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August 19, 1983


The opinion of the court was delivered by: SAND


This action, together with 83-5601 and 83-5604, arises out of the planned redemption of $125 million in 16% Sinking Fund Debentures ("the Debentures") by the defendant ADM Midland Company ("ADM") scheduled to take place on Monday, August 1st, 1983. Morgan Stanley & Company, Inc. ("Morgan Stanley") brings this suit under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77g, §§ 323(a) and 316(b) of the Trust Indenture Act of 1939, 15 U.S.C. §§ 77www(a), 77ppp(b), and other state and federal laws, alleging that the proposed redemption plan is barred by the terms of the Indenture, the language of the Debentures, and the Debenture Prospectus. Plaintiff contends, in addition, that the failure on the part of ADM to reveal its intention to redeem the Debentures, as well as its belief that such redemption would be lawful under the terms of the Indenture Agreement, amounts to an intentional, manipulative scheme to defraud in violation of federal and state securities and business laws. Morgan Stanley seeks a preliminary injunction enjoining ADM from consumating the redemption as planned, and, after full consideration on the merits, permanent injunctive relief barring the proposed transaction and damages. Both parties have pursued an expedited discovery schedule and now cross-move for summary judgment.


 In May, 1981, Archer Daniels issued $125,000,000 of 16% Sinking Fund Debentures due May 15, 2011. The managing underwriters of the Debenture offering were Goldman Sachs & Co., Kidder Peabody & Co., and Merrill, Lynch, Pierce, Fenner, & Smith, Inc. The Debentures state in relevant part:

 The Debentures are subject to redemption upon not less than 30 nor more than 60 days' notice by mail, at any time, in whole or in part, at the election of the Company, at the following optional Redemption Price (expressed in percentages of the principal amount), together with accrued interest to the Redemption Date..., all as provided in the Indenture: If redeemed during the twelve-month period beginning May 15 of the years indicated: Year Percentage 1981 115.500 % 1982 114.725 1983 113.950 1984 113.175 1985 112.400 1986 111.625 1987 110.850 1988 110.075 1989 109.300 199 0 108.525 1991 107.750 % 1992 106.975 1993 106.200 1994 105.425 1995 104.650 1996 103.875 1997 103.100 1998 102.325 1999 101.550 200 0 100.775

 and thereafter at 100%; provided, however, that prior to May 15, 1991, the Company may not redeem any of the Debentures pursuant to such option from the proceeds, or in anticipation, of the issuance of any indebtedness for money borrowed by or for the account of the Company or any Subsidiary (as defined in the Indenture) or from the proceeds, or in anticipation of a sale and leaseback transaction (as defined in Section 1008 of the Indenture), if, in either case, the interest cost or interest factor applicable thereto (calculated in accordance with generally accepted financial practice) shall be less than 16.08% per annum.

 The May 12, 1981 Prospectus and the Indenture pursuant to which the Debentures were issued contain substantially similar language. *fn1" The Moody's Bond Survey of April 27, 1981, in reviewing its rating of the Debentures, described the redemption provision in the following manner:

 "The 16% sinking fund debentures are nonrefundable with lower cost interest debt before April 15, 1991. Otherwise, they are callable in whole or in part at prices to be determined.

 The proceeds of the Debenture offering were applied to the purchase of long-term government securities bearing rates of interest below 16.089%.

 ADM raised money through public borrowing at interest rates less than 16.08% on at least two occasions subsequent to the issuance of the Debentures. On May 7, 1982, over a year before the announcement of the planned redemption, ADM borrowed $50,555,500 by the issuance of $400,000,000 face amount zero coupon debentures due 2002 and $100,000,000 face amount zero coupon notes due 1992 (the "Zeroes"). The Zeroes bore an effective interest rate of less than 16.08%. On March 10, 1983, ADM raised an additional $86,400,000 by the issuance of $263,232,500 face amount Secured Trust Accrual Receipts, known as "Stars," through a wholly-owned subsidiary, Midland Stars Inc. The Stars carry an effective interest rate of less than 16.08%. The Stars were in the form of notes with varying maturities secured by government securities deposited by ADM with a trustee established for that purpose. There is significant dispute between the parties as to whether the Stars transaction should be treated as an issuance of debt or as a sale of government securities. We assume, for purposes of this motion, that the transaction resulted in the incurring of debt.

 In the period since the issuance of the Debentures, ADM also raised money through two common stock offerings. Six million shares of common stock were issued by prospectus dated January 28, 1983, resulting in proceeds of $131,370,000. And by a prospectus supplement dated June 1, 1983, ADM raised an additional $15,450,000 by issuing 600,000 shares of common stock.

 Morgan Stanley, the plaintiff in this action, bought $15,518,000 principal amount of the Debentures at $1,252.50 per $1,000 face amount on May 5, 1983, and $500,000 principal amount at $1,200 per $1,000 face amount on May 31, 1983. The next day, June 1, ADM announced that it was calling for the redemption of the 16% Sinking Fund Debentures, effective August 1, 1983. The direct source of funds was to be the two ADM common stock offerings of January and June, 1983. The proceeds of these offerings were delivered to the Indenture Trustee, Morgan Guaranty Trust Company, and deposited in a special account to be applied to the redemption. The amount deposited with the Indenture Trustee is sufficient to fully redeem the Debentures.

 Prior to the announcement of the call for redemption, the Debentures were trading at a price in excess of the $1,139.50 call price. At no time prior to the June 1 announcement did ADM indicate in any of its materials filed with the Securities and Exchange Commission or otherwise that it intended to exercise its redemption rights if it felt it was in its self-interest to do so. Nor did it express any contemporaneous opinion as to whether it was entitled under the terms of the Indenture to call the Debentures when it was borrowing funds at an interest rate less than 16.08% if the source of such redemption was other than the issuance of debt.

 Plaintiff's allegations can be reduced to two general claims: First, plaintiff contends that the proposed redemption is barred by the express terms of the call provisions of the Debenture and the Indenture Agreement, and the consumation of the plan would violate the Trust Indenture Act of 1939, 15 U.S.C. § 77aaa et seq. and common law principles of contract law. The plaintiff's claim is founded on the language contained in the Debenture and Trust Indenture that states that the company may not redeem the Debentures "from the proceeds, or in anticipation, of the issuance of any indebtedness... if... the interest cost or interest factor... [is] less than 16.08% per annum." Plaintiff points to the $86,400,000 raised by the Stars transaction within 90 days of the June 1 redemption announcement, and the $50,555,500 raised by the Zeroes transaction in May, 1982 -- both at interest rates below 16.08% -- as proof that the redemption is being funded, at least indirectly, from the proceeds of borrowing in violation of the Debentures and Indenture agreement. The fact that ADM raised sufficient funds to redeem the Debentures entirely through the issuance of common stock is, according to the plaintiffs, an irrelevant "juggling of funds" used to circumvent the protections afforded investors by the redemption provisions of the Debenture. Plaintiff would have the Court interpret the provision as barring redemption during any period when the issuer has borrowing at a rate lower than that prescribed by the Debentures, regardless of whether the direct source of the funds is the issuance of equity, the sale of assets, or merely cash on hand.

 The defendant would have the Court construe the language more narrowly as barring redemption only where the direct or indirect source of the funds is a debt instrument issued at a rate lower than that it is paying on the outstanding Debentures. Where, as here, the defendant can point directly to a non-debt source of funds (the issuance of ...

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