Broad v. Rockwell Intern. Corp.

• Decision Date: 17 April 1981
• Docket Number: No. 77-2963,77-2963
• Citation: 642 F.2d 929
• Parties: Fed. Sec. L. Rep. P 97,956 David BROAD et al., Plaintiffs-Appellants, v. ROCKWELL INTERNATIONAL CORPORATION et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 929

642 F.2d 929

Fed. Sec. L. Rep. P 97,956

David BROAD et al., Plaintiffs-Appellants, v. ROCKWELL INTERNATIONAL CORPORATION et al., Defendants-Appellees.

No. 77-2963.

United States Court of Appeals Fifth Circuit.

April 17, 1981.

Henderson, Circuit Judge, concurred in part and dissented in part and filed opinion.

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

Ernest E. Figari, Jr., Johnson, Swanson & Barbee, Dallas, Tex., Donald I. Strauber, Edwin D. Scott, Terry A. Thompson, John J. Kallaugher, Chadbourne, Parker, Whiteside & Wolff, New York City, for Rockwell Intern. Corp., Collins Radio Co., Anderson, Bateman, Booth, Willard F. Rockwell, Jr., Roodhouse, Beall, Cattoi, Fulgham, Martin, Erickson, Drick and Raff.

William B. West, III, Clark, West, Keller, Butler & Ellis, Dallas, Tex., for U. S. Trust Co. of New York.

John F. Egan, Curtis, Maller-Prevost, Colt & Mosle, New York City, for U. S. Trust Co. of New York.

Terry Thompson, Edwin D. Scott, New York City, for William C. Hubbard.

James K. Manning, Brown, Wood, Ivey, Mitchell & Petty, New York City, for Brown, Wood, Ivey, Mitchell & Petty.

William J. Fitzpatrick, Atty., New York City, for Securities Industry Assoc.

Stanley T. Kaleczyc, Jr., National Chamber Litigation Center, Inc., Washington, D. C., for Chamber of Commerce of U. S. A.

Leonard Joseph, Dewey, Ballentine, Bushby, Palmer & Wood, New York City, for Donaldson, Lufkin & Jenrett, Inc., et al.

William H. Smith, American Bankers Assoc., Washington, D. C., for American Bankers Assoc.

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

Before GODBOLD, Chief Judge, BROWN, COLEMAN, AINSWORTH, CHARLES CLARK, RONEY, GEE, TJOFLAT, HILL, FAY, RUBIN, VANCE, KRAVITCH, FRANK M. JOHNSON, Jr., GARZA, HENDERSON, REAVLEY, POLITZ, HATCHETT, ANDERSON, RANDALL, TATE, SAM D. JOHNSON, THOMAS A. CLARK, and WILLIAMS, Circuit Judges.

RANDALL, Circuit Judge:

This case, which is before us for rehearing en banc, turns on the construction of an indenture dated as of January 1, 1967 (the "Indenture"). The original parties to the Indenture were Collins Radio Company, an Iowa corporation ("Collins"), and The Chase Manhattan Bank (National Association), a national banking association ("Chase"). The Indenture governed the terms of $40,000,000 principal amount of 4 7/8 Convertible Subordinated Debentures due January 1, 1987 (the "Debentures"), which were issued by Collins in January 1967. By means of a supplemental indenture executed in May 1970, United States Trust Company of New York, a New York corporation (the "Trust Company"), succeeded Chase as Trustee under the Indenture.

The events that triggered this lawsuit occurred in the fall of 1973, when Rockwell International Corporation, a Delaware corporation ("Rockwell"), acquired Collins in a cash merger. The central question in the case is this: In what form did the conversion rights of the holders of the Debentures survive the merger under the terms of the Indenture?

David Broad brought this class action on behalf of himself and all others who at the time of the merger were holders of the Debentures. He sued Rockwell, Collins, the controlling persons of both, ¹ and the Trust Company, alleging that the defendants breached the terms of the Indenture, breached their respective fiduciary duties, and violated various provisions of the federal securities laws. The district court granted a directed verdict in favor of the defendants at the close of Broad's case-in-chief, holding that (1) the defendants' interpretation of the Indenture and their actions in accord with that interpretation were correct and nonactionable as a matter of state law, and (2) for a number of reasons, no reasonable jury could have found violations of the federal securities laws based on the evidence Broad had adduced at trial. A panel of this court affirmed as to the directed verdict on the federal securities counts, but reversed and remanded on the pendent state-law claims; a majority of the full court, however, vacated the panel's decision under Fifth Circuit Local Rule 17 and ordered that the appeal be reheard en banc. Broad v. Rockwell International Corp., 614 F.2d 418, vacated and rehearing en banc granted, 618 F.2d 396 (5th Cir. 1980).

On rehearing en banc, we agree with the panel that the district court acted properly in directing a verdict on the federal securities claims, although we reach that conclusion on narrower grounds than those relied upon by the panel. We disagree, however, with the panel's construction of the Indenture, and hold instead that the district court properly construed that document's provisions. Accordingly, for the reasons set out herein, we affirm the judgment of the district court.

I. EVENTS LEADING TO THIS APPEAL

A. The Factual Background to This Litigation

In reviewing the trial court's grant of a directed verdict at the close of Broad's case-in-chief, we use the familiar standard articulated in Boeing Co. v. Shipman, 411 F.2d 365 (5th Cir. 1969) (en banc). ² Viewed in the light most favorable to Broad, the following is a general outline of the relevant facts adduced prior to the directed verdict; more detail is provided as necessary throughout the opinion. ³

In January 1967, Collins issued and sold to the public $40,000,000 aggregate principal amount of Debentures. The Debentures bore interest at the rate of 4 7/8% per year and matured on January 1, 1987, unless sooner redeemed by Collins. They were convertible, at the option of the holders thereof, into the common stock of Collins ("Collins Common Stock"), which had a par value of $1 per share. The Debentures were offered to the public through an underwriting syndicate managed by two New York investment banking firms Kidder, Peabody & Co. Incorporated and White, Weld & Co.

At the time the Debentures were marketed in 1967, Collins was a prosperous enterprise chiefly engaged in the development and production of radio communications and aircraft navigation equipment. The proceeds of the public offering, like the proceeds of previous offerings of debentures by Collins in the 1960s, were to be used to finance capital additions and to increase working capital for the expansion of Collins' business. During the period immediately before the offering of the Debentures, Collins Common Stock had traded on the New York Stock Exchange for approximately $60 per share. If a holder of Debentures were to choose to exercise his conversion privilege, Collins would issue to him, in exchange for his Debentures, one share of Collins Common Stock for every $72.50 principal amount of Debentures. This meant that conversion might become economically attractive if the market price of Collins Common Stock rose more than $12.50 over its market price of $60 per share at the time of the offering of the Debentures.

Beginning in its 1969 fiscal year, however, Collins suffered a series of economic reversals, manifested by declining sales and reduced income. In the midst of a generally declining stock market, Collins' fading fortunes did not go unnoticed: during the 1971 calendar year, Collins Common Stock never traded on the New York Stock Exchange at more than $21 per share, and in the fourth quarter of that year it was selling for as little as $9.75 per share. Collins was on the verge of bankruptcy. It was at that point, however, that Collins became affiliated with Rockwell.

In August 1971, Collins shareholders overwhelmingly approved the terms of an agreement by which Rockwell invested $35,000,000 in Collins, receiving in return two new series of Collins securities: preferred stock that was convertible into Collins class A common stock, and warrants to purchase additional class A common stock. As sole holder of the new issue of preferred stock, Rockwell also received, and soon exercised, the right to elect a majority of Collins' board of directors. In addition to the $35,000,000 investment, Rockwell provided some managerial assistance to Collins and guaranteed up to $20,000,000 in borrowings by MCI Leasing, Inc., a customer of Collins, so that MCI could order up to $33,000,000 worth of equipment from Collins. Rockwell indicated that while it did not, as of July 1971, propose that there be a merger between the two companies, it would not rule out the possibility that future events might make such a proposal attractive to it.

By 1973 such a proposal had evidently become attractive. In August of that year, Rockwell made a tender offer for Collins Common Stock, offering the shareholders $25 cash per share tendered. As part of the offer, Rockwell disclosed that if the offer were successful, it intended to propose a merger of Collins into Rockwell at that same figure of $25 per share. The tender offer was successful, and by October 1, 1973, Rockwell had acquired approximately 75% of the outstanding Collins Common Stock.

In accordance with the intentions it had stated prior to the tender offer, Rockwell with Collins duly entered into an Agreement and Plan of Merger dated as of October 8, 1973 (the "Merger Plan"), which provided that on the effective date of the merger, each holder of Collins Common Stock (other than Rockwell itself, of course) would receive $25 per share in cash upon surrender of the certificates evidencing such stock. Under Iowa law (which was applicable because Collins was an Iowa corporation), the approval of a majority of the Collins board of directors and of the holders of two-thirds of the outstanding shares of each class of Collins stock was required for a merger. As a result of the tender offer, Rockwell itself controlled more than two-thirds of the outstanding Collins Common Stock; but it did not hold the 90% needed under Iowa law to effect a "short-form" merger in which no vote of the shareholders would be necessary. As a result, a vote of the Collins shareholders was...