Stephenson v. Plastics Corp. of America

150 N.W.2d 668 (1967)

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Stephenson v. Plastics Corp. of America

Minnesota Supreme Court
150 N.W.2d 668 (1967)

Facts

Plastics Corporation of America, Inc. (Plastics) (defendant) issued stock-purchase warrants that gave each holder the option to purchase 30,000 shares of Plastics stock at a per-share price of $1 for a period of five years. The warrant agreements attempted to anticipate and provide for various corporate changes that might occur, including noncash-dividend distributions and capital reorganizations. In the event of a reorganization, Plastics was obligated to reserve a sufficient number of shares to provide for the exercise of options by the warrant holders. Plastics undertook a spin-off transaction in which it transferred part of its assets to a newly created corporation, United Fabricators and Electronics, Inc. (United) (defendant), which in turn transferred all its stock to Plastics. The United stock was then distributed to holders of Plastics stock—one share of the former for every two shares of the latter. Three of the seven directors of Plastics resigned and became the directors of United; the other four remained in control of Plastics. The United stock acquired by the four Plastics directors was exchanged for the three United directors’ Plastics stock. Warrant holders were given notice of the transaction, including a deadline to exercise their options and become eligible for the United stock distribution. However, the spin-off agreement made no reservation of shares to accommodate the exercise of the warrant holders’ options within the five-year period. A group of warrant holders (plaintiffs) brought suit for breach of contract, alleging that they were entitled to both the 30,000 shares of Plastics stock as specified in the warrants and the United stock that they would have been eligible to receive had they held the Plastics stock at the time of the distribution. United countered that the spin-off was not a capital reorganization as contemplated by the warrants, but more in the nature of a noncash dividend. Plastics also cross-claimed for indemnity against United. Both Plastics and United moved for judgment on the pleadings. The trial court granted the motion for United, but not for Plastics. The warrant holders appealed. The Minnesota Supreme Court granted certiorari.

Rule of Law

Issue

Holding and Reasoning (Sheran, J.)

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