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December 29, 1967


The opinion of the court was delivered by: Decker, District Judge.


This is an action in three counts brought by a warrant holder in Walnut Grove Products, Inc., an Iowa corporation. Defendant W.R. Grace & Co. is a Connecticut corporation which purchased the assets and assumed the liabilities of Walnut Grove. Walnut Grove is a small company engaged principally in the manufacture of livestock and poultry feeds, while the Grace Co. is much larger and widely diversified. The central issue involved here is whether or not the purchase of Walnut Grove's assets terminated plaintiff's right to exercise his warrants.

On July 16, 1964 Grace entered into an "Agreement and Plan of Reorganization" with Walnut Grove. This provided for the sale to Grace of the assets of Walnut Grove in exchange for shares of Grace common stock. Grace also agreed to assume substantially all the liabilities of Walnut Grove. Walnut Grove agreed to call a stockholders meeting by August 10, 1964 for the purpose of adopting voluntarily the Iowa Business Corporation Act, 28A, 28B Iowa Code Ann. ch. 496A. Another stockholders meeting on August 31 was to be called for the purposes of authorizing the following: The sale of assets to Grace, the voluntary dissolution of Walnut Grove following distribution to the stockholders of the Grace stock in complete liquidation of Walnut Grove, and an amendment of the articles of incorporation to change the name of Walnut Grove.

Under the terms of the agreement, one share of Grace common stock was to be issued for each three shares of Walnut Grove common stock outstanding at the time of the closing, which was set for October 1, 1964. Walnut Grove also was required by the agreement to take the necessary steps and give the required notices to cause the right to exercise outstanding warrants to purchase stock in Walnut Grove to expire at the close of business on the third full business day before the closing. The number of warrants outstanding as of July 16, 1964 was 143,505, which entitled the holders to purchase 172,206 shares of Walnut Grove common stock. These warrants were governed by the terms of a "Stock Warrant Agreement" executed by Walnut Grove and the Omaha National Bank on February 1, 1960.

Plaintiff had purchased fifty warrants evidenced by a Warrant Certificate dated March 24, 1960. His warrants were subject to the terms of the Warrant Agreement and allowed him to purchase shares of Walnut Grove up to March 1, 1970 at a specified price which would increase at designated times in 1964 and 1967. Paragraph 3(a) of the Warrant Agreement provides that warrants can be exercised up to March 1, 1970

  "except that if notice has been given as provided
  in Section 8(c) in connection with a
  distribution in a liquidation, dissolution or
  winding up of the Company, the right to exercise
  Warrants shall expire at the close of business on
  the third full business day before the record date
  specified in such notice. Any Warrant not so
  exercised shall become void, and all rights
  thereunder shall cease." (Emphasis added.)

Paragraph 8(c) requires notice to be given to each warrant holder thirty days prior to the record date for any distribution on Walnut Grove common stock.

It is apparent that the reorganization agreement contemplated that the warrant holders' rights would be subject to the above provisions of Paragraph 3(a) of the Warrant Agreement, including the notice of Paragraph 8(c). Defendant's principal contention in this case is that these provisions effectively governed, and were complied with, so as to terminate the rights of all warrant holders who did not exercise their warrant rights before the cut-off date. Defendant claims that there was a lawful "distribution in a liquidation, dissolution or winding up of the Company," so that Paragraph 3(a) was controlling of warrant holders' rights.

The meetings of August 10 and August 31 were held as set forth in the reorganization agreement. At the latter meeting, the shareholders of Walnut Grove approved by more than two thirds affirmative vote both the sale of assets for stock of Grace and the liquidation and dissolution of Walnut Grove. On August 31 a "Notice of Expiration of Warrant Certificates" was sent to plaintiff and all other warrant holders, indicating the actions which had been taken by the stockholders and pointing out that October 1 was the record date for the determination of holders of stock entitled to receive the liquidating distribution in shares of Grace stock. This notice expressed that, pursuant to Paragraph 3(a), warrants unexercised at the close of business on September 28 would become void.

In accordance with the August 31 notice, and the reorganization plan, holders of 140,660 warrants exercised their rights prior to the cut-off date. They received rights in 168,792 shares of Walnut Grove common stock, on which they received 56,264 shares of Grace stock in accordance with the distribution provisions of the Warrant Agreement and the July 16 reorganization agreement. Plaintiff was the holder of 50 of the 2,845 warrants which were not exercised before September 28, 1964. On October 1, 1964, the reorganization was consummated in accordance with the plan. Shortly thereafter the Grace shares were distributed to Walnut Grove stockholders. The dissolution of Walnut Grove, however, has not yet been formally completed.

Plaintiff contends here that the transaction was "in fact and in law" a merger or consolidation. Accordingly plaintiff argues that the rights of warrant holders were governed not by Paragraph 3(a) but by Paragraph 6 of the Warrant Agreement. Paragraph 6 provides that in the event of a reclassification, change, merger, or consolidation, the shares purchasable by the warrant holder shall

  "consist of the kind and amount of securities or
  property, if any, which would have been received
  by the Warrant holder if on the effective date of
  such reclassification, change, merger or
  consolidation he had been the holder of record of
  the Current Stock Unit receivable by him upon
  exercise of his Warrant immediately prior to such
  effective date."

The issue, then, has been joined clearly: Defendant claims that the transaction was a lawful sale of assets and a liquidation in dissolution of Walnut Grove, all in accordance with the applicable provisions of Iowa statutory law, and that the notice given by Walnut Grove effectively terminated plaintiff's warrant rights. Plaintiff claims that a merger was consummated which is subject to Paragraph 6 of the Warrant Agreement, providing for the continuation of plaintiff's warrant rights until March 1, 1970.

Count I of the complaint is founded upon diversity of citizenship, as plaintiff is a citizen of Illinois and defendant is a Connecticut corporation. There is a substantial question as to whether or not the actual amount in controversy exceeds $10,000, for the total value of plaintiff's warrants is no more than $800. The action is brought, however, as a class action under Rule 23, Fed.R.Civ.P., on behalf of plaintiff and all other holders of warrants in Walnut Grove who failed to exercise their rights at the time of the pending sale of the company's assets. Also included in the class plaintiff claims to represent are those warrant holders who did exercise their rights prior to September 28, 1964. Plaintiff's attempt to cast this action as a class suit has raised not only the question of whether the jurisdictional amount has been met and of whether the class members' interests can be aggregated so as to meet the amount required, but also has presented the issue of whether or not plaintiff can adequately represent both warrant holders who did and those who did not exercise their rights. The relief sought by plaintiff under Count I is the recognition and enforcement of continuing warrant rights for him under the terms of Paragraph 6 and other portions of the Warrant Agreement.

Count II is also brought as a class action, based upon the same facts relevant to Count I. It is founded upon Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), which declares it unlawful for any person, directly or indirectly,

  "to use or employ, in connection with the
  purchase or sale of any security registered on a
  national securities exchange or any security not
  so registered, any manipulative or deceptive
  device or contrivance in contravention of such
  rules and regulations as the Commission may
  prescribe as necessary or appropriate in the
  public interest or for the protection of

Plaintiff contends that the notice of August 31, 1964 falls within this statutory prohibition.

Court III alleges the same facts and is brought under Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), which declares it unlawful for any person in the offer or sale of any securities, directly or indirectly

  "(1)  to employ any device, scheme, or artifice
        to defraud, or
  (2) to obtain money or property by means of any
      untrue statement of a material fact or any
      omission to state a material fact necessary
      in order to make the statements made, in the
      light of the circumstances under which they
      were made, not misleading, or
  (3) to engage in any transaction, practice, or
      course of business which operates or would
      operate as a fraud or ...

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