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Broad v. Rockwell International Corp.
United States Court of Appeals for the Fifth Circuit
642 F.2d 929 (1981)
Collins Radio Co. (Collins) (defendant) issued and sold interest-bearing debentures with an aggregate principal of $40 million. Each debenture was convertible to Collins common stock at an exchange rate of one share of stock per $72.50 in debenture principal. The indenture provided that in the event of a merger, the surviving entity would assume Collins’s obligations with respect to the indenture and execute a supplemental indenture. The merger provision also stated that the Collins debenture holders would be entitled to convert their outstanding debentures to whatever the debenture holders would have received had they exercised their conversion rights immediately prior to the merger. At the date of issuance, the common stock was trading at $60 per share. But Collins’s financial fortunes declined, and the stock fell to as low as $9.75 per share. Rockwell International Corp. (Rockwell) (defendant) acquired Collins in a cash merger in which holders of Collins common stock tendered their shares or were bought out for $25 per share, after which the stock ceased to exist. As the surviving entity, Rockwell duly executed a supplemental indenture outlining the debenture holders’ right to exchange their debentures for cash at a conversion value of $25 per share of the Collins common stock at the exchange rate of $72.50 in principal—the same price to which the debenture holders would have been entitled in a pre-merger conversion. David Broad (plaintiff) brought a breach-of-contract claim against Rockwell; Collins; controlling parties of both entities (defendants); and the indenture trustee, the United States Trust Company of New York (defendant). Broad argued that the debentures’ conversion feature had been arbitrarily liquidated without compensation or permission. The court granted a directed verdict in favor of Rockwell and the associated parties. Broad appealed. The United States Court of Appeals for the Fifth Circuit granted certiorari.
Rule of Law
Holding and Reasoning (Randall, J.)
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