Van Gemert v. Boeing Co.
| Decision Date | 14 July 1975 |
| Docket Number | D,Nos. 321-325,s. 321-325 |
| Citation | 520 F.2d 1373 |
| Parties | Fed. Sec. L. Rep. P 95,234 William R. VAN GEMERT et al., Appellants, v. The BOEING CO. et al., Appellees. ockets 74-1157 to 74-1159, 74-1165 and 74-1185. |
| Court | U.S. Court of Appeals — Second Circuit |
Stuart D. Wechsler, Kass, Goodkind, Wechsler & Gerstein, New York City, Sachnoff, Schrager, Jones & Weaver, Ltd., Elson, Lassers & Wolff, Chicago, Ill., for appellants.
Norman Winer, Nathan, Mannheimer, Asche, Winer & Friedman, New York City, for appellants.
S. Hazard Gillespie, Davis, Polk & Wardwell, New York City (David E. Wagoner, Perkins, Coie, Stone, Olsen & Williams, Seattle, Wash., William H. Levit, Jr., Hughes, Hubbard & Reed, Los Angeles, Cal., of counsel), for appellees.
Before LUMBARD, OAKES and TIMBERS, Circuit Judges.
This appeal is from a judgment dismissing the amended complaint in a consolidation class action brought by nonconverting holders of The Boeing Company's "41/2% Convertible Subordinated Debentures, due July 1, 1980." The complaint was jurisdictionally based on the Securities Exchange Act of 1934 as amended, the Securities Act of 1933 as amended, the Trust Indenture Act of 1939 as amended and the principles of pendent jurisdiction. 1 The gist of the complaint was that the appellants and their class had inadequate and unreasonable notice of Boeing's intention to redeem or "call" the convertible debentures in question and were hence unable to exercise their conversion rights before the deadline in the call of midnight, March 29, 1966. Their damage lay in the fact that the redemption price for each $100 of principal amount of debentures was only $103.25, while under the conversion rate of, at a minimum, two shares of common stock for each $100 of principal amount of debentures, the stock was worth $316.25 on March 29, 1966, the cut-off date for the exercise of conversion privileges, or within 30 days The United States District Court for the Southern District of New York, Sylvester J. Ryan, Judge, held that Boeing complied with the notice provisions spelled out in the debentures and in the Indenture of Trust Dated July 1, 1958 (the Indenture), between Boeing and The Chase Manhattan Bank (Chase), Trustee, and that it was required to do no more; that the Trust Indenture Act of 1939, 15 U.S.C. §§ 77aaa et seq., was not violated; that if Boeing's Listing Agreement with the New York Stock Exchange (NYSE) were violated, it gave appellants no claim for relief; and that even if, as appellants claim, an adjustment in the conversion rate were required, and that failure to make the adjustment gave rise to a cause of action, appellants had no standing to raise the claim since they did not exercise their conversion rights. We reverse and remand on the ground that there was an obligation on Boeing's part to give reasonably adequate notice of the redemption to the debenture holders, which obligation was not fulfilled in this instance.
thereafter, $364.00. The named appellants number 56, and the total loss alleged is over $2 million.
Most of the facts are not in dispute; indeed, we commend the parties, and the court below, for agreeing to a 59-page statement as to facts, incorporating some 55 exhibits, and to what certain witnesses would testify if called at trial.
On July 15, 1958, each Boeing shareholder was given the right to purchase $100 of convertible debentures for each 23 shares of stock then held. 2 The debentures were to pay interest of 41/2 per cent per annum and were to be convertible by the debenture-holder into common stock at a rate (subject to adjustment) of two shares per $100 principal amount of debentures. Chase was appointed trustee under the Indenture Agreement, and the debentures, as well as the stock reserved for issuance upon conversion of the debentures, were listed on the NYSE. Application for such listing had been made pursuant to a Listing Agreement between Boeing and the Exchange.
Subscriptions for a total of $29,578,500 of debentures were received 3 and the balance of $1,019,100 was purchased by the underwriters. Chase as trustee then authenticated and the subscription agent delivered by registered mail the entire $30,597,600 aggregate amount of debentures in coupon form to the persons designated in the warrants surrendered or their agents, 4 but no list of these was kept by Boeing or Chase. 5
A number of provisions in the debenture, the Indenture Agreement, the prospectus, the registration statement for the debentures and the Listing Agreement with the NYSE dealt with the possible redemption of the debentures by Boeing and the notice debenture-holders were to receive of a redemption call so that they might timely exercise their right to convert the debentures into common stock rather than have their debentures redeemed at face value. The debentures themselves provided The holder of this Debenture is entitled, at his option, at any time on or before July 1, 1980, or in case this Debenture shall be called for redemption prior to such date, up to and including but not after the tenth day prior to the redemption date, to convert this Debenture . . . at the principal amount hereof, or such portion hereof, into shares of Capital Stock of the Company . . .
The Debentures are subject to redemption as a whole or in part, at any time or times, at the option of the Company, on not less than 30 nor more than 90 days' prior notice, as provided in the Indenture, at the following redemption prices (expressed in percentages of the principal amount) . . .
This Debenture may be registered as to principal upon presentation at the office or agency of the Company, in the Borough of Manhattan, The City of New York, New York, . . .
(Emphasis added.)
The Indenture itself, a 113-page printed booklet, provides in Art. V, § 5.02, as follows:
In case the Company shall desire to exercise the right to redeem all or any part of the debentures, as the case may be, pursuant to Section 5.01, it shall publish prior to the date fixed for redemption a notice of such redemption at least twice in an Authorized Newspaper, the first such publication to be not less than 30 days and not more than 90 days before the date fixed for redemption. Such publication shall be in successive weeks but on any day of the week. . . . 6
The Indenture also provided that debenture-holders who registered their bonds would receive notice by mail of any redemption call by the Boeing directors.
While the prospectus for the debenture issue did not refer to any registration rights, it did state that redemption could occur "on not less than 30 days' and not more than 90 days' published notice."
The NYSE Listing Agreement dated November 5, 1957, incorporated by reference into the listing application filed by Boeing in respect to the debenture issue, provided in Part III, Paragraph 4, as follows:
4. The Corporation will publish immediately 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 will give prompt notice to the Exchange of any such action; and will afford the holders of its securities listed on the Exchange a proper period within which to record their interests and to exercise their rights. . . .
(Emphasis added.)
Section A10 of the NYSE "Company Manual" specifically defines what is meant by publicity in the Listing Agreement:
Publicity: The term "publicity," as used . . . below, and as used in the listing agreement in respect of redemption action, refers to a general news release, and not to the formal notice or advertisement of redemption sometimes required by provisions of an indenture or charter.
Such news release shall be made as soon as possible after corporate action which will lead to, or which looks toward, redemption is taken . . . and shall be made by the fastest available means, i. e., telephone, telegraph or hand-delivery.
To insure coverage which will adequately inform the public, the news should be released to at least one or Section A10 of the Company Manual also provides specifically that when a convertible security is to be redeemed, the news release must include the rate of conversion and the date and time when the conversion privilege expires. It further provides that in addition to the immediate news release the company must give notice immediately to the NYSE itself, so as to enable the NYSE to take any necessary action with respect to further trading in the security.
more newspapers of general circulation in New York City which regularly publish financial news, or to one or more of the national news-wire services (Associated Press, United Press International), in addition to such other release as the company may elect to make.
On February 28, 1966, the Boeing board of directors inter alia authorized the president, vice president-finance or treasurer to call for redemption on a date to be selected by them or any one of them, all of the convertible debentures outstanding under the indenture of July 1, 1958. That same day a news release, headlining 1965 sales and net earnings, and referring to a contemplated stock increase, stock split and post-split dividends, mentioned that "(t)he company's management was also authorized to call for redemption at a future date all of the company's outstanding 41/2 percent convertible subordinated debentures." This statement, which did not mention even the tentative dates for redemption and expiration of the conversion rights of debenture holders that had been settled upon, was released by the Boeing "News Bureau" nationally to the financial editors of the New York Times, the New York Herald-Tribune, the Wall Street Journal and other major...
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