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PRESCOTT, BALL & TURBEN v. LTV CORP.

July 1, 1981

PRESCOTT, BALL & TURBEN and Elliot Associates, Plaintiffs,
v.
The LTV CORPORATION, LTV International, N.V. and Wilson Foods Corporation, Defendants



The opinion of the court was delivered by: MOTLEY

MEMORANDUM OPINION

On June 26, 1981, plaintiffs brought on the instant matter by order to show cause seeking both declaratory and injunctive relief. For the reasons given below, plaintiffs' request for preliminary injunctive relief is denied.

The Facts

 Plaintiffs, Prescott, Ball & Turben (PBT) and Elliot Associates (Elliot), are respectively Ohio and New Jersey limited partnerships involved in the trading of securities. Plaintiffs currently both own 5% Guaranteed (Subordinated) Debentures (the Debentures) of one of the defendants, LTV International, N.V. (LTV International). PBT is the current holder of $ 2,261,000 principal amount of the Debentures, and Elliot is the current holder of $ 1,518,000 principal amount of the Debentures.

 The Debentures were issued pursuant to a Trust Indenture dated July 1, 1968 (the Trust Indenture). The Debentures are guaranteed by LTV Corporation (LTV), a Delaware corporation of which LTV International is a wholly owned subsidiary. LTV International is incorporated in the Netherland Antilles. As provided by the Trust Indenture, the Debentures are convertible into LTV common stock. PBT's and Elliot's Debentures are respectively convertible into 96,793 and 64,985 shares of common. The Debentures are listed on the New York Stock Exchange (NYSE) and are currently traded on the NYSE. According to an affidavit from a member of the Elliot partnership submitted in support of the instant motion, the Debentures are currently trading at an amount in excess of $ 900 per debenture, an amount significantly in excess of the $ 600 face value of each of the Debentures. See Moving Affidavit of Paul R. Singer, at 4.

 At meetings of the Board of Directors of LTV (the Board) on April 19, 1981, and May 15, 1981, the Board agreed to a proposal which would distribute all the shares of Wilson Foods Corporation (Wilson), a wholly owned LTV subsidiary, to holders of LTV common stock on a pro rata basis. The proposed transaction would involve distribution of 100% of Wilson's stock to LTV's shareholders, with no surrender in return of either stock or cash by the LTV common stockholders participating in the distribution.

 Wilson is currently a major going concern involved in the slaughtering of various types of livestock and the packing and shipping of meat. In the last fiscal year, Wilson reported sales in excess of two billion dollars, although it suffered a slight loss on those sales. Wilson accounts for approximately 11% of the total asset value of LTV, and about 25% of its annual total revenues. Wilson's balance sheet indicates a net worth for the corporation of approximately $ 86,000,000 as of December 31, 1980. According to the prospectus circulated by LTV in connection with the proposed Wilson distribution, the distribution will reduce LTV's stated capital by $ 62,445,000 and its retained earnings by $ 30,285,000.

 LTV has filed a registration statement with the Securities and Exchange Commission, and this statement has already gone effective. See Form S-1, Wilson Foods Corporation Registration No. 2-72304 (Filed May 16, 1981). LTV has also already given notice of the "record date," the date on which the corporation will determine who will be entitled to participate in the Wilson distribution by virtue of being a holder of record of LTV common stock on that particular date. The record date is July 10, 1981. Thus, holders of the Debentures will have to decide by July 10, 1981, whether to convert their debentures for LTV common in order to share in the Wilson distribution.

 Discussion

 The legal controversy between the parties is narrow and sharply defined. Plaintiffs contend that the proposed distribution of Wilson stock to the common stockholders of LTV is in derogation of their rights as holders of the Debentures, and activates certain provisions of the Trust Indenture intended to protect those rights. Defendants disagree and seek to characterize the proposed distribution as simply a dividend to LTV shareholders. As the following discussion will make clear, the heart of this controversy, as well as its resolution, lies in the provisions of the Trust Indenture. The pertinent portions of the Trust Indenture will therefore be reproduced and examined in some detail.

 Section 4.06 of the Trust Indenture provides in pertinent part:

 
In case of any capital reorganization ... of the Guarantor (LTV) ..., there shall be no adjustment of the conversion price pursuant to Section 4.04 hereof but each Debenture shall after such capital reorganization ... be convertible into the kind and amount of shares of stock or other securities or property of the Guarantor, ... to which the holder of the number of shares of Common Stock deliverable (immediately prior to the time of such capital reorganization ...) upon conversion of such Debenture would have been entitled upon such capital reorganization ...; and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Article Four with respect to the rights and interests thereafter of the holders of the Debentures, to the end that the provisions set forth in this Article Four shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock or other securities or property thereafter deliverable on the conversion of the Debentures....

 Plaintiffs contend that the proposed distribution of Wilson shares is a "capital reorganization" for purposes of § 4.06. If they are correct, defendant LTV would be required under the terms of § 4.06 to hold back enough shares of Wilson to accommodate holders of the Debentures should they subsequently decide to convert their debentures into shares of LTV common. Defendants dispute the applicability of § 4.06. They do not dispute that § 4.06 would require the "warehousing" of sufficient Wilson shares to satisfy the post conversion entitlements of the current debenture holders if, in fact, § 4.06 is applicable to the Wilson distribution. Instead, defendants contend that § 4.06 is not applicable to the proposed distribution of Wilson stock because the proposed distribution is more properly considered as a dividend to LTV shareholders than the type of transaction which the parties contemplated would be included under the term "capital reorganization" in § 4.06 of the Trust Indenture.

 Defendants' position on the applicability of § 4.06 is also clear cut. In essence it has four steps. First, § 4.06 does not contain a definition of the term "capital reorganization." Second, other provisions of the Trust Indenture must be examined to see if they provide an indication of what the parties intended when they used the term "capital reorganization." Third, the provision of the Trust Indenture governing the types of notice which must be given to debenture holders in the event of certain transactions contains language proving that the parties intended the term "capital reorganization" to apply only to situations in which there was an exchange of stock. Fourth, since the holders of LTV ...


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