Fed. Sec. L. Rep. P 97,956 David Broad v. Rockwell International Corporation

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.

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 taken on November 2, 1973, and the Merger Plan was approved by the vote of the holders of approximately 84.5% of the Collins Common Stock. The merger was effected on November 14, 1973, and from that date until the present Collins has operated only as an internal division of Rockwell.

These events, of course, were not without effect upon the Debentures. After they were first offered to the public in 1967, Debentures in the principal amount of $1000 at times traded at almost $60 above face value. Later, however, as Collins' business fortunes diminished and the price of Collins Common Stock slumped dramatically, the market price of the Debentures fell as well. The only class member to testify at trial, William E. Barnes, testified that from 1969 through August 1973 he invested $194,000 in Debentures with an aggregate principal amount of $320,000; though the first Debentures he purchased were selling at well above their principal amount, the Debentures he later purchased were discounted to well below $600 per $1000 principal amount, and his average purchase price for all of his Debentures was about $606 for each $1000 principal amount of Debentures.4

The first significant activities of the Trust Company, other than its performance of routine administrative duties as substitute Trustee under the Indenture, came in the fall of 1973 when the Trust Company was called upon to consider whether the terms of a proposed supplemental indenture to be executed by Rockwell, as successor by merger to the obligations of Collins under the Indenture, complied with the terms of the Indenture. Under that supplemental indenture, Rockwell would assume in full all of the obligations of Collins under the Indenture, including the obligation to pay interest, and eventually to repay the principal, on the outstanding Debentures until they either were redeemed or matured in 1987. With regard to the conversion feature of the Debentures, the proposed supplemental indenture provided that each holder of a Debenture would have the right to convert his Debenture into the amount of cash that would have been payable to him under the Merger Plan had he converted his Debenture into Collins Common Stock immediately prior to the merger. In other words, a holder of Debentures could, at any time while his Debentures were outstanding, choose to convert them into exactly that which he would have received had he converted immediately before the merger and participated therein as a holder of Collins Common Stock. Because the holders of Collins Common Stock received no common stock in the merger, the holders of Debentures would have no right to convert into common stock either of Collins (who would have no more common stock) or of Rockwell after the merger. Rockwell's view of its post-merger obligations under the Indenture was shared by its counsel (the New York firm of Chadbourne, Parke, Whiteside & Wolff), and by Collins and Collins' counsel (the Los Angeles firm of Gibson, Dunn & Crutcher).

In order to determine whether the proposed terms of the supplemental indenture complied with the terms of the Indenture, the Trust Company engaged the New York law firm of Curtis, Mallet-Prevost, Colt & Mosle. Two partners in that firm John P. Campbell and John N. Marden undertook a review of the Indenture and the applicable law. Campbell and Marden took the position in September 1973 that a court might in the future find that the intent of the parties at the time the Indenture was executed was that the right to convert into common stock would survive a merger of Collins into another company, and that every holder of Debentures would have the right to convert his Debentures into common stock of the surviving company as long as the Debentures remained outstanding. Since the Indenture required that Rockwell assume all of Collins' obligations under the Indenture in the event of a merger, Campbell and Marden contended that Rockwell would be bound to agree in a supplemental indenture with terms providing for a conversion right of the Debentures into the common stock of Rockwell ("Rockwell Common Stock"), unless Rockwell could obtain the consent of each holder of Debentures that such a right could be extinguished. Furthermore, they contended, Rockwell's voting control of Collins prior to the merger imposed upon Rockwell and the directors of Collins a fiduciary obligation to the holders of Debentures.

The record indicates that discussions and exchanges of memoranda and drafts of opinions between counsel for Rockwell and Collins on the one hand, and counsel for the Trust Company on the other hand, continued for several weeks, and their disagreement was heated. There is also evidence in the record indicating that Rockwell exerted considerable pressure on the Trust Company to change its position, threatening the withdrawal of certain other business from the Trust Company and possible litigation if the Trust Company blocked the merger by refusing to execute a supplemental indenture. At something of an impasse with counsel for Rockwell, Campbell advised the Trust Company on September 18, 1973, that it could follow any of four alternative courses of action: (1) the Trust Company could decline to execute a supplemental indenture (thus blocking the Collins-Rockwell merger) unless the supplemental indenture provided for a right to convert into Rockwell Common Stock; (2) the Trust Company, as a policy decision, could refuse to take a position as to the rights of the holders of the Debentures after the merger, relying on the provisions in the Indenture and in the supplemental indenture by which Rockwell would indemnify the Trust Company from liability in any lawsuits that might later be brought; (3) the Trust Company could resign as Trustee under the Indenture; or (4) the Trust Company could seek a declaratory judgment with respect to the conversion rights of the holders of Debentures after the merger. Campbell recommended alternative (2), and the Trust Company ultimately followed that recommendation.

Thus, on October 11, 1973, Rockwell sent a letter to the holders of the Debentures to notify them of the proposed merger between Rockwell and Collins. The text of the letter read as follows:

Rockwell International Corporation ("Rockwell") has proposed the merger of Collins Radio Company ("Collins") into Rockwell. Pursuant to the terms of the proposed merger Rockwell would assume all of Collins obligations, including Collins obligations under the Indenture, dated as of January 1, 1967, relating to Collins 4 7/8 Convertible Subordinated Debentures due January 1, 1987 (respectively the "Indenture" and the "Debentures").

Rockwell and United States Trust Company of New York, the Successor Trustee under the Indenture (the "Trustee"), intend to execute a Supplemental Indenture to the Indenture on or about November 1, 1973. This Supplemental Indenture is to be effective on the effective date of the merger of Collins into Rockwell and will provide for the assumption by Rockwell of the due and punctual payment of the principal of and interest on the Debentures and the due and punctual performance and observance by Rockwell of all the terms, covenants and conditions of the Indenture. The Supplemental Indenture does not alter or impair the rights accorded under the Indenture to holders of the Debentures and does not change the provisions of the Indenture.

With regard to the conversion rights of holders of the Debentures, counsel for Rockwell and counsel for Collins have each advised that under Section 4.11 of the Indenture, the Section that provides for the adjustment of conversion rights upon a merger or similar event, a holder of a Debenture, upon effectiveness of the proposed merger, would have the right, until the expiration of the conversion right of such Debenture, to convert the Debenture into the amount of cash that would have been payable with respect to the number of shares of Collins Common Stock into which the Debenture could have been converted immediately prior to effectiveness of the proposed merger. The current conversion price of $72.50 entitles the holder of a $1,000 Debenture to convert it into 13.79 shares of Collins Common Stock. Pursuant to the merger each share of Collins Common Stock outstanding immediately prior to the merger (other than those held by Rockwell) is to be converted into $25. Thus, after the merger, a $1,000 Debenture will be convertible into $344.75 in cash.

The Trustee has advised that it does not take a position with regard to this letter or the statements herein, and that it has consulted with its counsel who confirmed that as Trustee it should not take a position with regard thereto.

Neither the proposed merger nor the proposed Supplemental Indenture requires action by the Debentureholders. Upon effectiveness of the merger, the Debentures will represent indebtedness of Rockwell. You will not need to surrender or exchange your Debentures for new debentures.

(Emphasis added.) The letter was signed by both the president and the chairman of the board of Rockwell.5

According to Campbell's testimony by deposition, at some point prior to the merger he abandoned his interpretation of the Indenture in favor of the interpretation advanced by counsel for Rockwell and Collins. When asked to explain why he had abandoned his earlier position, Campbell answered as follows:

It started out with a premise that we must find law to support the position which (Broad) now assert(s). I made, I thought, a very good try and had almost convinced myself by starting with the conclusion and working back to get the authority. It was a good dog, but it wouldn't hunt. I fell down.

Other evidence in the record, however, indicates that as late as January 1974, Campbell continued to see some validity in his earlier view.

Nonetheless, on November 14, 1973, the merger was effected, and a supplemental indenture between Rockwell and the Trust Company was executed, effective as of November 1, 1973. The supplemental indenture provided that Rockwell would assume Collins' obligations on the Debentures. Specifically, it provided that after the merger, the holders of the Debentures had the right to convert the debentures into that which they would have received in the Merger Plan had they converted immediately before the merger's effective date. In accordance with the October 11 letter, Rockwell has consistently interpreted this to mean that the Debentures could be converted into cash, but not into the common stock of either Rockwell or Collins; the conversion rate was $344.75 in cash for each $1000 in principal amount of Debentures surrendered.

Plaintiff David Broad, a holder of Debentures at the time of the merger, filed this class action in federal court against Rockwell, Collins, the controlling persons of both, and the Trust Company. Broad alleged two claims under the federal securities laws specifically, under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1976), and under Rule 10b-5 promulgated by the Securities and Exchange Commission thereunder, 17 C.F.R. § 240.10b-5 (1980).6 His two federal claims were, as a logical matter, urged essentially in the alternative. His main claim was that the defendants had collectively engaged in a fraudulent scheme to deny the holders of debentures their rights under the Indenture to convert into common stock at any time until the Debentures matured in 1987 or were sooner redeemed. In the alternative, he claimed that at the time the debentures were issued in 1967, the defendants had omitted to disclose a material fact with regard to the terms of the Debentures specifically, that under the terms of the Indenture, the right to convert into Collins Common Stock could, in the event of a merger, be replaced with the right to convert into only that which the holders of Collins Common Stock received in the merger.7

Broad also alleged a number of pendent state-law claims.8 Essentially, these claims were that all the defendants had breached the Indenture; that all the defendants had breached the covenant of good faith and fair dealing implied into the Indenture by law; that Rockwell had breached a fiduciary duty which it owed the holders of the Debentures by virtue of its control of both parties to the 1973 merger; and that the Trust Company had breached its fiduciary duty as Trustee for the holders of the debentures. The argument that the defendants had breached the Indenture was also urged in the alternative: Broad first contended that the Indenture unambiguously provided for a right to convert into common stock that would survive any merger. But if not unambiguously susceptible to the interpretation he urged in his first argument, Broad contended that the Indenture was at the least ambiguous, and that the intent of the parties at the time the Indenture was executed was that the right to convert into common stock would survive any merger.

Broad sought three alternative forms of relief for the class: (1) "restoration" of the option to convert into Rockwell Common Stock (since no Collins Common Stock existed after the merger); (2) a judgment for the difference between the redemption price (103 1/4 of principal amount) and the market value of the Debentures as of the date of judgment, with interest from the date of the merger; or (3) redemption at 103 1/4 of the principal amount of the Debentures.

At the close of Broad's case-in-chief on the third day of trial, the district court granted the defendants' motions for a directed verdict on all of these claims. With regard to the claim that the defendants omitted to disclose a material fact in connection with the issuance of the Debentures in 1967 and subsequent to that time, the court held that the record was devoid of evidence from which reasonable persons could find that any defendant acted with scienter, even if recklessness were sufficient to satisfy the scienter requirement under Rule 10b-5. Additionally, the court held that the Trust Company had no duty to disclose this allegedly omitted fact since it had no connection with the Debentures until 1970. With regard to the claim that the defendants had schemed to deprive the holders of the Debentures of their conversion rights, the court held that any of three grounds justified the directed verdict: first, there was no evidence from which reasonable men could find that the defendants acted with scienter, even if reckless conduct were sufficient to satisfy the scienter requirement; second, Rockwell correctly construed the Indenture in 1973 and fully respected the rights of the holders of the Debentures in the merger; and last, the wrongs alleged in this claim did not occur in connection with a purchase or sale of a security, since the holders of the Debentures still held their Debentures after the merger.

With regard to the state-law claims, the court held that even if Broad's claim that the Indenture was ambiguous had been timely made,9 that argument was unfounded: the Indenture was unambiguous, and its terms were as Rockwell contended. The court held that its ruling on this question of law foreclosed Broad's breach of contract claim, since it was undisputed that Rockwell's conduct was in full compliance with the court's interpretation of the Indenture. The court further held that Rockwell's compliance with the Indenture also foreclosed any breach of fiduciary duty claims, and that the record was devoid of evidence from which reasonable persons could conclude that Rockwell acted with bad motives. As to the Trust Company, the court held that it had only those duties specified in the Indenture and in the Trust Indenture Act of 1939 (the "Trust Indenture Act"), 15 U.S.C. §§ 77aaa-77bbbb (1976), and that it had not breached any of those duties.

As an alternate ground for the directed verdict on all counts, the court held that the record was devoid of evidence from which reasonable persons could find actual damages, and that none of the equitable remedies requested by Broad would have been appropriate even if he had prevailed on one or more of his theories of liability.

On appeal, a panel of this court affirmed the directed verdict on the federal securities claims, but reversed and remanded on the state-law claims. With regard to the Rule 10b-5 claim that the defendants had omitted to disclose in 1967 and thereafter until the merger the possibility that the right to convert into common stock would be altered in the event of a merger, the panel agreed with the district court that there was no evidence in the record from which reasonable persons could find that any of the defendants had acted with scienter. 614 F.2d at 439-41. With regard to the Rule 10b-5 claim that in 1973 the defendants had engaged in a fraudulent scheme to deprive the holders of the Debentures of their rights to convert into Collins Common Stock, the panel agreed with the district court that as regards the holders of the Debentures there had been no "purchase or sale" of a security, rejecting Broad's argument that the loss of the conversion right was analogous to a constructive or forced sale. Id. at 435-39. Having agreed with the district court that there could be no liability on the federal securities claims, the panel declined to discuss the district court's alternative ground for the directed verdict on those claims that the record was devoid of evidence from which reasonable persons could find actual damages. Id. at 439 n.24.

The panel parted ways with the district court on the question of the Indenture's ambiguity, however, holding that the Indenture was ambiguous as a matter of law because it did not speak "with the requisite clarity" to the post-merger conversion rights of the holders of the Debentures. That being the case, the panel held that the jury should have been allowed to determine whether Rockwell and the Trust Company had acted in accord with the intent of the parties at the time the Indenture was executed. Id. at 426-29. Further, since under New York law every contract contains an implied covenant of fair dealing, the panel held that the jury should have been allowed to determine whether the defendants had dealt fairly with the holders of the Debentures. Id. at 429-30.

With regard to the fiduciary duty claims, the panel held that Rockwell's duties to the holders of the Debentures should be considered to have been met if on remand the jury were to find either (1) that Rockwell complied with the intent of the parties at the time of the execution of the Indenture, or (2) that despite its breach of the Indenture, Rockwell acted in good faith based on a reasonable understanding of the Indenture. Id. at 430-31. As to the Trust Company's fiduciary duty, the panel held that the Trust Indenture Act imposed no fiduciary obligations in addition to those imposed by applicable state law. Id. at 431-32. Returning to state law, the panel held that the Trust Company was cloaked with a fiduciary duty to the holders of the Debentures under New York law, and that it was for the jury to decide whether the Trust Company had violated that duty. Id. at 432.

On the question of the measure of damages applicable to the state-law claims, the panel agreed with the district court that equitable relief such as redemption of the Debentures or restoration of the common stock conversion privileges would be inappropriate. But the panel held that if on remand the jury found that the defendants had breached the Indenture, the district court could apply the default provisions set out in the Indenture, which provided that the principal and accrued interest on the Debentures would be accelerated to be due and payable immediately as of the time of the default. Id. at 433.

Because the construction of the Indenture is basically a question of contract law, it is perhaps worthwhile to discuss briefly the way in which this type of contract operates, and the reasons why such contracts must be so long and detailed. Convertible debentures represent one of many means through which business enterprises obtain capital from investors for long periods of time. Most such means can be classified as either "debt securities" or "equity securities," but convertible debentures are something of a hybrid basically a debt security, but with equity features.

In part because of the differing treatment of debt and equity securities both by statute and at common law, debt securities are, to a much larger degree than is true of equity securities, creatures of contract law.10 As a result, the written contracts that govern the rights and obligations of debt securities are often long and complex, for those contracts attempt to anticipate and deal with in advance all possible contingencies that might call into question the operation of those rights and obligations. In the case of debentures, those contractual rights are set forth in a document that is separate from the debt instrument itself. That document, whose terms are incorporated by reference on the face of the debt instrument, is commonly called an indenture.11

The debt represented by the debenture is typically not secured by specific assets of the issuer,12 and is frequently subordinated to senior indebtedness of the issuer. It is usually the case that the debentures of a given issue are held by a great number of parties, and for this reason it was found desirable, as the modern concept of debentures developed, that the indenture designate a corporate trustee to protect the rights of the many holders of the debentures and to perform certain ministerial tasks connected with the normal operation of the debentures. Thus, although the debts created by the debentures run directly from the issuer to the holders, the contractual rights conferred by the indenture run from the issuer to the trustee for the benefit of the holders of the debentures.13 In today's usage, then, a security is generally termed a "debenture" when it is a long-term unsecured debt security, issued pursuant to an indenture and with an indenture trustee.

Not all debentures are "straight debt securities." The Debentures at issue in this case are examples of "convertible debentures," which exhibit characteristics of both debt and equity securities:

A convertible debenture is one which gives the holder the right to exchange his debenture for other securities of the (issuing) Company, usually for shares of common stock and usually without payment of further consideration. The conversion right, although set forth in the debenture and in the indenture, is separate and distinct from the debt evidenced by the debenture. As a separate right it has its own ascertainable value.

American Bar Foundation, Commentaries on Indentures 522-23 (1971) (footnotes omitted) (hereinafter cited as Commentaries). The fact that a debenture is convertible into equity securities is an important feature, and therefore the terms under which the debenture may be converted are usually summarized on the face of the debenture itself. All convertible debentures, however, purport only to summarize the salient provisions of the conversion terms on the face of the instrument; as is the case with the other complicated provisions that govern the duties of the issuer and trustee, the terms of redemption, and so forth, many of the details concerning the debenture's convertibility must be set forth instead in the governing indenture.

The indenture will specify a rate at which the debentures can be converted into equity securities (usually common stock). This is often expressed in terms of a "conversion price," which may be conceptualized as the price at which a share of stock may be "purchased" by the holder of the debenture in exchange for the surrender of indebtedness under the debenture. For example, if the conversion price for a debenture in the principal amount of $1000 is $50, the holder of the debenture is entitled to convert his $1000 debenture into a total of 20 shares of common stock.

The discussion above only briefly describes the manner in which convertible debentures function. Given this,

it is not surprising that corporate indentures are lengthy and complex. There is much that much be covered by the contract set forth in the indenture. But it is also true that much of what has to be covered is, or could be, virtually the same for all indentures. These are the provisions that are commonly referred to as "boiler-plate," e. g., provisions regulating the issuance, authentication, transfer and exchange of securities; provisions establishing the procedures for collective action by the securityholders; and provisions prescribing the duties of the trustee. These, and certain others, are provisions which have been stated in many different ways in various indentures. Since there is seldom any difference in the intended meaning, such provisions are susceptible of standardized expression. The use of standardized language can result in a better and quicker understanding of those provisions and a substantial saving of time not only for the draftsmen but also for the parties and all others who must comply with or refer to the indenture, including governmental bodies whose approval of authorization or the issuance of the securities is required by law.

Commentaries at 3. Not least among the parties "who must comply with or refer to the indenture" are the members of the investing public and their investment advisors. A large degree of uniformity in the language of debenture indentures is essential to the effective functioning of the financial markets: uniformity of the indentures that govern competing debenture issues is what makes it possible meaningfully to compare one debenture issue with another, focusing only on the business provisions of the issue (such as the interest rate, the maturity date, the redemption and sinking fund provisions and the conversion rate) and the economic conditions of the issuer, without being misled by peculiarities in the underlying instruments.

B. Conversion Rights at Common Law and the Need for Contractual Antidilution Provisions

In the case at bar, there are specific portions of the Indenture that set out the rights of the holders of the Debentures, and the obligations of the Trustee and issuer, in the event that the issuer is merged into another company. Nonetheless, the common law's treatment of conversion rights upon merger is important in this case in two different respects. First, it must be determined whether the common law provides the holders of the Debentures with rights in addition to the rights that are set out in the Indenture. Second, an understanding of the common law's treatment of conversion rights upon merger explains the historical development of boilerplate contractual antidilution provisions of the sort found in the Indenture.

The Commentaries explain in brief the possible dangers to the conversion rights of the holders of debentures that might attend certain actions by the issuer of the debentures:

The anti-dilution provisions are designed to preserve the value of the conversion privilege against diminution by certain voluntary corporate acts. For example, if the conversion price is $25 a share at a time when the common stock has a market value of $30 a share, the conversion right is clearly valuable. If the Company should then split its stock 3 for 1, the market price of its shares would be reduced to approximately $10 per share. Thus the value of the right to convert at $25 per share would have been virtually destroyed, by that voluntary corporate action, in the absence of appropriate protective provisions.

Inasmuch as ownership of a convertible debenture does not give the holder the rights of a shareholder, the holder of a convertible debenture would have almost no protection against acts by the Company which would adversely affect the value of the common stock issuable on conversion, such as a split-up of shares, stock dividends, distribution of assets, issuance or sale of other convertible securities, issuance of options, issuance or sale of common stock at prices below the current conversion or market price, merger, sale of assets or dissolution and liquidation of the Company. Events of this type are customarily described as "diluting" the value of the conversion privilege, and if protection is desired against such dilution, appropriate provisions must be included in the indenture.

Commentaries at 527 (1971) (emphasis added; footnote omitted). As justification for the phrase we have italicized above, the Commentaries cite Parkinson v. West End Street Railway Co., 173 Mass. 446, 53 N.E. 891 (1899) (per Holmes, J.).

Justice Holmes' decision in Parkinson was aptly cited by the authors of the Commentaries for the proposition that antidilution protection must be provided by contract if it is to be provided at all, for Parkinson holds that there is no such protection at common law. The plaintiff in Parkinson held Highland Street Railway bonds that were convertible into Highland's preferred stock. When West End Street Railway acquired Highland "subject to all (of Highland's) duties, restrictions, and liabilities," id. at 447, 53 N.E. at 891, the existing holders of Highland's preferred stock received West End prefe