Alonzo G. Decker, Jr., James Parker Nolan, Frederick Deane, Jr., James L. O'Keefe, Gregory S. Devine, Fay A. Le Fevre, Nicholas T. Camicia, Dr. Milton S. Eisenhower, Steven Muller, John K. Stevenson, Hays T. Watkins, Howard E. Simpson and Cyrus S. Eaton.
Ralph C. Ferrara, Gen. Counsel, Jacob H. Stillman, Associate Gen. Counsel, Gilbert Miller, Atty. Fellow, S. Lee Terry, Jr., Atty., Securities and Exchange Com'n, Washington, D. C., for amicus curiae, Securities and Exchange Commission; Paul Gonson, Sol., Securities and Exchange Com'n, Washington, D. C., of counsel.
Before ADAMS, GIBBONS and GARTH, Circuit Judges.
OPINION ANNOUNCING THE JUDGMENT OF THE COURT
Pittsburgh Terminal Corporation, Monroe Guttmann, Loretta Guttmann, Evelyn Bittner and Janet Rees (the Bondholders), holders, prior to December 13, 1977, of convertible debentures issued by The Baltimore and Ohio Railroad Company (B & O), appeal from a final judgment dismissing their complaint, which charged that a dividend by the B & O on that date of stock of Mid-Allegheny Corporation (MAC) to B & O stockholders of record on that date violated the federal securities laws and the laws of several states. The defendants are B & O, a Maryland corporation, The Chesapeake & Ohio Railway Company (C & O), a Virginia corporation which on December 13, 1977, owned more than 99% of B & O's common stock, Chessie System, Inc. (Chessie), a Virginia corporation which is a holding company for C & O and its subsidiaries, and fourteen present or former directors of B & O. The convertible debentures owned by the Bondholders are B & O Series A, dated January 1, 1956 and maturing January 1, 2010, paying interest at 4.5%, and convertible at any time before maturity into 10 shares of B & O common stock for each $1000 of face value. The action of which the Bondholders complain is the action of the defendants in fixing December 13, 1977, as both the date of declaration of, and the record date for participation in, the in kind dividend of MAC stock to B & O common stockholders. That action deprived debenture holders of the opportunity to convert before the record date and thereby participate in the dividend. The District Court held that it violated no legally protected rights of the debenture holders. 1 We reverse.
B & O owns and operates a railroad regulated by the Interstate Commerce Commission (ICC). Prior to the transactions giving rise to this lawsuit, B & O also owned substantial non-rail assets such as real estate, timber and mineral reserves. At one time both its common stock and its debentures were traded on the New York Stock Exchange (NYSE). When C & O acquired 99.63% of B & O's common stock, trading in that security ceased and it was delisted, although 13 individuals still held some shares. The NYSE listing of B & O's convertible debentures continued. No dividends were paid on the B & O common stock after 1961. Thus the holders of convertible debentures had no particular incentive to exercise the conversion privilege unless the no dividend policy were to change.
Because the regulations of the ICC prohibited a railroad corporation from engaging in non-rail business, B & O's and C & O's assets not used in rail transportation remained undeveloped. Beginning in 1973 when Chessie was formed, C & O began segregating its non-rail assets in a separate corporation, Chessie Resources, Inc., so that they could be developed free of constraints imposed by the ICC. The Chessie management desired to accomplish the same result with respect to B & O's non-rail assets. To that end, in January of 1977, the Chessie Corporation Restructuring Committee settled on a plan whereby the B & O would transfer those assets to MAC, a wholly owned B & O subsidiary, and then distribute the MAC stock as a dividend to B & O's fourteen common stockholders.
If, prior to the dividend in MAC stock, the number of B & O common stockholders were to increase substantially, B & O might have had to file a registration statement for MAC with the Securities and Exchange Commission (SEC). 15 U.S.C. § 77f (1976). There were practical difficulties with the preparation of a registration statement, especially that of placing a value on B & O's non-rail assets. But if notice of the MAC transaction had been given to the convertible debenture holders prior to the record date of the in kind dividend, many of them might have elected to convert. Thus the Restructuring Committee concluded that the MAC transaction should be structured in such a way that the convertible debenture holders would not have such notice until after the record date. This, it was thought, would permit counsel for B & O to obtain from the SEC a no-action letter with respect to registration of the MAC stock.
At the time the MAC transaction was under consideration, B & O had outstanding bond obligations under three trust indentures. One of these, a Convertible Income Bond Debenture, contained a provision requiring B & O to pay into a surplus income sinking fund an amount equal to any dividend. A second, the Refunding and General Mortgage Indenture, required that arrearages in the sinking funds had to be made up before a dividend could be paid. It was these provisions which had prevented B & O from paying dividends since 1961. The third Indenture was that governing the convertible debentures held by the Bondholders. In order to facilitate the dividend in MAC stock, B & O called for redemption the Convertible Income Bonds, and discharged the sinking fund arrearages on the Refunding and General Mortgage Indenture by paying the sinking funds approximately $7,000,000. These steps were accomplished by the summer of 1977. The Restructuring Committee then turned to the Indenture for the convertible debentures.
The convertible debentures also contained a redemption feature which in 1977 called for payment of a premium of 2.5% of their face amount. (344a). B & O did not elect to redeem. Conversion privilege features of the indenture oblige B & O to reserve sufficient common stock and to adjust for changes in par value. (350a). Conversion rights to the bondholders are protected in the event of merger or sale. (354a). Article V, Section 12 of the Indenture provides:
SECTION 12. 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. A copy of each such published notice shall promptly after such publication be filed with the Trustee.
(357a). When the convertible debentures were issued in 1956, B & O entered into a listing agreement with the NYSE relating to them, which incorporated by reference B & O's earlier listing agreements. Listing Agreement A-12653 for an earlier bond issue, incorporated by reference in that for the 1956 convertible debenture issue, provides:
4. The Corporation will give the Exchange at least ten days' notice in advance of the closing of the transfer books, or of the taking of a record of its stockholders for any purpose.
5. The Corporation will publish promptly to the holders of any of its securities listed on the Exchange any action taken by the Corporation with respect to dividends or to the allotment of rights to subscribe or to any rights or benefits pertaining to the ownership of its securities listed on the Exchange; and shall give prompt notice to the Exchange of any such action; and shall afford the holders of its securities listed on the Exchange a proper period within which to record their interests and to exercise their rights; and shall issue all such rights in form approved by the Exchange and will make the same transferable, payable and deliverable in the Borough of Manhattan, in the City of New York.
(455a). In addition to the Listing Agreements, the B & O is bound by the Rules...
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