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GARDNER & FLORENCE CALL COWLES FOUND. v. EMPIRE IN

July 5, 1984

GARDNER AND FLORENCE CALL COWLES FOUNDATION, MINNEAPOLIS STAR & TRIBUNE PENSION TRUST, PRINCETON DAY SCHOOL, DAVID SCHWARTZ FOUNDATION, SCRIPPS CLINIC and SIMPSON COLLEGE, Plaintiffs, against EMPIRE INCORPORATED, ALLEN & COMPANY, INCORPORATED, RELIANCE INSURANCE COMPANY, S. A. SPENCER, H. N. FORMAN, HAROLD M. WIT and ROBERT W. PLASTER, Defendants.


The opinion of the court was delivered by: KNAPP

MEMORANDUM & ORDER

WHITMAN KNAPP, D.J.

 Before us is defendants' motion pursuant to Fed.R.Civ.P. 12(b)(6) to dismiss the complaint for failure to state a claim upon which relief can be granted. For reasons which follow, we grant this motion.

 This case involves a merger between defendant Empire Incorporated ("Empire") and Exco Acquisition Corporation ("Exco") in which Empire was the survivor. Plaintiffs, holders of convertible subordinated debentures issued by Empire prior to the merger, claim that the terms of the merger violated certain contractual rights set out in the Indenture under which the debentures were issued, and further that defendants' actions constituted a breach of fiduciary duty owed them as debenture holders.

 FACTS

 Plaintiffs are the owners of $1.3 million face value of 9% convertible subordinated debentures issued by Empire in January of 1981, which debentures are due and payable on December 31, 2005. Empire sold approximately $25 million of these debentures. The debenture holders had the right to convert to Empire common stock at the ratio of 20.51 shares of stock for every $1,000 face value of debenture; or, put differently, to acquire Empire common at "conversion price" of $48.75 per share.

 When the debentures were issued approximately 3 million shares of Empire common stock were outstanding. Both the debentures and the common s;tock were listed and trading on the New York Stock Exchange. Immediately prior to the issuance of the debentures in January 1981, Empire common was trading at approximately $49 per share (just over the $48.75 conversion price). In August of 1982 the stock traded as low as $9.50 per share. When the merger was announced in October of 1982 the stock was trading at around $20 per share, and at $27 per share immediately prior to the occurrence of the merger (still well below the $48.75 conversion price).

 On June 9, 1983 Exco merged into Empire. Exco had issued 3 million shares of common stock, all of which were purchased by defendants Robert W. Plaster, S. A. Spencer, H. N. Forman, Harold M. Witt, Allen & Company and Reliance Insurance Company, for the aggregate amount of $30,000, ($.01 per share). Following approval by 96% of the Empire common shareholders who participated in the merger vote, each share of outstanding Empire common could be exchanged for $22 in cash and one new $9 face amount 9% subordinated debenture with a market value of $5. Empire shareholders thus received $27, in the form of cash plus one new debenture, upon surrender of each share of Empire common. *fn1" This amounted to a $7 premium over the then $20 market price. *fn2" Following the repurchase of the oustanding stock, each share of Exco common stock was converted into one share of Empire common.

 Prior to the merger each debenture holder was given the opportunity to convert, under the above formula, and receive the same consideration received by the Empire shareholders in the merger. The debenture holders were also informed that following the merger their debentures would continue to be convertible to Empire common. None of the debenture holders took advantage of this opportunity, presumably because the debentures were trading at a higher price than the consideration they would have received had they chosen to convert.

 It is undisputed that defendants (Plaster in particular) profited from the merger. Plaster, who owned 18% of the old Empire stock, received over $11.7 million in cash and $4.8 million in principal of new debentures -- a total of over $16.5 million -- upon surrender of his stock which immediately prior to the merger had a market value of approximately $14.4 million. Plaster now owns 14% of Empire through the conversion of his Exco stock, for which he paid $4,188. Plaster has continued as president of Empire, with that office's substantial emoluments.

 All the information above set forth was communicated in detail, prior to the merger, to Empire's shareholders, the debenture holders, the Securities and Exchange Commission and the investing public. The announcement and consummation of the merger appear to have had no adverse effect on the market price of the debentures, which have consistently traded at a higher price than the value of the conversion right.

 Count I

 Count I of the amended complaint alleges that Empire breached its obligation under the Indenture by maintaining the conversion ratio of 20.51 shares per $1,000 face value of debenture instead of adjusting this ratio pursuant to § 4.05(c) of the Indenture. That section provides in part:

 In case the company shall . . . distribute to all holders of share of its Common Stock evidences of its indebtedness or securities or assets (excluding cash dividends or cash distributions payable out of consolidated net income or retained earnings of the Company and its consolidated Subsidiaries, or dividends payable in shares of Common Stock) or rights to subscribe therefor . . . the conversion price in effect immediately prior to such distribution shall be adjusted. . . . Such adjustment shall become effective on the date of such distribution retroactively to immediately ...


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