# Petition — Rome v. Indian Head, Inc. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_2320%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition - **Published:** January 1, 1977 - **Citation:** 434 U.S. 897 ## Text | oo | IN THE dy ‘= Supreme Court of the Uniti tbe 22 October Term, 1977. No. @7-1808 MORTON P. ROME and MARJORIE T. ROME, Trustees Under a Trust Agreement, Petitioners, v. THYSSEN-BORNEMISZA EUROPE, N.Y., et al., Respondents. PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT. EpwIn P. Romer. WiLLiAM E. TAYLor, JEANNE P. WRoOBLESKI, 1100 Four Penn Center Plaza, Philadelphia, PA 19103 Tel. (215) 569-370C Attorneys for Petitioners. Of Counsel: BLANK, Rome, Kiaus & ComISskyY, 1100 Four Penn Center Plaza, Philadelphia, PA 19103 Morton P. Rome, 204 Kent Road, Wyncote, PA 19095 Bruce A. HECKER, Ina POSTEL, SHEA, GouLp, CLIMENKO & CASEY, 330 Madison Avenue, New York, NY 10017 International Printing Co., 711 So. 50th St., Phila., Pa. 19143 — Tel. (215) 727-8711 Page I ok ec cabhiiucs Wa eeRe EEOC ERS Coster 06 1 ED sited ck cic dbeuk Cua oe sen ce ceetkadabeesaes 2 QUESTION PRESENTED FOR REVIEW ................0000005: 2 CONSTITUTIONAL ProvisION, STATUTES AND RULES INVOLVED .. 4 I YW oe cack bcpceetccauuadudusescsas 5 REASONS FOR GRANTING THE WRIT .............0.ceeceee0s 13 I. This Court Should Resolve the Split of Authority Existing Among the Courts of Appeals on Whether Specific Findings in Support of a Class Action De- termination Order Are Required to Be Made by a Court. This Is Particularly Vital Where Actions Are Ordered to Be Maintained as Class Actions for Pur- poses of Settlement Only Involving Issues Concern- ing Adequacy of Representation and Conflicting Interests of the Representative Parties ............ 13 Il. The Validity of Rules 23(c)(2) and 23(c)(3) in Compelling Non-Parties Described as Plaintiff Class Members to Perform the Affirmative Act of Opting Out or Be Bound by the Adjudication of a Court Which Lacks Personal Jurisdiction Over Them Pre- sents a Significant Question of Federal Law and Juridical Administration Which Should Be Decided EE iectesenikndsdeohanbesscdapewha ts 18 III. The Class Action Settlement Approved by the Courts Below Misused the “Opt Out” Provisions of Rule 23 to Foreclose the Rights of Objecting and Silent Con- vertible Debenture Owners Who by Their Debenture Contracts Were Not Required Affirmatively to Re- quest Exclusion to Protect Against Loss of Their Rights to Convert Into Common Stock. If Not Vacated, This Decision Will Be a Serious Threat to the Entire National Market for Convertible Deben- INDEX (Continued). Page APPENDIX A: District Court Memorandum Opinion, Filed November i Ct cls anushicek’ sob bunbe bade watehSadanda Al District Court Judgment and Order Designating Class Action, Filed November 18, 1976 ................ A42 APPENDIX B: Order of the Court of Appeals Affirming Judgment, Filed DRUM £6 Kcuden badaséddeuueacdeesdeecesess A50 APPENDIX C: U. S. Constitution, Fifth Amendment ................. A53 Rules Enabling Act, 28 U. S. C. § 2072 ................ A53 Securities Exchange Act of 1934, Sec. 10(b), 15 U. S. C. ds to Gaiety hides aaduedessadheuakertnkes A54 Securities and Exchange Commission Rule 10b-5, 17 pe eth sated be wcbseee tendons os A54 § 259, Delaware General Corporation Law ............ A55 Federal Rules of Civil Procedure: EEN ducal cogs > eGhGbss Dadiaweacebescadasay A57 SE use Wek Wikwed Ade kbee baad seabeds kedmnabbe A60 SE dit Cha hdedndiddenssochdbendebacene deed va A63 tN > “re Oo hab adn a ah TABLE OF CITATIONS. Cases: Page Bailey v. Patterson, 369 U. S. 31 (1962) ............-5eeee 17 Capital City Gas Company v. Phillips Petroleum Company, SOS Fi. Se BED CS GR. TED cde cncdevecvedvnvsveces 28 City of Detroit v. Grinnell Corporation, 495 F. 2d 448 (2d EE, 4 b0 FSR ReVEdeN NUON Reen dv eccecesebvecpedse 18, 28 East Texas Motor Freight System, Inc. v. Rodriguez, — U. S. —, 45 LW 4524 (May 31, 1977) .............. ee eeeee 16 Eisen v. Carlisle & Jacquelin, 52 F. R. D. 253 (S. D. N. Y. 1971) Revd on other grounds, 479 F. 2d 1005 (2d Cir. 1973), Remanded with instructions to dismiss the class action as so defined, 417 U. S. 156 (1974) ............. 14, 15 Eisen v. Carlisle & Jacquelin, 391 F. 2d 555 (2d Cir. 1968) ERE GEE 6 GA Se dnd eek cece sé de sey dies nésesvocccisensé 15, 16 Gonzales v. Cassidy, 474 F. 2d 67 (5th Cir. 1973) .......... 16 Hall v. Beals, 306 U. S. 45 (10GB) ......ncccccccccccecsces 17 Hansberry v. Lee, 311 U. S. 32 (1940) ........... cee eee eee 16 Hanson v. Denckla, 357 U. S. 235 (1958) ...............5. 21, 23 Honeywell, Inc. v. Metz Apparatewerke, 509 F. 2d 1137 (7th Ts ME spc cecncbawchediuetdes aveewebenss ckncves’ 22, 24 International Shoe Co. v. Washington, 326 U. S. 310 (1945) 19, 20, 21, 23 Interpace Corporation v. City of Philadelphia, 438 F. 2d 401 SMD Gocecces eteecscdsnnpusecessesecetcess 14 Kentucky Home Mut. Life Ins. Co. v. Duling, 190 F. 2d 797 RL ED ppe'es cccavessedacectessvieccescucses 16 Kremens v. Bartley, — U. S. —, 45 LW 4451 (May 16, 1977). .16, 18 Kusner v. First Pennsylvania Corporation, 531 F. 2d 1234 (3d SME Sek deyhids bpenbedneheeddsensdexeoevens 27 McGee v. International Life Insurance Company, 355 U. S. SE EE Wabid abe sdeedyandbenusteceseseneectesten 19, 21 Mississippi Pub. Corporation v. Murphree, 326 U. S. 438 SE cicpbhednetadetes od cone vevadenadsascdseseeee 24 Morris v. Burchard, 51 F. R. D. 530 (S. D. N. Y. 1971) ..... 14 TABLE OF CITATIONS (Continued). Cases (Continued): Page Nguyen Da Yen v. Kissinger, 70 F. R. D. 656 (N. D. Cal. BOUB) oni csiv'ncwnev occ cwetdncr seaneeeneeeeeeee 13 Price v. Lucky Stores, Inc., 501 F. 2d 1177 (9th Cir. 1974) .. 13 Rosario v. Rockefeller, 410 U. S. 752 (1973) ............... 17 Rutledge v. Electric Hose & Rubber Company, 511 F. 2d 668 (Gt Cis. RUGR «ou .< + 0vuvchanxen tue 15 Santa Fe Industries, Inc. v. Green, — U. S. —, 45 LW 4317 (Dawes GA, BOUT) ccc ccvccccdcccccedeueckesameaseaes 26 Saylor v. Lindsley, 456 F. 2d 896 (2d Cir. 1972) ........... 28 Schlesinger v. Reservists Committee to Stop the War, 418 U. &. SEB CIPS) .c cice caccscicsceseadesseneseaeeeee 16-17 School District of Philadelphia v. Harper & Row Publishers, Inc., 267 F. Supp. 1001 (E. D. Pa. 1967) .............. 19-20 Shaffer v. Heitner, — U. S. —, 45 LW 4849 (June 24, 1977) 2, 19, 23 Snyder v. Harris, 394 U. §. 332 (1969) .................00- 24 . Soona v. lown, G39 U. &. SEB CRGR) oc ccccacscccecseascesua 16 Van Gemert v. The Boeing Co., 520 F. 2d 1373 (2d Cir. 1975), cert. denied, 423 U. S. 949 (1975) ...............00eee 27 West Virginia v. Chas. Pfizer & Co., 440 F. 2d 1079 (2d Cir. 1971), cert. denied, 404 U. S. 871 (1971) .............. 16 Constitutional Provision, Statutes and Rules Involved: United States Constitution: CY 4,19, 22, 24 15 U. S. C. § 78j(b), Sec. 10(b), Securities Exchange Act of MRE .corccccccedecesegeveceseeceennaenneen 4, 26 28 U. S. C. § 2072, Rules Enabling Act ................20:. 4,24 VU. & GC. 6 REDAE) 0.0.2. cccvcssctncacwnsepaeneneee 2 State Statute: § 259, Delaware General Corporation Law .......... 4, 26, 27 Regulation: 17 C. F. R. § 240.10b-5, Securities and Exchange Com- TABLE OF CITATIONS (Continued). Page Federal Rules of Civil Procedure: Deets ling es eases « 2, 3, 4, 10, 13, 14, 15, 16, 17, 18, 19, 20, 23, 24, 25, 27, 28, 29 ee hae ces dudentepesedaseeeces 4,11 ete die dec ceheapeetsveyeeses ese es 4,19, 24 Other Authorities: Advisory Committee Note, 39 F. R. D. 98 (1966) .......... 13 Current Problems in Federal Civil Practice, (P. L. I. 1975) DP Urisenekeeidavectseseeevsscecccecceccece 25 Folk, The Delaware General Corporation Law—A Commen- tary and Analysis (Little, Brown, 1972) Section 259/365- Frankel, Amended Rule 23 From A Judge’s Point of View, 32 A. B. A. Antitrust L. J. 295 (1966) ................45. 27 Manual for Complex Litigation (1975) Part I, § 1.40, p. 25 i dei cbacbicdscesevoecsesecces 18 3B Moore's Federal Practice, § 23.45[1], p. 23-707 (1977) .. 14 7 Moore's Federal Practice, § 65.18[3], at 65-135-136 (1975) 28 7 Wright & Miller, Federal Practice & Procedure, § 1761 at TT ied se eLMGus dow ed6cekGeknccrccyeccscebe 16 11 Wright & Miller, Federal Practice & Procedure, '§ 2941 at atau akeslevectesesccetsccecs 28 Kaplan, Continuing Work of the Civil Committee: 1966 Amendments of the Federal Rules of Civil Procedure, 81 i CED ccc adedcvctovevscsosecece 13 IN THE Supreme Court of the United States OcrosER TERM, 1977 No. MORTON P. ROME and MARJORIE T. ROME, Trustees Under a Trust Agreement, Petitioners, 0. THYSSEN-BORNEMISZA EUROPE, N.V., ET AL., Respondents. PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT. Petitioners, Morton P. Rome and Marjorie T. Rome, trustees under a trust agreement made November 22, 1954, for the benefit of Sally P. Rome, respectfully pray that a writ of certiorari issue to review the judgment of the Court of Appeals for the Second Circuit rendered in these pro- ceedings on May 2, 1977.° OPINIONS BELOW. On November 16, 1976, the District Court issued a Memorandum Opinion approving as fair and reasonable the settlement of three actions ordered to be maintained as class actions, for purposes of settlement only (A1).’ * The Respondents are too numerous to be included in the caption. They are listed in the Order of the Court of Appeals printed in the Appendix, infra, to this petition (A50-51). 1. Citations herein to “( A—)” are to the Appendix, infra, to this ition. References to the Record in the Court of Appeals are made by the designations: “(Vol. I a)”, “(Vol. II a)”, or “(Vol. III a)”. The Appendix has been segregated for convenience into Appendix A, B, and C. 2 Petition for a Writ of Certiorari The Memorandum Opinion of the District Court is re- ported at 424 F. Supp. 679. On November 18, 1976, the District Court entered a Judgment and Order that the ac- tions shall proceed as class actions (A42). This Order is unreported. The Court of Appeals for the Second Circuit affirmed the Judgment of the District Court in an Order, dated May 2, 1977 (A50), which is unreported. The Court of Appeals did not write an opinion. JURISDICTION. The judgment of the Court of Appeals was entered on May 2, 1977 (A50). The jurisdiction of this Court is in- voked under 28 U. S. C. § 1254(1). QUESTIONS PRESENTED FOR REVIEW. In Shaffer v. Heitner, — U. S. —, 45 LW 4849 (June 24, 1977), this Court struck down a Delaware se- questration procedure which “coerces a defendant either to submit to personal jurisdiction in a forum which could not otherwise obtain such jurisdiction or to lose the se- curities which have been attached.” In this securities litigation, declared to be a class ac- tion for settlement purposes only, the courts below, utiliz- ing the mandatory “opt-out” provisions of Rules 23(c) (2) and 23(c)(3) of the Federal Rules of Civil Procedure, co- erced petitioners, convertible debenture holders who ob- jected to the settlement, as absent, involuntary non-parties (but described as class members in the settlement ), to sub- mit to the personal jurisdiction of a forum which could not otherwise have obtained personal jurisdiction over them, or suffer, as a result of a “freeze-out” by short-form statu- tory merger, the loss of their common stock conversion ene ee . Sart aes Petition for a Writ of Certiorari 3 rights for a cash sum below the conversion price. If not vacated, the decision of the courts below is a serious threat to the entire national market for convertible debentures, because it opens the door to a method by which a practi- cal destruction of the entire underlying basis for converti- ble debenture purchases may be effected. The backdrop of this matter included a class action determination in which no specific findings were made to support the order, the representative designated in the settlement and order to represent petitioners’ “class” was not one of its members, and his attorneys and the repre- sentatives for all classes. named as such in the settlement and order had multiple and conflicting interests. The questions presented are these: 1. Whether an order that three separate actions alleg- ing federal securities and common law violations shall be maintained as class actions, for purposes of settlement only, was a fundamentally erroneous construction and ap- plication of Rule 23 of the Federal Rules of Civil Proce- dure violative of due process under the Fifth Amendment to non-parties described as plaintiff class members: (a) when entered without any specific findings of the existence of the prerequisites, standards, and criteria for class actions established by Rules 23(a) and 23(b); and (b) where the representative designated in the settlement and order to represent a convertible de- benture owner class was not one of its members, and his attorneys and the designated representatives for all classes established by the settlement and order ha? multiple and conflicting interests. 4 Petition for a Writ of Certiorari 2. Whether the application of Rules 23(c)(2) and 23(c)(3) of the Federal Rules of Civil Procedure to non- parties described as plaintiff class members violated their Fifth Amendment due process rights, to the extent that a judgment approving a settlement entered in class actions is made binding upon such non-parties who are not other- wise personally subject to the court’s jurisdiction. 3. Whether the utilization of Rules 23(c)(2) and (3) of the Federal Rules of Civil Procedure in a class action can properly bind, by a judgment approving the settle- ment, objecting and silent non-parties described as plain- tiff class members (convertible debenture owners whose rights to convert were substantially altered by the settle- ment ), unless they act affirmatively to opt out, where such non-party convertible debenture owners had several con- tract rights pursuant to the terms of their debentures which provided that there would be no alteration or impairment of their rights to convert into common stock without their consent. CONSTITUTIONAL PROVISION, STATUTES AND RULES INVOLVED. This case involves the Fifth Amendment to the Con- stitution of the United States, the Rules Enabling Act, as amended, 28 U. S. C. § 2072, Section 259 of the Delaware General Corporation Law, Section 10(b) of the Securities Exchange Act of 1934, 15 U. S. C. § 78j(b), Securities and Exchange Commission Rule 10b-5, 17 C. F. R. § 240.10b-5, and Rules 23, 65<.ad 82 of the Federal Rules of Civil Pro- cedure, which are set forth herein at Appendix C , infra, pp. A53 through A63. Pera» : Petition for a Writ of Certiorari 5 STATEMENT OF THE CASE. In April, 1968, Indian Head Inc. (“Indian Head”), a diversified Delaware corporation, issued and sold publicly $25 million of its 5% percent convertible debentures due April 15, 1993 (“Debentures”). The Debentures were listed and traded on the New York Stock Exchange. By the terms of the Debentures and the Indenture, each $1000 Debenture was convertible into 25.974 shares of Indian Head common stock, or a conversion price of $38.50 per share (Vol. II, 467a at 482a). Beginning in October, 1973, Thyssen-Bornemisza Group, N.V. (“TBG”), (the name of which was later changed to Thyssen-Bornemisza Europe N.V.) (“TBE”), a Netherlands international and industrial holding com- pany, began to acquire Indian Head common stock at $27 per share, in cash, through a tender offer and direct pur- chase from Indian Head. In August, 1974, Thyssen- Bornemisza, Inc. (“TBI”), a Maryland corporation organ- ized originally as a wholly-owned sudsidiary of TBE to hold all securities of Indian Head, acquired additional shares of Indian Head common stock at $27 per share in cash through a second tender offer, bringing its holdings to over 90%. As a result, the Indian Head common stock and the Debentures were suspended from trading on the New York Stock Exchange on August 30, 1974 and delisted on September 24, 1974. Thereafter, the Debentures and com- mon stock were traded only in the over-the-counter market. On February 11, 1976, TBI, in a press release, an- nounced plans to merge Indian Head into a newly formed wholly-owned subsidiary of TBI, to be known as Thyssen- Bornemisza Holdings, Inc. (“TBH”). Under this proposed plan of merger, the Debentures would be assumed by TBH. After the merger, however, the Debenture holders 6 Petition for a Writ of Certiorari would no longer have the right to convert their Debentures into common stock, but only might surrender them and receive $779.22 in cash for each $1000 of Debentures they held, or at the rate of $30 per share for 25.974 common shares. Three purposed class actions’? challenging various aspects of the Thyssen-Indian Head transactions were in- stituted in the Southern District of New York by holders and former holders of the Debentures, holders of Indian Head common stock, and holders of certain Indian Head warrants. These actions challenged the two tender offers and purchases of Indian Head securities on various grounds, including federal securities and common law violations, and sought both injunctive relief and damages. On March 4, 1976, at the outset of a hearing on a re- quest for injunctive relief to bar the merger plan an- nounced by TBI in its press release of February 11, 1976, the defendants withdrew the merger proposal. After withdrawal of the merger plan, counsel for de- fendants entered into settlement negotiations with counsel for plaintiffs in the three actions. By July 20, 1976, these negotiations resulted in a Stipulation and Agreement of Settlement (“Settlement Agreement”) (Vol. I, 160a), en- compassing two of the three actions.* On July 28, 1976, an amendment to the Settlement Agreement brought the third action within its scope (Vol. I, 186a). Under the terms of the Settlement Agreement and its amendment, the parties agreed, subject to the approval of the court, that the three actions were to be maintained as class actions, but for purposes of settlement only. Vari- 2. Brucker, et al. v. Thyssen-Bornemisza Europe, N.V., et al., 74 Civ. 5755, filed December 31, 1974; Weinberger v. Powers, et all., jad 2 _ mem Hr, 1975; and Shamrock Corp., et al. v. ian Head Inc., et al., iv. 1736, filed April 9, 1975 (Vol. 750a, 754a, 757a). , —- 3. The Brucker and Weinberger actions, supra, n. 2. Tor Rese pore Petition for a Writ of Certiorari 7 ous classes * of Indian Head present and former securities holders were defined and class representatives and lead counsel for all classes were designated, along with repre- sentatives and co-counsel for each class.* The Settlement Agreement included a provision for consummation of a short-form statutory merger of Indian Head into TBH, the newly formed Delaware subsidiary of TBI. Under this merger, all publicly held common stock of Indian Head and rights to acquire Indian Head stock were to be eliminated, with TBH (whose name would then be changed to Indian Head), to be the sole remaining stockholder. Each public Indian Head com- mon stockholder would be paid $32 in cash upon the merger. The Debenture Owner Class, of which petitioners were described members, would lose their rights to con- vert into Indian Head common stock after the merger, but a Debenture owner could (i) surrender his Deben- tures after the merger and receive $844.16 in cash for each $1000 Debenture (or at the rate of $32.50 for the 25.974 common shares into which the Debenture was otherwise convertible, although the original conversion price was $38.50): (ii) retain his Debentures until maturity on April 15, 1993; (iii) surrender his Debentures at any time after the merger but prior to maturity in exchange for $831.17 in cash (or at the rate of $32 per share for the 25.974 common shares); or (iv) convert his Debentures into common stock prior to the merger and seek appraisal under Delaware law. Subject to the court’s approval of the settlement and merger, TBI agreed it would pay into a Fee Fund the 4. The classes established were: Common Stock; Debenture Owners; Debenture Sellers A & B; Warrant Owners; and Warrant Sellers A & B. Pg 5. Lead counsel for all classes was sole counsel for the - mon Stock Class. 8 Petition for a Writ of Certiorari amount of awards by the court for the fees and expenses of plaintiffs’ attorneys and experts, not in excess of $600,000. Finally, the Settlement Agreement provided that all actions, wherever and by whomever brought, arising out of or relating to the subject matter of the three class ac- tions being settled, were to be stayed and enjoined, in any court other than the court before which the three class actions were pending, until entry of a judgment and order determining whether the proposed settlement was fair, reasonable and adequate. In addition, if the settlement was subsequently approved, all class members were to be permanently enjoined from prosecuting any claims arising out of or relating to the matters set forth in the complaints of the three actions. On August 2, 1976, the District Court entered an Order which included, with the exception of the permanent injunction provision, all of the terms of the Settlement Agreement described above and was substantially identi- cal to the form of Order submitted by the settling parties (Vol. I, 148a). The Order directed that the three actions were to be maintained as class actions for purposes of set- tlement only, and designated the class representatives, lead counsel and co-counsel for each of the classes previ- ously selected by the parties. The class action determination order was entered even though it was clear from the record that certain of the class representatives were not members of the classes they were designated to represent, and there existed multi- ple and conflicting interests of the named representatives and their attorneys. For example, the individuals designated to represent all classes were only members of the Debenture Owner Class, one of the 7 classes. The individual designated to RPE ERT TL ET FR QUEEN eT Oe Petition for a Writ of Certiorari 9 represent the Debenture Owner Class (of which peti- tioners were described members), was not a member of that class and not a member of the Debenture Seller Class A, although he was named to represent the Debenture Owner Class and the Debenture Seller Classes A and B. (--As a member of the Debenture Seller Class B this “rep- resentative” had claimed a loss of $213.43 in his class suit (Vol. III, 754a at 755a, 06-04-75).—) The repre- sentative designated for the Common Stock Class had in fact only been added as a named plaintiff in a second amended complaint, filed with the consent of the defend- ants by the attorneys who had been designated in the Settlement Agreement as lead counsel for all classes, six days after the settlement bargain of July 20, 1976 had been struck on behalf of the class he was named to represent (Vol. I, 84a). The lead counsei designated for all classes had origi- nally represented only Debenture owners (Vol. I, 7a). After the settlement agreement of July 20, 1976, in the second amended complaint consented to by defendants and filed July 26, 1976, added plaintiffs who were common stock holders and warrant owners were then represented by this lead counsel (Vol. I, 84a). Before becoming lead counsel for all classes, these attorneys had not previously represented the Debenture Seller Classes A and B or the Warrant Seller Classes A and B. The firm designated as co-counsel for the Debenture Owner Classes and the Debenture Seller Classes A and B had not previously represented any members of the De- benture Owner Class or Debenture Seller Class A, but only the representative of the Debenture Seller Class B who had claimed a loss of $213.43 in his class suit. The District Court Order also directed that notice of the proposed settlement and the hearing thereon be given to all identifiable class members. Pursuant to this provi- 10 Petition for a Writ of Certiorari sion of the Order, petitioners, as holders of $25,000 of Debentures, were mailed and received notice of the settle- ment hearing. Although petitioners were residents of the Eastern District of Pennsylvania and not personally subject to the jurisdiction of the United States District Court for the Southern District of New York, the notice commanded them either to opt out of the Debenture Owner Class, in accordance with the provisions of Rule 23(c)(2) and the procedures established by the August 2 Order, or be bound by the adjudication of the United States District Court for the Southern District of New York (Vol. III, 579a at 582a). The notice to petitioners and other described class members omitted to disclose the facts set forth above concerning the positions of the class representatives and their attorneys, and, indeed, did not even name the class representatives. Under the terms of the notice, petitioners, if they re- quested exclusion, would not share in the benefits of the settlement, would not be bound by any judgment entered in the matter, and would only be able to pursue their indi- vidual claims, if any. If petitioners failed to submit a re- quest for exclusion the result would be, according to the notice, that as a class member they would be bound by the terms of any judgment or order in the matter, including a judgment and order approving the proposed settlement. If petitioners objected to the proposed settlement they were invited to appear at the settlement hearing and show cause why the proposed settlement should not be approved and the action dismissed* (Vol. III, 579a at 582a and 586a ). 6. The stay and injunction against prosecution of any suits by any person, arising out of or relating to the subject matter of any of the pleadings in the actions being settled, the terms of the Settlement Agreement or the merger, in any court other than the Southern District Court, pending entry of a judgment and order approving the settlement and merger, although set forth in the Settlement Agreement and the District Court’s Order of August 2, EPEAT SEP PIM TPMT - rece ee ae ae BR Wr re ree Petition for a Writ of Certiorari ll Because petitioners concluded that these courses ef- fectively confronted them with a Hobson’s choice, they filed a notice of intention to appear and set forth various grounds for their objections to approval of the proposed settlement and merger (Vol. I, 193a). Petitioners did not seek to intervene or become parties. After hearing. ( Vol. I, 207a, Vol. II, 267a) the District Court rejected all of petitioners’ contentions, filed its Memorandum Opinion that the settlement was fair and reasonable, and approved the merger contemplated therein (Al). Judgment and Order was then entered that the three actions shall pro- ceed as class actions on behalf of all members of each of the seven classes who had not theretofore requested ex- clusion (A42). Before receipt of the District Court’s Memorandum Opinion, petitioners, to comply with the injunction con- tained in the August 2, 1976 Order (Vol. I, 148a at 156a- 157a) despite its questionable effect under Rule 65(b) of the Federal Rules, along with another owner of Deben- tures who had requested exclusion from the settlement, filed on November 16, 1976 in the United States District Court for the Southern District of New York, 76 Civ. 5129, a separate class action complaint on behalf of themselves and representatively on behalf of all other owners of De- bentures who had not affirmatively consented to the settle- ment, seeking primarily therein injunctive and declaratory relief. This independent suit asserted some claims arising out of or relating to the matters set forth in the complaint of the settled actions (Vol. II, 402a at 407a). The scope of the District Court’s permanent injunc- tion included unidentified but described “class members”. 6. (Cont'd.) 1976 (Vol. I, 148a) did not appear in the Notice of Hearing on the settlement. Nor did the proposed permanent injunction against any suits by all class members, in the event of court approval of the settlement, appear in the Notice of Hearing on the settlement ( Vol III, 579a). 12 Petition for a Writ of Certiorari As a result this separate class action suit of petitioners could possibly be proscribed by the terms of the injunc- tion, although petitioners were not parties to the actions settled, but, as was their right, pursuant to the invitation in the notice simply had objected and contested at the hearing on the settlement the legality of the compromise as it affected them and other owners of Debentures who had not affirmatively consented to the settlement. In an effort to effect dissolution of this permanent injunction is- sued in the District Court Judgment and Order (A42 at A48-49), petitioners timely filed a Motion to Alter or Amend Judgment, pursuant to Rule 59(e) of the Federal Rules of Civil Procedure (Vol. II, 402a). Petitioners also filed an Application for Partial Stay of Judgment and Order Pending Appeal (Vol. II, 413a), and Motion for an Order Clarifying and Supplementing the Record (Vol. II, 427a). These motions and application were denied by the District Court on November 29, 1976 (Vol. II, 412a, 426a, 433a), on which date petitioners filed a notice of appeal to the Second Circuit from the Judgment and Order entered November 18, 1976 (Vol. II, 465a). Petitioners’ challenge of the settlement by appeal was rejected by a panel of the Second Circuit on May 2, 1977, which affirmed the judgment of the District Court {A50). a a eee een ieee eee Petition for a Writ of Certiorari 13 REASONS WHY WRIT SHOULD BE GRANTED. I. This Court Should Resolve the Split of Authority Ex- isting Among the Courts of Appeals on Whether Specific Findings in Support of a Class Action Deter- mination Order Are Required to Be Made by a Court. This Is Particularly Vital Where Actions Are Ordered to Be Maintained as Class Actions for Purposes of Settlement Only Involving Issues Concerning Ade- quacy of Representation and Conflicting Interests of the Representative Parties. Although it appears that the draftsmen of amended Rule 23 of the Federal Rules of Civil Procedure contem- plated requiring the court to make specific findings in support of a class action determination order both in the language of the Rule, and in the notes,’ there is a conflict among the Courts of Appeals on the necessity for making such specific findings. In Price v. Lucky Stores, Inc., 501 F. 2d 1177 (9th Cir. 1974), the court held that Rule 23 implicitly required the District Court to make specific findings on the ques- tions of whether those provisions had been satisfied and properly applied. In the absence of such findings, it was held that reversal and remand was required. This hold- ing of Price was followed in Nguyen Da Yen v. Kissinger, 70 F. R. D. 656, 661 (N. D. Cal. 1976), where the Court stated: “In determining whether a matter should proceed as a class action the Court is required to make findings 7. Fed. R. Civ. P. 23(b)(3); Advis Committee Note, 39 F. R. D. 98, 103 (1966); See also Kaplan, Continuing Work of the Civil Committee: 1966 Amendments of the Federal Rules of Civil Procedure, 81 Harv. L. Rev. 356, 390 (1967). 14 Petition for a Writ of Certivrari concerning each essential element of the class action rule.” The commentary expressed in 3B Moore’s Federal Prac- tice, { 23.45 [1], p. 23-707 (1977) is consistent with that of the 9th Circuit. On the other hand, despite the widespread growth in the use of the class action device, “so instinct with bene- fits, (but) also fraught with mischievous effects”, Morris v. Burchard, 51 F. R. D. 530, 536 (S. D. N. Y. 1971), the Third Circuit, like the Second, is of the view that the language in Rule 23 relating to findings” . . . refers merely to the preliminary determination the court must make before deciding the class action issue and does not require an express, objective articulation of those determinations.” Interpace Corporation-v. City of Philadelphia, 438 F. 2d 401, 404 (3d Cir. 1971).° In Eisen v. Carlisle & Jacquelin, 52 F. R. D. 253 (S. D. N. Y. 1971),° the Court made ex- tensive findings of fact in determining that the suit was maintainable as a class action. However, relying on Interpace, it noted that its findings were not a “necessary procedure” in every class action determination. 52 F. R. D. at 256, n. 1. In the present case, the District Court, in entering the August 2, 1976 Order that the actions agreed to be settled shall be maintained as class actions, made no findings with respect to the criteria and standards set forth in Rules 8. But see the observation in the majority opinion in Interpace, supra, 438 F. 2d at 404, in which it was conceded to be “a salutary practice”, where conflicting positions are given to the District Court in connection with the class action determination, for there to be “at least a minimum articulation of the reasons for its decision.” Cf. the dissent of Judge Adams in Interpace, supra, 438 F. 2d at 404-407 9. Rev'd on other grounds, 479 F. 2d 1005 (2d Cir. 1973), re- manded with instructions to dismiss the class action as so defined, 417 U. S. 156 (1974). ee ie Ein a ee ee ee Fe mr or > em mem moe Petition for a Writ of Certiorari 15 23 (a) and (b). The District Court merely accepted the Settlement Agreement arrived at by the parties to the actions and defined the classes and designated certain rep- resentatives of each class, just as set forth in the Settle- ment Agreement (Vol. I, 148a). In the Memorandum Opinion approving the terms of the settlement, the basis for the District Court's rejection of petitioners’ objections as to the inadequacy of represen- tation of the Debenture Owner Class was grounded on the view that the settlement did not abridge petitioners’ substantive rights (Al at Al7). This conclusion was reached despite the fact that the failure of any one of the requirements of Rule 23 destroys the alleged class action. Eisen v. Carlisle & Jacquelin, 391 F. 2d 555, 561 (2d Cir. 1968 ); Rutledge v. Electric Hose & Rubber Company, 511 F. 2d 668, 673 (9th Cir. 1975). Accordingly, the disposition by the District Court of petitioners’ objections concerning inadequacy of represen- tation makes evident the dangers of error and abuse that are encountered where there is a lack of specific finding by the District Court concerning each essential element of the class action rule. By affirming the judgment of the District Court, despite petitioners’ square attack on the adequacy of rep- resentation and the presence of multiple and conflicting interests of the representative parties and their attorneys, the Court of Appeals approved this practice. The parties to the settlement were thus allowed “to secure the benefit of a class action without first satisfying the requirements for it.” Eisen, supra, 417 U. S. at 177. Although “Rule 23 speaks to notice as well as to ade- quacy of representation and requires that both be pro- vided”, Eisen, supra, 417 U. S. at 176, the District Court’s Opinion, adopted by the Court of Appeals, erroneously 16 Petition for a Writ of Certiorari treated a finding that “no substantive rights of debenture holders are abridged by the settlement” (Al at Al7) as dis- positive of the issues of inadequacy of representation and multiple and conflicting interests. It is well-settled that to be maintainable as a class action a suit must meet all the requirements of Rule 23(a) and also fall within one of the subsections of 23(b). Eisen v. Carlisle & Jacquelin, supra, 391 F. 2d at 561 ( Eisen I1); West Virginia v. Chas. Pfizer & Co., 440 F. 2d 1079, 1089 (2d Cir. 1971), cert. denied, 404 U. S. 871 (1971). Although a Court must consider each of the criteria set forth in Rules 23(a) and (b), since the 1966 revision particularly careful scrutiny must now be given to Rule 23(a)(4). Eisen II, supra, 391 F. 2d at 562; Gonzales v. Cassidy, 474 F. 2d 67, 74-75 (5th Cir. 1973); see Hans- berry v. Lee, 311 U. S. 32, 44 (1940); Kentucky Home Mut. Life Ins. Co. v. Duling, 190 F. 2d 797, 802 (6th Cir. 1951). Implicit in the requirements of Rule 23(a) (4) is that the party seeking to represent the class must himself be a member of that class. The rationale for this requirement is that it is unlikely that a non-member of the class will adequately defend the interests of the class. 7 Wright & Miller, Federal Practice & Procedure, §1761 at 585 (1972). This Court has continually held that a litigant must be a member of the class which he seeks to represent at the time the class action is certified by the District Court. Otherwise, he lacks standing to assert the rights of class members. East Texas Motor Freight System, Inc. v. Rodriguez, — U. S. —, 45 LW 4524 (May 31, 1977); Kremens v. Bartley, — U. S. —, 45 LW 4451, 4454, n. 12 (May 16, 1977); Sosna v. Iowa, 419 U. S. 393, 403 (1975); Schlesinger v. Reservists Committee to Stop the War, 418 * Are Ko a0 UR Re CR ATEOF Te ERT ieee - Petition for a Writ of Certiorari 17 U. S. 208, 216 (1974); Rosario v. Rockefeller, 410 U. S. 752, 759, n. 9 (1973); Hall v. Beals, 396 U. S. 45, 49 (1969); Bailey v. Patterson, 369 U. S. 31, 32-33 (1962). Implicit also, if not in reality explicit, in the require- ments of Rule 23(a)(4) is that a representative cannot have interests which might be antagonistic to other mem- bers of that class. Such antagonism may arise as a result of differences over economic interests or individual pre- dilections. The principal relief sought must not be re- pugnant to the interests of class members. If the relief or new status accruing to class members as a consequence of the representative’s actions is not in the interests of class members, that, too, constitutes noncompliance with Rule 23(a)(4). Petitioners’ rights to due process were clearly im- paired by the District Court’s refusal to adhere to the criteria set forth in Rules 23(a) and (b), and in particular Rule 23(a)(4). In its Opinion, the District Court con- cluded that because it believed the settlement was fair and reasonable, any objections that went to the propriety of the maintenance of a class action could be rejected. Peti- tioners’ contentions were thus disposed of in a fashion which allowed the ends to justify the means. This case clearly presents an appropriate vehicle for the Court to enunciate a uniform and salutary standard that every class action determination must be supported by specific findings of fact and conclusions of law, which articulate the reasons for such decision and how each of the criteria specified by Rules 23(a) and 23(b) have been met. In addition, to curb the potential abuses inherent in class actions agreed to be maintained by parties for pur- poses of settlement only, thereby preventing the sacrifice of procedural and substantive fairness, this Court should mandate that the practice of determining that actions shall 18 Petition for a Writ of Certiorari be maintained as class actions “for purposes of settlement only”, after the terms of a settlement had already been bargained with defendants by plaintiffs, as undesignated “class representatives”, and their counsel, is not merely condemned, but permanently outlawed. Cf. Manual for Complex Litigation (1975) Part I, § 1.40, p. 25 and § 1.46, pp. 55-58; City of Detroit v. Grinnell Corporation, 495 F. 2d 448, 466 (2d Cir. 1974); Memorandum Opinion of the District Court, dated November 16, 1976 (A1). In class actions there is and can be no substitute for fair and adequate representation, and specific findings should articulate this. Just as this Court recently, in Kremens v. Bartley, supra, 45 LW at 4455, thought it not amiss to remind a district court that it is under obligation “to ‘stop, look and listen’ before certifying a class in order to adjudicate constitutional claims,” granting the writ sought by petitioners will serve as a similar admonition of the gravity involved in complying with the requirements of Rule 23(a) before certifying class actions. II. The Validity of Rules 23(c)(2) and 23(c)(3) in Compell- ing Non-Parties Described as Plaintiff Class Members to Perform the Affirmative Act of Opting Out or Be Bound by the Adjudication of a Court Which Lacks Personal Jurisdiction Over Them Presents a Significant Question of Federal Law and Juridical Ad- ministration Which Should Be Decided by This Court. By their express terms, Rules 23(c)(2) and 23(c)(3) make a judgment entered in a class action binding on all non-party class members except those individuals who take affirmative action and opt out of the class in accordance with the provisions of Rule 23(c)(2)(A) and the specific procedures established by the court in a particular case. Petitioners contend that these provisions founded solely upon a rule of court, which forces non-parties de- Petition for a Writ of Certiorari 19 scribed as class members not otherwise personally subject to a court’s jurisdiction to perform the affirmative act of opting out or be bound by the adjudication of a court which lacks personal jurisdiction over them, is unconsti- tutional! because it deprives such non-parties of due process guaranteed by the Fifth Amendment. Rule 82 of the Federal Rules of Civil Procedure also prohibits the con- struction of the rules to extend the jurisdiction of the dis- trict courts. Although this Court has often considered the juris- dictional due process claims of non-residents defendants, see, e.g., Shaffer v. Heitner, supra, 45 LW 4849 (June 24, 1977 ); McGee v. International Life Insurance Company, 355 U. S. 220 (1957); International Shoe Co. v. Washing- ton, 326 U. S. 310 (1945), neither it nor the lower federal courts have ever delineated the due process limitation on a federal court’s personal jurisdiction over an individual or entity in the position of an involuntary non-party plaintiff as a result of being a described member of a class in an action ordered to be maintained as a class action under Rule 23 of the Federal Rules of Civil Procedure. Somewhat over ten years ago, the District Court in School District of Philadelphia v. Harper & Row Pub- lishers, Inc., 267 F. Supp. 1001. 1005 (E. D. Pa. 1967), expressed the following comment on the amended scope of Rule 23: “Although the new rule gives us no express power to order a proposed member to join the class—if a proposed member, over whom we previously had no personal jurisdiction, simply ignores the notice, whether by intention or by inadvertence, it becomes, by inaction alone, a member of the class to be bound by the judgment. Our ‘invitation’, thus extended, be- comes, in effect, a ‘command’. Such a radical exten- 20 Petition for a Writ of Certiorari sion by (sic of) this Court’s jurisdiction by the mere inaction of a non-appearing, non-resident citizen is, in our view, unprecedented.”* By its silence, a proposed class member not only forfeits its previously unfettered right to choose its own forum and to initiate its own litigation, but ap- parently waives any objections it might have concern- ing the lack of personal jurisdiction and venue of this Court. We have some doubt, too, of the propriety of a rule which extends the binding, substantive effect of a judgment to absent, but ‘described’, class memhers as well as to ‘identified’ class members.” In footnote 14 (267 F. Supp. at 1005), the court stated: “Previously, any enlargement of the jurisdiction and venue powers of the district courts by Congress has been specifically conferred by statute. The Inter- pleader Statutes 28 U. S. C. §§ 1335, 2361 and the recent Habeas Corpus Amendment to 28 U. S. C. § 2441 are but several examples.” There is a body of case law bearing on this question now raised which casts serious doubt on the validity of the “opt-out” provisions of Rules 23(c)(2) and 23(c)(3) to the extent that they are made applicable to involuntary non-parties described as plaintiff class members over whom the court previously had no jurisdiction. Traditionally, a court’s personal jurisdiction has at- tached to a plaintiff, resident or non-resident, only when the plaintiff voluntarily submits his claim for adjudication. Beginning with International Shoe, supra, a case in- volving a corporation, this Court has consistently adhered ee ee Pe A Be ee he pt Petition for a Writ of Certiorari 21 to the rule that a state court may not exercise personal jurisdiction over a defendant unless that defendant has had: “ _ . [c]ertain minimum contacts with [the] forum such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.” 326 U. S. at 316. The same rule was followed in McGee v. International Insurance Company, supra, 355 U. S. at 222. The rule of International Shoe was extended to in- dividual defendants in Hanson v. Denckla, 357 U. S. 235 (1958). After specifically noting “. . . [t]here is no suggestion that the court failed to employ a means of notice reasonably calculated to inform non-resident de- fendants of the pending proceeding, or denied them an opportunity to be heard . . .” (357 U. S. at 245) the Court held: “ ___ [The restrictions on the personal jurisdiction of state courts] are more than a guarantee of immunity from inconvenient or distant litigation. They are a consequence of territorial limitations on the power of the respective States. However minimal the burden of defending in a foreign tribunal, a defendant may not be called upon to do so unless he has had the ‘minimal contacts’ with that State that are a pre- requisite to its exercise of power over him.” 357 U. S. at 251. [Citation omitied.] International Shoe, McGee and Hanson all dealt with the power of state courts under the Fourteenth Amendment. The lower federal courts have consistently held that the personal jurisdiction of district courts is limited in the same manner and to the same extent by the due process 22 Petition for a Writ of Certiorari clause of the Fifth Amendment. The holdings in these cases are summarized by the Seventh Circuit in Honey- well, Inc. v. Metz Apparatewerke, 509 F. 2d 1137 (7th Cir. 1975). After acknowledging that the Supreme Court cases on “minimum contacts” all related to the jurisdiction of state courts under the Fourteenth Amendment, the Honey- well Court held: “. . « In this litigation, on the other hand, a federally created right is at issue, and due process is properly a matter for examination’in light of the Fifth Amend- ment rather than the Fourteenth Amendment. That is not to say, however, that the International Shoe line of cases is irrelevant to our inquiry here. The due process clause of the Fifth Amendment is essentially a recognition of the principles of justice and fundamental fairness in a given set of circum- stances, Galvan v. Press, 347 U. S. 522, 530, 74 S. Ct. 737, 98 L. Ed. 911 (1954); Aetna Insurance Com- pany v. Hartshorn, 477 F. 2d 97, 100 (5th Cir. 1973), and, so viewed, on the facts of this case, we can per- ceive no operative difference between the concept of due process as applied to the states and as applied to the federal government. This and other courts have reached this result, explicitly or tacitly, and have ap- plied the ‘minimum contacts’ standard to fedaral ques- tion cases in which in personam jurisdiction was at issue, and we deem it appropriate to do so here... .” 509 F. 2d at 1143. [Footnote and citations omitted. ] Under the line of cases represented by Honeywell, the due process clause of the Fifth Amendment prohibits a non- resident defendant from being compelled to adjudicate his rights in a district court in an action arising under federal law unless he has had “minimum contacts” with the forum. PRIN. ad IPO OE OE Ir Petition for a Writ of Certiorari 23 Most recently, this Court in Shaffer v. Heitner, supra, 45 LW 4849 (June 24, 1977), declared the State of Dela- ware’s assertion of jurisdiction over non-residents by a sequestration order, based solely on the statutory presence of securities in Delaware, was violative of due process, be- cause that clause “does not contemplate that a state may make binding a judgment . . . against an individual or cor- porate defendant with which the state has no contacts, or relations.” International Shoe, supra, 326 U. S. at 319. By acquiring securities of a Delaware corporation, this Court held that the defendants did not “surrender their right to be brought to judgment only in states with which they had ‘minimum contacts’.” Id., 45 LW at 4857. Mr. Justice Stevens, concurring in the judgment, noted: “One who purchases shares of stock on the open market can hardly be expected to know that he has thereby become subject to suit in a forum remote from his residence and unrelated to the transaction.” Id., 45 LW at 4858. The compulsion of Rules 23(c)(2) and (3) on non- parties described as plaintiff class members, who had pur- chased convertible debentures on the open market, to per- form the affirmative act of opting out or be bound in a class action settlement by the adjudication of a court which lacks personal jurisdiction over them, is quite analogous to the impermissible “surrender” of rights held by this Court to be inconsistent with due process in the Shaffer case, and, it is contended, equally impermissible constitutionally. This compulsion of Rule 23 can also not be justified on the basis of the minimal effort normally required to “opt out” of a class. Hanson v. Denckla, supra, clearly holds that no burden, no matter how minimal, can be con- stitutionally imposed by a state court which lacks a con- stitutional basis for asserting personal jurisdiction over a 24 Petition for a Writ of Certiorari citizen. Based on Honeywell, supra, and the decisions consistent with it, the same rule should be equally applica- ble to district courts to strike down the coercive effect of Rules 23(c)(2) and 23(c)(3) on objecting non-parties who are described as plaintiff class members. In addition to this contended inconsistency with the Fifth Amendment, petitioners also submit that the effect of Rules 23(c)(2) and 23(c)(3) represents an invalid ex- pansion of the personal jurisdiction of district courts, con- trary to the express provisions of the Rules Enabling Act and Rule 82. To the extent this Court’s decisions in Mis- sissippi Pub. Corporation v. Murphree, 326 U. S. 438 (1946), and Snyder v. Harris, 394 U.S. 332 (1969), appear to have language contrary to these contentions concerning the Rules Enabling Act and Rule 82, those expressions should be reconsidered and declared inapplicable to the present context. There is nothing in the Rules Enabling Act or Rule 82 or their respective histories which indicates that their proscriptions should be construed as being solely limited to subject matter jurisdiction. Facially, both the statute and the rule appear equally applicable to personal jurisdiction and both appear to prohibit expansion of that jurisdiction as is purported to be accomplished by Rule 23. III. The Class Action Settlement Approved by the Courts Below Misused the “Opt Out” Provisions of Rule 23 to Foreclose the Rights of Objecting and Silent Con- vertible Debenture Owners Who by Their Debenture Contracts Were Not Required Affirmatively to Re- quest Exclusion to Protect Against Loss of Their Rights to Convert Into Common Stock. If Not Va- cated, This Decision Will Be A Serious Threat to the Entire National Market for Convertible Debentures. Since adoption in 1966 of amended Rule 23, there has been a running controversy on the “opt out” reguire- ee ae Petition for a Writ of Certiorari 25 ments adopted in Rule 23, in contrast to “opt in.” Com- pare Report of the Commission on Federal Courts of the Association of the Bar of the City of New York, Class Actions—Recommendations Regarding Absent Class Mem- bers and Proposed Opt-In Requirements, 25 Record of N. Y. C. B. A. 897 (1973), with the Report and Recom- mendations of the American College of Trial Lawyers Special Committee on Rule 23, pp. 31-34 (March 15, 1972)." Stated in the terms of the Debentures involved in this litigation, each of which is deemed to be a contract made under and for all purposes to be construed in ac- cordance with the laws of the State of New York, as pro- vided in Sec. 16.09 of the Indenture pursuant to which these Debentures were issued (Vol. II, 467a at 576a), is the provision that: «<< . no... supplemental indenture shall . . . alter or fenpals the right to convert the same into shares of common stock at the rates and upon the terms provided in the Indenture without the consent of the holder of each Debenture so affected...” (Vol. II, 467a at 483a-484a ). Petitioners’ contentions in the courts below included the position that their Debenture contract prevented the alteration or impairment of their separate and several con- tracts rights to convert into common stock, without the individual written consent of each holder. Therefore the class action settlement could only bind those holders who affirmatively opted in and could not bind those who did not respond. As a result in the event of a merger, the Debenture owners could not be forced to accept the 10. These reports appear in Current Problems in Federal Civil Practice, (P. L. I. 1975) pp. 461-521. 26 Petition for a Writ of Certiorari altered right to convert into money, instead of common stock. Of course, because the Debentures were redeem- able, Indian Head or any successor could redeem the De- bentures. The District Court, however, interpreted the Debenture contract and the Indenture as authorizing such conversion alteration in the event of a merger (Al at Al15-17). The construction and interpretation of the nature of the contract rights created by the Debentures is governed by state law, that of New York, as specified in the Inden- ture. The creditors of a corporation (the Debentures hav- ing creditor status ), merged under the laws of Delaware, become creditors of the corporation into which it has been merged, with all rights unimpaired, and all liabilities and duties of the merged constituent corporation become attached to the surviving or resulting corporation. Sec. 259, Delaware General Corporation Law (A55). In addition, this section of the Delaware statute provides that such liabilities and obligations may be enforced against the surviving or resulting corporation to the same extent as if the liabilities have been incurred or contracted by the surviving or resulting corporation. Thus, the creditors of a merged constituent corporation under Delaware law are automatically protected. See Folk, The Delaware General Corporation Law—A Commentary and Analysis ( Little, Brown, 1972) Section 259/ 365-368. In Santa Fe Industries, Inc. v. Green, — U. S. —, 45 LW 4317 (March 23, 1977), this Court held that in a short-form statutory merger under Delaware law, the policies and interests of the state forum are paramount, and an expansion by federal judicial construction making Sec. 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 applicable is impermissible. Therefore, petitioners contend, the settlement and consummation of the merger with its concomitant de- Petition for a Writ of Certiorari 27 struction of the rights to convert into common stock in- fringed the Delaware statutory provision contained in Sec. 259 of its General Corporation Law. All the sub- stantive state-created rights of the Debenture owners were not preserved unimpaired. See Van Gemert v. The Boeing Co., 520 F. 2d 1373, 1382, n. 19 (2d Cir. 1975), cert. denied, 423 U. S. 949 (1975); Kusner v. First Pennsylvania Corporation, 531 F. 2d 1234, 1238 (3d Cir. 1976). The class action settlement procedure approved by the courts below perverted and misused the “opt out” pro- visions of Rules 23(c)(2) and 23(c)(3) to foreclose the rights of objecting and silent Debenture owners who by their Debenture contracts were not required affirmatively to request exclusion to protect against loss of their rights to convert into common stock. Petitioners contend that by the nature of their con- tract, as well as by their not having been previously sub- ject to the personal jurisdiction of the Court, they had the right to be let alone, and the right to remain unclassified, in the absence of some voluntary expression of choice. See M. Frankel, Amended Rule 23 From a Judge's Point of View, 32 A. B. A. Antitrust L. J. 295, 300 (1966). As a further device to effect the foreclosure of rights of objecting and silent debenture owners, the court- approved settlement and merger authorized the issuance, as part of the judgment (A42 at A48-49), of a permanent injunction against all class members ‘rom prosecuting any claims arising out of or relating to the matters set forth in the complaints of the settled actions, including any claim related to consummation of the merger, other than a pro- ceeding for appraisal under Delaware law. This permanent injunction was issued without prior adequate notice, and without a trial on the merits, although a permanent injunction can properly be issued only after a 28 Petition for a Writ of Certiorari right thereto has been established at a trial on the merits. 11 Wright and Miller, Federal Practice and Procedure, § 2941 at 361 (1973); Capital City Gas Company v. Phillips Petroleum Company, 373 F. 2d 128, 131 (2d Cir. 1967). Yet the hearing on approval of the class action settlement and merger was not a trial on the merits. City of Detroit v. Grinnell Corporation, supra, 495 F. 2d at 456; Saylor v. Lindsley, 456 F. 2d 896, 904 (2d Cir. 1972). In addition, at the hearing on the settlement, no evidence was intro- duced by the proponents of the compromise to establish lack of adequacy of another remedy or any irreparable loss or damage necessary to support the grant of this permanent injunction. 7 Moore's Federal Practice { 65.18[3] at 65- 135-136 (1975). This permanent injunction made a nullity of the provision in the Indenture pursuant to which the Debentures were issued, which specifically provided in Sec. 8.09: “Anything in this Indenture to the contrary not- withstanding, the holder of any Debenture without reference to or the consent of either the Trustee or the holder of any other Debenture, in his own behalf and for his own benefit, may enforce, and may institute and maintain any proceedings suitable to enforce, his right to convert his Debenture into shares of Common Stock as provided in Article Five.” (Vol. II, 467a at 537a ) The ultimate effect of the judgment and order of the courts below, if not vacated, threatens to open the door to and enable the forced elimination and destruction of the right to convert into common stock of literally billions of dollars of outstanding convertible debentures in the United States. Issuers and their controlling persons, through the device of a statutory merger without the consent of con- ee . Petition for a Writ of Certiorari 29 vertible debenture owners, utilizing the mechanism of settlement under Rule 23, with its “opt out” provisions contained in Rules 23(c)(2) and 23(c)(3), can achieve this result at discount prices below the face amount of the debentures. The device utilized and approved by the decisions below works a practical destruction of the under- lying basis for convertible debenture purchases. If this misuse of Rule 23, by the route of settlement and statutory merger, is not vacated, the future underwriting and issu- ance of convertible debentures in the capital markets of the country by issuers whose common stock is expected to rise, may well, for all practical purposes, be foreclosed. No reasonable investor, who is made aware that his con- version rights into common stock might thus be eliminated, would purchase such securities. The continued sale of convertible securities without specific advance warning and notice of the eventuality of potential conversion right destruction can work a major deceit on the investing public. 30 Petition for a Writ of Certiorari CONCLUSION. For the foregoing reasons, petitioners submit that: 1. The judgment and order approving the settlement and merger should be vacated in entirety, with instructions to dissolve the order granting the permanent injunction contained therein. 2. This case should be remanded to the District Court with such appropriate directions as will prohibit alteration or impairment of the conversion rights into common stock of all Debentures owned by petitioners and other owners thereof without the affirmative consent of each Debenture owner affected. Respectfully submitted, Epwin P. Rome, WILLIAM E. TaAyLor, JEANNE P. WROBLESKI, 1100 Four Penn Center Plaza Philadelphia, PA 19103 Tel. (215) 569-3700 Attorneys for Petitioners. Of Counsel: BLANK, Rome, Kiaus & Comisky, 1100 Four Penn Center Plaza, Philadelphia, PA 19103 Morton P. Rome, 204 Kent Road, Wyncote, PA 19095 Bruce A. HECKER, IrnA POSTEL, SHEA, GouLp, CLIMENKO & CASEY, 330 Madison Avenue, New York, NY 10017 Dated: July 29, 1977 os ne = eee ew ee enone: ee nse premntnne +--+ ree -o oe APPENDIX A. Memorandum Opinion #45364. (Filed November 16, 1976) UNITED STATES DISTRICT COURT SOUTHERN District OF NEw YORK 74 Civ. 5755 EDWARD BRUCKER and DANIEL R. KAPLAN, as Trustees under the Trust Agreement dated Novem- ber 15, 1968, made by WILTRUD E. GADBOYS, as Grantor, CECIL G. HUSKEY, W. T. STRATTON and NORTE & CO., a partnership composed of JOSEPH C. GALDI and RITA D. GALDI, Plaintiffs, —against— THYSSEN-BORNEMISZA EUROPE N. V., THYSSEN- BORNEMISZA, INC., THYSSEN-BORNEMISZA HOLDINGS, INC., MARINE MIDLAND BANK, INDIAN HEAD, INC., JAMES G. FERGUSON, JAMES M. FLACK, ANDREW KALMAN, PAUL W. McALISTER, JOHN E. OSULLIVAN, RICHARD J. POWERS, JAMES E. ROBISON, ROBERT M. SCHWARZENBACH, MARSHALL F. SMITH, HERBERT E. BACHRACH, GERARD B. HUIS- KAMP, WHITE, WELD & CO., INCORPORATED, L. EMERY KATZENBACH, H. H. THYSSEN- BORNEMISZA, R. L. GENILLARD and CHEMI- CAL BANK, Defendants. (Al) A2 Appendix A 75 Civ. 229 WILLIAM B. WEINBERGER, Plaintiff, —against— RICHARD J. POWERS, JAMES M. FLACK, ANDREW KALMAN, PAUL W. McALLISTER, JOHN E. O’SULLIVAN, JAMES E. ROBISON, ROBERT M. SCHWARZENBACH, MARSHALL F. SMITH, JAMES G. FERGUSON, THYSSEN-BORNEMISZA, INC. and INDIAN HEAD, INC., Defendants. 75 Civ. 1736 SHAMROCK CORPORATION, individually and on be- half of all holders of Common Stock and Warrants of Indian Head, Inc., similarly situated, Plaintiffs, —against— INDIAN HEAD, INC.. THYSSEN-BORNEMISZA GROUP N. V., THYSSEN-BORNEMISZA, INC., WHITE, WELD & CO: INCORPORATED, et al., Defendants. Memorandum. STEWART, District Judge: Before the Court is an application pursuant to Rule 23 of the Federal Rules of Civil Procedure for approval of a proposed settlement. Counsel for both plaintiffs and defendants have submitted -well documented papers in Appendix A A3 support of the proposed settlement. Objectors have pre- sented papers in response, and have been heard at hear- ings before this Court on October 13 and 18, 1976. Upon a detailed review of the arguments and documents sub- mitted by all parties, it is the Court’s conclusion that the settlement is fair and reasonable and should be approved. Indian Head is a diversified American company which in 1973 had approximately 5,425,000 shares of common stock outstanding.’ The common stock was listed on the New York Stock Exchange. Warrants were issued and outstanding pursuant to a 1965 agreement, and were listed on the American Stock Exchange.’* $25,000,000 of 5%% convertible subordinated debentures due April 15, 1993 (in denominations of $1,000), were also issued and outstanding subject to the terms and conditions of an In- denture dated April 15, 1968, between Indian Head and Marine Midland Grace and Trust Company of New York as Trustees [“Indenture”}. Thyssen-Bornemisza Europe, N. V. [“TBE”] is an in- ternational industrial holding company with headquarters in the Netherlands. In September, 1973, pursuant to a Memorandum of Understanding between TBE and Indian Head,? TBE made a tender offer at $27 a share, and 1. It also had 649,000 shares reserved for issuance to the con- vertible debenture holders pursuant to their conversion rights, and 111,667 shares reserved for the conversion of preferred shares. 1A. “Each Warrant is issued Poe to the Warrant Agree- ment with the Chemical Bank of New York as Warrant Agent (“CuemicaL” ), and entitles the holders through May 15, 1990 to purchase one share of common stock, or an aggregate of 400,000 shares, at the following exercise prices: $20 per share if exercised before the close of business on May 15, 1970; $25 per share to May 15, 1975; $30 per share to May 15, 1980; $35 per share to May 15, 1985; and $40 per share to May 14, 1990;” Plaintiffs’ affidavit p. 23. 2. Indian Head agreed in the Memorandum of Understanding to 1) sell TBE 750,000 shares of Indian Head's authorized but un- issued common stock at $27 per share; 2) ate with TBE in the first tender offer; 3) elect to the Indian Head Board of Directors A4 Appendix A acquired approximately 33.9% of the common stock;° although initially it had offered to buy only between 26% and 32%. Prior to the tender offer, the New York Stock Ex- change had indicated to Indian Head and TBE that owner- ship by TBE of over 32% would probably result in delisting the common stock. This information was included in the statutory notice to shareholders.‘ In paragraph 9 of this same notice to shareholders, TBE disclaimed any present intention to acquire control of Indian Head. 2. (Cont’d.) Huiskamp (Chairman of TBE’s Board of Management) and Bachrach ( a member of TBE’s Board of Management and director of its Corporate Planning and Development), and to make one a member of the Executive Committee and one a member of the Finance Committee. TBE a to buy from the Directors of Indian Head up to 50,000 of their shares, and to name Robison Ace Head's former president) to the TBE Supervisory Board which makes TBE policy), if the tender offer succeeded. 3. TBE’s initial offer was to hase from the public between 750,000 and 1,100,000 shares of common stock, be addition to 750,000 to nad ue ng directly from Indian Head's authorized but unissued st This would have given them 26% to 32% of the stock. At the expiration of the offer 1,213,619 shares had been tendered, and ye this was slightly in excess of the number of shares TBE sought, TBE states that it agreed to purchase all shares tendered in order not to disappoint the cendindan stockholders ( Defendants _Joint Memorandum in Support of Proposed Settle- ment, p. 3) [“Defendants’ Memorandum in Support”). 4. “. . . if the ownership by TBG (later changed to TBE) of Indian Head common stock should arise above 32% (30%, if 30% or less is purchased _— to this offer and the agreement referred to above) such additional ownership might ultimately result in the delisting of Indian Head common stock from the Exchange. TBG has expressed to Indian Head its commitment that it will consult with Indian Head before taking any action, other than the trans- actions described in this offer, which would increase TBG’s owner- ship of Indian Head common stock beyond 30% of the outstandin shares. Delisting could also result if the number of persons hold- ing at least 100 shares of Indian Head common stock (approxi- mately 4,000 at the present time) should fall below 1,200.” (Plain- ad be in support of settlement, Exhibit 24, { 13) [“Plaintiffs’ its”]. Appendix A A5 Except to the extent described above, it is not the present intention of TBE to attempt to acquire control of Indian Head by means of these transactions, nor in its capacity as a major stockholder of Indian Head does TBE now have or intend to develop plans or proposals to liquidate Indian Head, to sell its assets or to merge it with any other person or to make any change in its business, management or corporate structure. TBE does intend to vote its shares in a manner which is intended to benefit all of the stock- holders of Indian Head, including TBE. ( Plaintiffs’ Exhibit 24. ) Indian Head’s management made no recommendation to its shareholders with respect to this first tender offer— though it did state in the notice that it cooperated with TBE in making the offer (it made available a list of share- holders ). No notice of this first tender offer or of the possible delisting of the common stock was sent to the debenture holders, warrant holders or preferred share holders. How- ever, the 1973 Annual Report did refer to the tender offer and the resulting acquisition of the stock. In July, 1974, TBE made a second tender offer to buy all remaining Indian Head common stock, (again at $27 a share ), and all outstanding warrants at $2.25 per warrant. This second tender offer was financed by a $50,000,000 long-term revolving credit agreement with the Chase Manhattan Bank, N. A. and fourteen other banks located outside the United States. Plaintiffs claim that these financial arrangements were made just nine weeks after the first tender offer (although the second tender offer was not to take place for 7 more months), and thus supports an inference that TBE’s statement ‘in its first tender offer that it did not intend to liquidate Indian Head, sell it, or AG Appendix A merge it, was false and misleading. The defendants dis- pute this claim. The notice to shareholders of the second tender offer disclosed, among other things: the financing arrangements for the offer ( Plaintiffs’ Exhibit 45, § 11); the fact that Indian Head's Board of Directors and management made no recommendation, although they had cooperated with TBG (later changed to TBE) (Id. § 12); the number of shares each member of the Indian Head Board was going to tender or retain (Id.); the fact that as a result of the 1974 tender offer the common stock might no longer meet the requirements of the New York Stock Exchange for continued listing and the Exchange might delist the shares (Id. { 13); that TBG intended to acquire control of Indian Head, but did not have any present plans to sell its assets or merge. The notice also stated: TBG expects to purchase a substantial majority of the common stock as a result of this offer and thereby acquire control of the Company. TBG believes the Company to be well managed and to present an at- tractive long-term investment opportunity. TBG presently does not have any plans or proposals to make any major changes in the Board of Directors, management, corporate structure, operating policies or business of the Company or to suggest its liquida- tion, the sale of its assets or a merger with any other person. However, it reserves the right to make changes in the future should it determine that the best interests of the Company and its stockholders are served thereby. (Id. § 9). No copy of this notice was sent to the registered con- vertible debenture owners. As a result of this second tender offer, TBE’s total ownership of common stock increased to approximately Appendix A A7 90.6%. They also obtained about 8% of the outstanding warrants. Shortly after the tender offer, the New York Stock Exchange delisted Indian Head’s common stock and convertible debentures, and thereafter they were traded over the counter. The three class action lawsuits involved in this settle- ment were brought, as a result of these two tender offers, against TBE, Indian Head, TBI,° Marine Midland, Trus- tee for the Debentures, Chemical Bank, warrant agent, White, Weld & Co., Inc., Indian Head’s investment ad- visor, and various individual defendants who are or were officers and directors of Indian Head. The Complaints in all three actions alleged violations of the Williams Act § 14(d) and (e) * and § 10b of the Securities Act of 1934 * and Rule 10b-5 promulgated thereunder. The convertible debenture owners claim that the failure to send them notice was a violation of the Act and that this prevented them from favorably exercising their conversion rights. They also claim that TBE’s acquisition of control constituted a constructive merger in violation of the Indenture. The warrant owners claim the tender offers were false and mis- leading. Both the Brucker and Shamrock Complaints also allege a common law breach of fiduciary obligations. The defendants moved either for dismissal of the Com- plaints or for summary judgment, and the plaintiffs cross- 5. A Maryland corporation which is a wholly-owned subsidi of TBE, formed for the express purpose of acquiring Indian Head's stock and warrants. 6. Edward Brucker, et al. v. Thyssen-Bornemisza Europe, N. V., et al., 74 Civ. 5755 [“Brucker”] and William Weinberger v. Powers, et al., 75 Civ. 229 [“Weinberger”] were originally brought on behalf of convertible debenture owners of Indian Head. Sham- rock Corporation v. Indian Head, et al., 75 Civ. 1736 [“Shamrock”] was brought on behalf of all holders of common stock and warrants of Indian Head. 7. 15 U. S. C. 78n et seq. 8. 15 U. S. C. 78j(b). A8 Appendix A moved for summary judgment. These motions were sub judice on February 12, 1976, when TBE announced a pro- posed “short-form” merger * of Indian Head into a TBE affiliate which was to take place on March 19, 1976."° The Brucker plaintiffs moved to enjoin the merger through an amended class action complaint,"’ which was filed on behalf of all owners of warrants and common stock, as well as the debenture holders previously repre- sented. On March 4, at the opening of the preliminary injunction hearing, the defendants announced that they were withdrawing the merger plan. Subsequent to the announcement of the proposed merger, but prior to its withdrawal, the Court of Appeals for the Second Circuit issued opinions in Marshel v. AWF Fabric, 533 F. 2d 1277 (2d Cir.), vacated, 45 U. S. L. W. 3272 (Oct. 12, 1976), and Green v. Santa Fe Industries, Inc., 533 F. 2d 1283 (2d Cir. ), cert. granted, 45 U. S. L. W. 3220 (Oct. 5, 1976), which considerably changed the law as to short-form mergers, and left many questions for future litigation. This uncertainty in the law led defend- ants to withdraw their merger proposal, and to negotiate with the plaintiffs, Transcript, First Settlement Hearing on October 13, 1976, at 22 [“Ist Tr.”]. A Stipulation and Agreement of Settlement was reached and signed by all the parties in late July. The 9. Under § 253 of the Delaware Corporation Law. 10. Under the proposed merger, the common shareholders would be paid $30 cash per share (compared to the $27 price of the tender offers ), the convertible debentures could be surrendered for $779.22 cash, the conversion value at $30 per share (compared to the $701.30 tender offer conversion value) or held until maturity earning the regular interest payments but without the right to con- vert. The warrant owners were to receive nothing. 11. The amended complaint claimed that the merger plan con- stituted a = pn ee and thus the debenture holders were entitled oo the redemption price, rather than the conversion price of Appendix A A9 Court then ordered, among other things, that the three actions should be maintained as class actions for purposes of settlement only, that a settlement hearing be held on October 13, and that a notice of this hearing and of the settlement terms be sent to all the members of the various classes, so that those who wanted to be excluded could opt out, and those who wanted to object could do so. Two objectors appeared at the settlement hearings, Morton P. and Marjorie T. Rome, trustees of a trust which owns 25 debentures, and Morris Shuldenrein,’* owner of 7,500 warrants. Since most of the Romes’ objections go to the scope of the settlement, and not its actual terms, we will defer discussion of their objections for the moment, and first discuss the fairness of the actual terms of the settlement. The settlement agreement provides for the merger of Indian Head into a subsidiary of Thyssen-Bornemisza, Inc., [“TBI’]. Under the terms of the 32 million dollar settle- ment, the common stockholders will receive $32 a share upon the merger. The owners of the 54% convertible sub- ordinated debentures due in 1993,’* have a number of options: 1) hold on to the debentures and collect the in- terest until 1993, at which time they can collect the $1000, 2) convert now at $32.50 a share, and receive $844.16 per $1000 debenture,"* or 3) convert any time between the merger and 1993 and receive $32 per share (or $831.17 per $1000 debenture), a fixed cash sum. In addition, 12. Although Mr. Shuldenrein did not properly file his objec- tion, the Feat heard his statement, and has considered his ob- jection. 13. The convertible debentures are issued in face amounts of $1000 or integral multiples thereof, and are convertible into 25.974 shares of common stock per $1000 in principle amount. 14. This applies only to debenture owners who were owners on August 2, 1976 and who still own on the date of the merger. 15. As is apparent, those debenture holders who convert as part of the s maeat will receive $.50 more per share than those Al0 Appendix A former owners of Indian Head convertible debentures who held them on September 27, 1973,"* and sold on or before July 1, 1974,” will receive up to $50 per debenture. Former owners of debentures who held them on July 2, 1974 and sold between July 12, 1974** and August 2, 1976,” will receive up to $100 per debenture, the exact amount determined by the sales price. As to the warrant holders, those who have owned war- rants continuously from July 12, 1974 to the date of the merger will receive $4.00 per warrant. As to the warrant holders who have not owned their warrants continuously: owners on August 2, 1976, who still own on the date of the merger will receive $2.50 per warrant; owners of warrants on July 2, 1974, who sold their warrants between July 12, 1974, and August 2, 1976, will receive $1.50 per warrant. There will be no payment for any warrant sold between August 1, 1973, and July 1, 1974. In addition to the above amounts, TBI will pay all the expenses of adminis- tering the settlement and will pay up to $600,000 for counsel fees and expenses as awarded by the Court. Plaintiffs’ attorneys agree to accept an award not to exceed $600,000. 15. (Cont'd. ) who convert later. The difference is due to the fact that the Inden- ture requires the debenture holder to receive what the common stockholders receive (here, $32 a share) in the case of a merger. od rp Second Settlement Hearing on October 18, 1976, p. 68 r. J}. 16. Date of the first tender offer. 17. On July 1, 1974, Indian Head requested i ae Lae its stock. Trading was supentied from July cat Ful 18. July 12, 1974, was the date of the second tender offer. 19. August 2, 1976, is the date the Order in the instant case signed. was Appendix A All The general principles which guide the Court in assessing the fairness, reasonableness and adequacy of a class action settlement are clear. ... the role of a court in passing upon the propriety of the settlement of a. . . class action is a delicate one . . . since ‘[t]he very purpose of a compromise is to avoid the trial of sharply disputed issues and to dispense with wasteful litigation, the court must not turn the settlement hearing ‘into a trial or a rehearsal of the trial.’ Rather . . . it must reach ‘an intelligent and objective opinion of the probabilities of ultimate success should the claim be litigated’ and ‘form an educated estimate of the complexity, expense, and likely duration of such litigation . . . and all other factors relevant to a full and fair assessment of the wisdom of the proposed compromise. Newman v. Stein, 464 F. 2d 689, 691-92 (2d Cir.), cert. den., 409 U. S. 1039 (1972); (citations omitted). Levin v. Mississippi River Corp., 59 F. R. D. 353, 361 (S. D. N. Y. 1973). Some of the factors considered “rele- vant to a full and fair assessment” of the proposed settle- ment by the District Court, and approved by the Court of Appeals in City of Detroit v. Grinnell Corporation, 495 F. 2d 448, 463 (2d Cir. 1972), were: 1) the complexity, expense and likely duration of the litigation; 2) the reac- tion of the class to the settlement; 3) the stage of the pro- ceedings and the amount of the discovery completed; 4) the risks of establishing liability; 5) the risks of estab- lishing damages; 6) the risks of maintaining the class action through the trial; 7) the ability of the defendants to withstand a greater judgment; 8) the range of reason- ableness of the settlement fund in light of the best possible recovery; 9) the range of reasonableness of the settlement Al2 Appendix A fund to a possible recovery in light of all the attendant risks of litigation. At the heart of the analysis the Court must evaluate the strength of the plaintiffs’ case, consid- ering both the likelihood of establishing liability and the consequent probable reward in damages. It must con- sider these factors in light of the terms of the settlement. In the instant case, there are complicated questions of law on both the issues of liability and damages. While the role of a Court in determining the fairness of a settle- ment is not to decide these issues, the Court should, and here does, take note of the fact that these complex ques- tions of law are unresolved, thus making this case an appropriate one for settlement. One of the primary unre- solved legal questions involves the interpretation and ap- plication of Marshel, supra, Green, supra, and Merit v. Libby, McNeill and Libby, 533 F. 2d 1310 (2d Cir. 1976) to the attempted short-form merger in this case, particu- larly in light of the fact that the Indian Head merger is distinguishable on its facts from each of the above cases. Thus the Court does not agree with the objectors’ assertion that a liability is clear with respect to issues arising from the short-form merger. This case also presents complex legal and factual questions on a variety of other issues, among them: whether or not the 1973 and 1974 tender offers were false and misleading in failing to disclose that TBE would merge Indian Head into an affiliate: whether or not under Van Gemert v. Boeing, 520 F. 2d 1373 (2d Cir.), cert. den., 423 U. S. 947 (1975), Indian Head was obligated to send notice of the tender offers to the regis- tered debenture owners. In determining the reasonableness of the amount of the settlement in relation to the amount of a possible re- covery after trial, the Court has considered the expert opinions submitted to the Court by Martin Whitman of Appendix A Al3 M. J. Whitman & Co., and Robert Winston, of Winston Perry Financial Corporation, the evaluation by counsel, and the cost of litigating the aforementioned legal issues. The Court has also noted the favorable reaction of the classes to the settlement.” In light of these factors, we find the settlement fair and reasonable.” The Romes raise a number of objections to the pro- posed settlement; most of them going to the scope of the settlement, and not the fairness of its terms. First they object to the designation of the suits as class actions for purposes of settlement only, on the grounds that this is unauthorized by Rule 23 and is violative of the provisions of the Manual for Complex Litigation, which advises against “a tentative determination of a class action request for the purpose of settlement.” * The Second Circuit has stated in Grinnell, supra, that the Manual recommenda- tions “were not meant to be intractable rules,” and that the major concern of the Manual may be satisfied where, as here, the settlement provides “for notice of a hearing 20. The plaintiff wrote in his. affidavit in support of the pro- posed settlement, that: Out of $14,295,000 convertible debentures, the owners of $1,240,000 communicated with us. The owners of $1,212,000 (including L. F. Rothschild & Co.) indicated acceptance, the owners of $27,000 opted out (not including $25,000 of the Rome objectants referred to hereafter). The owner of $1,000 said she would not sell a $1,000 bond for $844.16. [The ac- ceptance of an additional $172,000 was noted at the hearing, Ist Tr. at 18.] Out of 585,386 shares of publicly held common stock, the owners of 4,851 shares communicated with us, with the owners of 701 shares indicating acceptance, the owners of 3,271 shares opting out, and one owner of 1,050 shares objecting. Out of 349,467 publicly held warrants, the owners of 9,070 communicated with us, all of whom indicated acceptance. [Plaintiffs affidavit at 9-10]. 91. Thus we find no merit in Mr. Shuldenrein’s claim. 22. Manual for Complex Litigation § 1.40 (1975). Al4 Appendix A and an opportunity to challenge the fairness or any other aspect of the proposed settlement,” Grinnell, 495 F. 2d at 466. In addition, Grinnell stated that the Manual’s ob- jectives may be satisfied where, as here, the settlement was not negotiated in the early stages of the dispute, but rather after the parties had engaged in considerable litigation and were able to assess the risks of success, and where, as here, there were not different counsel vying to be class repre- sentatives before the settlement agreement was reached and publicized, thus not presenting a situation such as in Ace Heating and Plumbing Co. v. Crane Co., 453 F. 2d 30 (3d Cir. 1971). Therefore, the designation of these ac- tions as class actions for purposes of settlement only was proper in this case. The objectors also claim that there is an abuse of the use of Rule 23 as it is applied in this case to the converti- ble debenture holders. They note that the Rules Enabling Act ** under which the Federal Rules of Civil Procedure were promulgated, specifically provided that the Rules should not abridge or modify any substantive rights. The abuse to which the objectors point is the proposed settle- ment, which they contend will abridge the substantive conversion rights of the debenture holders. We do not agree that the settlement abridges any substantive rights of the debenture holders (see pp. 16-18 infra). Further, we find that the Rule 23 procedures were properly fol- lowed. Full notice was given to all members of the classes, and their rights to appear and object, or to opt out, were fully explained. Thus the Rule 23 procedures have protected the substantive rights of the individual debenture holders. The Romes also challenge the adequacy of the notice of the proposed settlement. The notice complied with 23. 28 U. S. C. 2074, as amended November 6, 1966, Pub. L. 89-773, § 1, 80 Stat. 1323. <7 Oo — =, Appendix A Al5 23(c)(2) and clearly advised the class members of the nature of the pending action and the general terms of the settlement, and indicated where more detailed informa- tion was obtainable and where objections could be heard. All material facts were included. Many of the Romes’ objections arise out of an asser- tion that the Indenture prevents any class action settle- ment involving debenture owners, as the Court can in no way alter “. . . the creditors [debenture holders] . . . sepa- rate and several contract rights . . .” * without the indi- vidual written consent of each holder. They claim that the setthment can only bind those holders who affirma- tively opt in and cannot bind those who do not respond. They also claim that the Indenture agreement prevents a forced conversion into money in the event of a merger, and requires either that Indian Head redeem the deben- tures * or that Indian Head respect the absolute right to convert into common stock. An analysis of these arguments requires an interpre- tation of the Indenture agreement, particularly Sections 5.06, 12.02, 13.01, and 13.02 (Articles 5, 12 and 13 of the Indenture are set out in Appendix A). Objectors argue that § 12.02, which provides for approval by two-thirds of the outstanding debentures when the issuer wishes to change or modify the Indenture itself, and requires con- sent of each debenture holder when the right to convert is altered or imparied, should be interpreted in this case to require the written consent of each debenture holder, since an attempt is being made to alter or impair the con- version right (2d Tr. at 6-10). The plaintiffs and defendants argue in response that the voting requirements of § 12.02 do not apply in the 24. Reply Brief of Objectors, p. 3. 25. At the current redemption price of $1,033 (103.302). Al6 Appendix A case of a merger. Rather, they state that § 5.06, § 13.01 and § 13.02 (which do not call for individual consent or a two-thirds vote) should govern the merger,” since these sections specifically discuss what is to occur in case of a merger (Defendants’ Memorandum in Response to Ob- jectors’ Brief at 20; 2d Tr. at 2-10). § 5.06 provides that: In case of any . . . merger into another corporation . . such successor . . . shall execute and deliver to the Trustee a supplemental indenture . . . providing that the holder of each debenture then outstanding shall have the right thereafter to convert such deben- ture into the kind and amount of shares of stock and other securities and property receivable upon such . . . merger . . . by a holder of the number of shares of common stock of the company into which such de- benture might have been converted immediately prior to such... merger.... First, we agree that §5.06 should control here be- cause it contains a detailed and specific provision as to what the debenture holders’ rights are in a merger while § 12.02 deals with their rights in a general context. In the case of a merger, § 5.06 requires that the sup- plemental Indenture contain the right to convert into whatever form of property the shareholders receive in the merger. Thus the debenture holders have never had an absolute right to convert into Indian Head stock in a merger, but only the right to convert into whatever form of “property” the shareholders would receive. Defendants 26. The debenture holders were alerted to the applicability of these sections by the debenture itself, which stated that “. . . the holder . . . has the right . . . to convert this debenture into fully paid and non-assessable shares of Common Stock of the Company . subject to such adjustment, if any, of the conversion rate and the securities or other property issuable upon conversion as may be required by the provisions of the Indenture.” Appendix A Al7 argue that cash is “property” within the meaning of § 5.06. We agree that cash is within the scope of the term “prop- erty” as used in § 5.06, and note that it has been so inter- preted in Broenen v. Beaunit, 440 F. 2d 1244 (7th Cir. 1970). Here, as a result of the proposed merger, the In- dian Head shareholders will receive only cash for their stock. Thus the provision in the settlement agreement allowing for conversion of the debentures into cash only is proper under § 5.06 because this is all the shareholders are receiving. In addition, § 5.06 does not require the indi- vidual written consent of each debenture holder when conversion rights are altered pursuant to a merger, so we conclude that the settlement abridges no rights of the debenture holders and can properly bind all debenture holders who do not opt out. Since we find that no substantive rights of the deben- ture holders are abridged by this settlement, this dis- penses with the following objectors’ claims: 1) that rep- resentation of the class was not adequate since class representatives cannot assert rights running individually and severally to each holder (Objectors’ Brief in Support of Objections to Proposed Settlement at 15-16, 23-25); 2) that their constitutional rights under the Fifth and Fourteenth Amendments and Article One, Section 10 were violated (Id. at 16-17); 3) that the class is not sufficiently numerous, since not a sufficient number assented in writ- ing (Id. at 23); and 4) that the settlement violates rights of all non-assenting convertible debenture owners under Delaware law (Id. at 40), New York law (Id. at 41), and Pennsylvania law (Id. at 43). The Rome objectors also claim that the settlement agreement violates various sections of the Securities Act of 1933, 15 U. S. C. § 77a et seq. [“1933 Act”], the Secu- Al8 Appendix A rities Exchange Act of 1934, 15 U. S. C. §78a et seq. [“1934 Act”], and the Trust Indenture Act of 1939, 15 U.S.C. § 77aaa et seq. Objectors claim that §5(c) of the 1933 Act” has been violated since the proposed settlement and notice of settlement is an “offer to sell” as well as an “offer to buy” securities, and as such the parties have not complied with the registration requirements of the Act. The settlement agreement is clearly not an offer by TBE to sell a security. While the settlement may be interpreted to encompass an “offer to buy,” we find that the registration requirements of §5(c) were not meant to apply to offers of an issuer or controlling stockholder of an issuer, to acquire for cash the issuer’s outstanding securities. When the issuer itself is making an offer to buy its own securities—at least when the offer goes to a sub- stantial number of security holders-—§5(c) would seem literally to apply in the sense that there is no specific exemption or exclusion; for that is an offer (and hence a transaction ) “by an issuer.” On the other hand, however tempting it might have been before the special legislation of 1968 to reenforce Rule 10b-5 under the 1934 Act by using §5(c) to attack the problems of inadequate disclosure by issuers in public tender offers . . » not merely the legislative history of § 5(c) but the whole registration structure of the 1933 Act is utterly inconsistent with any concept of issuers registering public offers to buy as distinct from public offerings to sell. 4 Loss, Securities Regulation 2317-8 (Supplement to 2d Ed., 1969). Rather, Loss found that the provision “was originally in- serted solely for the purpose of preventing dealers from 27. 15 U.S.C. § 77e. Appendix A A19 making offers to buy from underwriters during the waiting period.” 1 Loss, Securities Regulation 212 (2d Ed., 1961). Even if the requirements of § 5(c) were held to apply to offers by an issuer to buy its own stock, plaintiffs and defendants claim that §3(a)(10)** would exempt the settlement from the registration requirements.” Section 3(a)(10) states: Sec. 3(a) Except as hereinafter expressly provided the provisions of this title shall not apply to the fol- lowing classes of securities: (10) Any security which is issued in exchange for one or more bona fide outstanding securities, claims or property interests, or partly in such exchange and partly for cash, where the terms and conditions of such issuance and exchange are approved, after a hearing upon the fairness of such terms and condi- tions at which all persons to whom it is proposed to issue securities in such exchange shall have the right to appear, by any court, or any official or agency of the United States, or by any State or Territorial bank- ing or insurance commission or other governmental authority expressly authorized by law to grant such approval... . According to the objectors, the Supplemental Inden- ture with modified conversion rights which will be issued as a consequence of the settlement to debenture holders 28. 15 U.S. C. § 77c(a) (10). 29. 3(a)(10) has been applied to judicially approved settle- ments, see LIN Broadcasting Corp. [1972-73 Transfer Binder] CCH Fed. Sec. L. Rep. § 79,154 at 82,512; VTR Inc. [1971-72 Transfer Binder] CCH Fed. Sec. L. Rep. { 78,518 at 81,117. A20 Appendix A who do not convert, is a “security” within the meaning of §5(c) (Objectors’ Brief at 31). They contend, therefore, that the provisions of § 5(c) are applicable. If so, it would seem to follow that § 3(a)(10) would also apply to exempt the transaction, since there would be an issuance of a secu- rity (Supplemental Indenture ) in exchange for “bona fide outstanding securities” (the Indenture ).*° The objectors argue further, nevertheless, that there is no exemption be- cause the required judicial hearing was held after the issuance of the security, not before (2d Tr. at 32-34). This view is predicated on the assumption that the notice of settlement was an issuance of a security. The Court does not hold that view because the terms of the settlement do not become effective until approved by the Court. The hearing on the fairness of the terms and conditions of the settlement at which all persons affected had an opportunity to appear and be heard, was held on October 13 and 18, 1976. Thus the hearing fully complied with the requirements of § 3(a)(10). 30. Because the issuance of the Supplemental Indenture is not a specific term of the settlement, but is activated by the terms of the prior Indenture (which require such a Supplemental Indenture in the case of a merger), it could be argued that the settlement it- self is purely a cash exchange, whereby TBE is issuing cash onl for Indian Head securities. While under this view §3(a)(10 would seem not to be directly on point (since no security is bein issued ), it might be held to be applicable in light of the purpose o the registration sections. The purpose of requiring registration is to place the facts before the public, and to protect against fraud and misrepresentation, 1 Loss, Securities Regulation 178-181 (2d Ed., 1961). Section 3(a)(10) provides an exception to this re- uirement where the facts have been disclosed and the fairness of the terms and conditions have been passed on by a Court. While this section only applies when securities are issued, the same pw considerations would seem to apply to transactions where cash only is being offered in exchange for an outstanding security. Thus an exemption from §5(c) should be allowed for offers to buy out- standin securities with cash which have been judicially approved after a hearing. ee ee Appendix A A21 The objectors also claim the class notice omitted cer- tain material facts * in violation of §17(a) of the 1933 Act, and sections 10(b) and 14(e) of the 1934 Act. We find the notice in this case more than adequate, and that these sections have not been violated. Since wwe also have concluded that no terms or rights under the Indenture are violated by the settlement, [see pp. 15-18 supra], no ac- tion will lie under the Trust Indenture Act. In addition, the objectors claim that the notice of set- tlement violates sections 13(d), 13(e), 14(d), and 14(e) of the 1934 Act * and the Rules promulgated under these sections. They claim that the notice constitutes a “tender offer,” and as such the defendants have failed to comply with the filing requirements of the Act. While the settle- ment agreement d»es contemplate what might technically be described as a tender offer,** we think that these sec- tions were not meant to apply to judicially approved set- tlement agreements, particularly in light of the legislative history. Congress principal concern was to assure the share- holder substantial timely disclosure ... Congress de- termined that the shareholder should have the ‘rele- vant facts’ so he can make an informed decision on whether to sell his holdings or to maintain his invest- ment in a company that might be changing hands and undergoing significant transformation. Note, 86 Harv. L. Rev. 1250, 1256 (1973). 31. Objectors’ Brief at 25 and 32. 32. 15 U. S. C. § 78m et seq. and § 78n et seq., passed in 1968 and commonly known as the “Williams Act.” 33. The term “tender offer” is not defined in the statute, regu- lations, or legislative history. Thus Courts have found that they have latitude to apply the provisions of 9 14 in light of the factual context. Nachman Corporation v. Halfred, Inc., [1973-74 Transfer ig73) CCH Fed. Sec. L. Rep. { 94,445 at 95,589, 590 (N. D. IIL, 1 , A22 Appendix A As noted by the Seventh Circuit: . . . the overriding purpose of Congress in enacting this legislation was to protect the individual investor when substantial shareholders or management under- take to acquire shares in a corporation for the purpose of solidifying their own position in a contest over how or by whom the corporation should be managed. In the words of Senator Williams: ‘[The bill] is designed solely to require full and fair disclosure for the bene- fit of investors’. . . Bath Industries, Inc. v. Blot, 427 F. 2d 97, 109 (7th Cir. 1970). See also Electronic Specialty Co. v. International Controls Corp., 409 F. 2d 937, 945 (2d Cir. 1969); 113 Cong. Rec. 24664 (1967). That the purpose was to protect the individual investor can also be seen from looking at what the Act requires to be disclosed. It requires disclosure of, among other things, the identity and background of the person or group making the tender offer; the size of the holdings of the person or group; the source of funds to be used and the financing arrangements for these funds; the purpose of the tender offer, and the plans of the offerer (to liquidate, sell, merge, etc.); and the price, terms, and conditions of the offer. We find that the individual investors have been more than adequately protected by the procedures followed in the instant judicially-approved settlement, where the in- dividual investor has had full notification of the terms of the offer, the people or group involved, the purpose of the offer and the plans of the offeror. Thus we conclude that the filing requirement of the Williams Act does not pre- clude this settlement.” 34. In addition, 14(d)(8)(b) poy that there is an exemp- tion from the filing requirements of 14(d) for “any offer for or re- quest or invitation for tenders of any security . . . by the issuer of such security.” rr “se ee ee, ed th eee ee ee ee ee a ree Appendix A A23 ___ Accordingly, the Court concludes that the settlement is fair and reasonable, and should be approved. So ORDERED. CuHarLEs E. Stewakr, J. United States District Judge DatTep: New York, New York November 15, 1976. AQ4 Appendix A APPENDIX A [to District Court Memorandum Opinion] ARTICLE FIVE CONVERSION OF DEBENTURES Section 5.01. The holder of any Debenture or Debentures shall have the right at any time prior to ma- turity, at his option, to convert, subject to the terms and provisions of this Article Five, the principal amount of any such Debenture or Debentures (or any portion of the prin- cipal amount thereof which is an integral multiple of $1000) into fully paid and non-assessable shares of Com- mon Stock at the conversion rate of 25.974 shares of Com- mon Stock for each $1,000 principal amount of Debentures, subject in each case to any adjustments in such conversion rate pursuant to the provisions of Section 5.04 (except that with respect to any Debenture or Debentures which shall be called for redemption such right shall terminate at the close of business on the second business day next preceding the date fixed for redemption of such Debenture or Debentures, unless the Company shall default in payment due upon redemption thereof), upon surrender of the Debenture or Debentures, the principal of which is so to be converted, to the Company at any time during usual business hours at the office or agency to be maintained by it in accordance with the provisions of Section 6.02, and, if so required by the Company, accompanied by a written instrument or instruments of transfer in form satisfactory to the Company and the Trustee duly executed by the holder or his duly authorized agent or legal representative. Prior to delivery of any certificate or certificates represent- ing shares of Common Stock into which the principal of ee et ee ee ee © ete Ba weedy as teeme erie | eos a er ME ie tite erties om - Appe xdix A A25 such Debenture or Debentures is so to be converted, the Company shall have received a written notice at its said office or agency from the holder of the Debenture or Debentures so surrendered specifying the name or names (with address) in which said certificate or certificates are to be issued. For convenience, the conversion of all or a portion, as the case may be, of the principal of any Debenture into Common Stock is hereinafter sometimes referred to as the conversion of such Debenture. All Debentures surrendered for conversion shall, if surrendered to the Company or any conversion agent, be delivered to the Trustee for cancellation and cancelled by it or, if sur- rendered to the Trustee, shall be cincelled by it, and no Debentures shall be issued in lieu thereof. The Trustee within a reasonable time shall upon request return can- celled Debentures to the Company. In case any Debenture shall be surrendered for con- version of only a portion of the principal amount thereof, the Company shall execute and the Trustee shall authen- ticate and deliver to the holder of such Debenture, at the expense of the Company, a new Debenture or Debentures in principal amount equal to the unconverted portion of the Debenture so surrendered. In case of the surrender of any Debenture for con- version (in whole or in part) on a date after the record date (as defined in Section 2.03) for the payment of any interest on Debentures and before the date for payment of such interest, such Debenture shall be accompanied by funds in an amount equal to the amount of interest which would have been payable on such interest payment date in respect of the principal represented by the Debenture (or portion thereof) so surrendered for conversion had the same not been so surrendered for conversion; provided, however, that no such funds need be deposited in the case of any Debenture (or portion thereof) which has been A26 Appendix A duly called for redemption prior to such payment date. The funds so deposited shall be paid on the interest pay- ment date to the person in whose name such Debenture (or the Debenture or Debentures in exchange or substi- tution for which such Debenture shall have been issued ) was registered on such record date; provided, however, that if the Company shall default in the payment of interest due on the Debentures on such interest payment date, such funds shall be repaid to the person who deposited the same. Section 5.02. As promptly as practicable after the surrender, as herein provided, of any Debenture or De- bentures for conversion, the Company shall deliver or cause to be delivered at the office or agency to be main- tained by it in accordance with the provisions of Section 6.02 to or upon the written order of the holder of the De- benture or Debentures so surrendered a certificate or certificates representing the number of fully paid and non- assessable shares of Common Stock into which such De- benture or Debentures (or portion thereof) shall have been converted in accordance with the provisions of this Article Five. Prior to delivery of such certificate or certificates, the Company shall have received at its said office or agency from the holder of the Debenture or Debentures so sur- rendered the written notice referred to in Section 5.01 with respect to the name or names (with address ) in which said certificate or certificates are to be issued. Subject to the following provisions of this Section and of Section 5.04, such conversion shall be deemed to have been made im- mediately prior to the close of business on the date that such Debenture or Debentures shall have been surrendered for conversion, so that the rights of the holder of such De- benture or Debentures (or the portion thereof being con- verted ) as a Debentureholder shall cease at such time, and Oe a ee en eee Baie Appendix A A27 the person or persons entitled to receive the shares of Com- mon Stock upon conversion of such Debenture or De- bentures shall be treated for all purposes as having become the record holder or holders of such shares of Common Stock at such time, and such conversion shall be at the conversion rate in effect at such time; provided, however, that no such surrender on any date when the stock transfer books of the Company shall be closed shall be effective to constitute the person or persons entitled to receive the shares of Common Stock upon such conversion as the record holder or holders of such shares of Common Stock on such date, but such surrender shall be effective to con- stitute the person or persons entitled to receive such shares of Common Stock as the record holder or holders thereof for all purposes at the time immediately prior to the close of business on the next succeeding day on which such stock transfer books are open, and such conversion shall be at the conversion rate in effect at such time on such next succeeding day. Section 5.03. ‘No adjustments in respect of accrued interest or dividends shall be made upon the conversion of any Debenture or Debentures. SecTION 5.04. The conversion rate from time to time in effect shall be subject to adjustment as follows: (a) In case the Company shall (i) pay a divi- dend in shares of its capital stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of Common Stock into a smaller number of shares, or (iv) issue by reclassification of its shares of Common Stock any shares of the Com- pany, the conversion rate in effect immediately prior thereto shall be adjusted retroactively as provided be- low so that the holder of any Debenture thereafter surrendered for conversion shall be entitled to receive A28 Appendix A the number of shares of the Company which he would have owned or have been entitled to receive after the happening of any of the events described above had such Debenture been converted immediately prior to the happening of such events. An adjustment made pursuant to this subsection (a) shall become effective retroactively immediately after the record date in the case of a dividend and shall become effective imme- diately after the effective date in the case of a sub- division, combination or reclassification. (b) In case the Company shall issue rights or warrants to all holders of its Common Stock entitling them (for a period expiring within 45 days after the record date mentioned below) to subscribe for or purchase shares of Common Stock at a price per share less than the current market price per share of Com- mon Stock (as defined in subsection (d) below) at the record date mentioned below, the number of shares of Common Stock into which each $1,000 prin- cipal amount of Debentures shall thereafter be con- vertible shall be determined by multiplying the num- ber of shares of Common Stock into which such principal amount of Debentures was theretofore con- vertible by a fraction, the numerator of which shall be the number of shares of Common Stock outstand- ing on the date of issuance of such rights or warrants plus the number of additional shares of Common Stock offered for subscription or purchase, and the denominator of which shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such current market price. Subject to subsection (e), such adjust- ment shall be made whenever such rights or warrants ~~ er OO eye état ate sendin ds OR ee cw a Appendix A A29 are issued and shall become effective retroactively immediately after the record date for the determina- tion of stockholders entitled to receive such rights or warrants. (c) In case the Company shall distribute to all holders of its Common Stock evidences of its in- debtedness or assets (excluding cash dividends or dis- tributions) or rights to subscribe or warrants to purchase (excluding those referred to in subsection (b) above), then in each such case the number of shares of Common Stock into which each $1,000 prin- cipal amount of Debentures shall thereafter be con- vertible shall be determined by multiplying the num- ber of shares of Common Stock into which such principal amount of Debentures was theretofore con- vertible by a fraction, the numerator of which shall be the current market price (as defined in subsection (d) below) per share of Common Stock on the date of such distribution, and the denominator of which shall be such current market price per share of the Com- ion Stock, less the then fair market value (as deter- mined by the Board of Directors, whose determination shall be conclusive, and described in a statement filed with the Trustee) of the portion of the assets or evi- dences of indebtedness so distributed or of such sub- scription rights or warrants applicable to one share of the Common Stock. Subject to subsection (e), such adjustment shall be made whenever any such distribu- tion is made and shall become effective retroactively immediately after the record date for the determina- tion of stockholders entitled to receive such distribu- tion. (d) For the purpose of any computation under subsections (b) and (c) above, the current market A30 Appendix A price per share of Common Stock at any date shall be deemed to be the average of the daily closing prices for the 30 consecutive business days commencing 45 business days before the day in question. The closing price for each day shall be the last reported sales price regular way or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, in either case on the New York Stock Exchange, or, if the Com- mon Stock is not listed or admitted to trading on such Exchange, on the principal national securities ex- change on which the Common Stock is listed or ad- mitted to trading, or if not listed or admitted to trad- ing on any national securities exchange, the average of the closing bid and asked prices as furnished by any New York Stock Exchange firm selected from time to time by the Company for the purpose. (e) No adjustment in the conversion rate shall be required unless such adjustment would require an increase or decrease of at least 1% in such rate; pro- vided, however, that any adjustments which by reason of this subsection (e) are not required to be made shall be carried forward cumulatively and taken into account in any subsequent adjustment which ear ing such -forward) requires an increase or de- ro of erg os 1%. All calculations under this Article Five shall be made to the nearest cent or to the nearest one-thousandth of a share, as the case may be. (f) Whenever the conversion rate is adjusted, as herein provided, the Company shall promptly file with the Trustee a certificate of a firm of independent public accountants selected by the Board of Direc- tors (who may be the regular accountants employed by the Company) setting forth the conversion rate Lee ee De NTE a A rm nr ele Re ee Abe ne Ae Rs oa ee Re RO yutle ba Nenana meee 35 tales nc =e Appendix A A31 applicable after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Such certificate shall be conclusive evidence of the correctness of such adjustment. Promptly after re- ceipt of such certificate, the Trustee, in the name of the Company and as its agent, shall mail a notice specifying such adjustment to each Debentureholder at his last address appearing on the registration books of the Company. The Trustee shall not at any time be under any duty or responsibility to any Deben- tureholder to determine whether any facts exist which may require any adjustment of the conversion rate. (g) In the event that at any time, as a result of an adjustment made pursuant to subsection (a) of this Section, the holder of any Debenture thereafter surrendered for conversion shall become entitled to receive any shares of the Company other than shares of its Common Stock, thereafter the number of such other shares so receivable upon conversion of any Debenture shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Commoen Stock contained in subsections (a) to (f), inclusive, of this Section, and the provisions of Sec- tions 5.02 and 5.05 to 5.09, inclusive, with respect to the Common Stock shall apply on like terms to any such other shares. SEcTION 5.05. No fractional shares or scrip represent- ing fractional shares shall be issued upon the conversion of any Debenture or Debentures. If more than one De- benture shall be surrendered for conversion at one time by the same holder, the number of full shares issuable upon conversion thereof shall be computed on the basis of the aggregate principal amount of the Debentures so A32 Appendix A surrendered. If the conversion of any Debenture or De- bentures results in a fraction, an amount equal to such fraction multiplied by the closing price (determined as provided in Section 5.04(d) ) of the Common Stock on the day of conversion shall be paid to such holder in cash by the Company. SEcTION 5.06. In case of any consolidation of the Company with or merger of the Company into another corporation, or in case of any sale or other disposition of all or substantially all the property of the Company as an entirety to any person, the corporation resulting from such consolidation or such successor or acquiring person, as the case may be, shall execute and deliver to the Trustee a supplemental indenture, in form satisfactory to the Trus- tee, providing that the holder of each Debenture then outstanding shall have the right thereafter to convert such Debenture into the kind and amount of shares of stock and other securities and property receivable upon such con- solidation, merger, sale, lease or other disposition by a holder of the number of shares of Common Stock of the Company into which such Debenture might have been converted immediately prior to such consolidation, merger, sale or other disposition. Such supplemental indenture shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments pro- vided for in this Article Five. The provisions of this Sec- tion shall similarly apply to successive consolidations, mergers, sales or other dispositions. Notice of the execu- ‘tion of such a supplemental indenture shall be given in accordance with the provisions of Section 12.02. The Trustee shall not be under any responsibility to determine the correctness of any provisions contained in any such supplemental indenture relating either to the kind or amount of shares of stock or securities or property tele waite wAtNT 6 rae wee ee =, oe a. Appendix A A33 receivable by Debentureholders upon the conversion of their Debentures after any such consolidation, merger, sale, lease or other disposition or to any such adjustment, but, subject to the provisions of Section 9.01, may accept as conclusive evidence of the correctness of any such pro- visions, and shall be protected in relying upon, an Opinion of Counsel with respect thereto. Section 5.07. The Company covenants that it will at all times reserve and keep available out of its author- ized Common Stock, solely for the purpose of issuance upon conversion of Debentures as herein provided, such number of shares of Common Stock as shall then be issu- able upon the conversion of all outstanding Debentures. The Company covenants that all shares of Common Stock which shall be so issuable shall, when issued, be duly and validly issued and fully paid and non-assessable. The Company covenants that, upon conversion of Debentures as herein provided, there will be credited to Common Stock capital account, from the consideration for which the shares of Common Stock issuable upon such conversion are issued, an amount per share of Common Stock so issued as determined by the Board of Directors, which amount shall not be less than the amount required by law and by the [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_2320%3A1. Public record. Not legal advice.