The opinion of the court was delivered by: Napoli, District Judge.
MEMORANDUM OPINION AND ORDER
This is a securities action involving an alleged violation of
section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j,
and Rule 10b-5 of the Securities and Exchange Commission,
17 C.F.R. § 240.10b-5. Jurisdiction is predicated upon section 27
of the '34 Act, 15 U.S.C. § 78aa. The case is presently before
the court on motions for summary judgment of both plaintiff and
defendant. Each party asserts the lack of a genuine issue of
material fact and each contends that it is entitled to judgment
as a matter of law. The court agrees that there is no issue of
material fact.
Plaintiff is the owner of a small business who previous to the
purchase in question, had invested occasionally in the stock
market. His previous purchases were of common stock. Defendant
issued on March 1, 1962, through a trustee (at which time
defendant was a Kansas corporation) $5,242,400 in five per cent
convertible subordinated debentures. Plaintiff and, as joint
tenants, his wife who is not a party herein purchased two
debentures in $1000 denominations during April of 1967.
Being advised that these debentures were a "good investment,"
they were purchased on the open market through his broker. At no
time did plaintiff see a prospectus or the trust indenture under
which the debentures were issued nor did he investigate any
aspect of the debentures, their ratings or the defendant company.
Upon receipt following purchase, plaintiff examined the
debentures but not thoroughly. He knew at that time that the
debentures were convertible but was not positive as to the
meaning of "convertible" and he did not understand the meaning of
the term "redeemable" or "callable". The debentures were
redeemable at the option of the defendant upon at least thirty
days published notice and the payment of a premium.
By late 1968, the holders of approximately $4 million worth of
the debentures had elected to and did convert them into common
stock. Then, on October 30, 1968, and again on November 7,
notices were published in the New York Times announcing that
defendant was redeeming the debentures as of November 29, 1968,
and that the holder's right of conversion would be terminated by
said redemption at 3 P.M. on November 29, 1968. By that date, the
holders of $5,086,600. of the debentures (including the
approximately $4 million worth previously converted) had
converted at favorable market prices, leaving unredeemed
debentures worth $155,800. Plaintiff was not aware of this notice
and did not convert his debentures.
In addition to publication in the Times, notice was mailed to
all holders who had registered with the trustee. All holders
could have so registered; plaintiff held his debentures in
nonregistered bearer form. Consequently, he did not receive
mailed notice. Also, resulting from defendant's press release,
stories of defendant's announcement to redeem were published on
October 29, 1968, in the Wall Street Journal, Womens Wear Daily,
Daily News Record, Homes Furnishings Daily and the Reuters and
Dow-Jones wire services. The essential facts of the defendant's
redemption and of the termination of the holder's conversion
rights were printed in these news items. Plaintiff did not see
these stories.
The form of the debenture is that commonly used for this type
of security. On the upper third of the one page form, there
appeared the name of the company, the state of incorporation, the
denomination and number of the individual debenture, the recital
to pay the bearer or registered holder, and the following title:
5% Convertible Subordinated Debenture Due March 1,
1982.
Plaintiff's claims of violation of section 10(b) and rule 10b-5
are essentially two: first, the form of the debenture itself is
attacked as deceptive and misleading in that its formal title
printed in large, prominent letters contains the word
"convertible" but fails to mention the defendant's right to
redeem, which is included in the paragraphs of small print; and
second, that for various reasons, the notice of redemption was
defective and, hence, ineffective to terminate plaintiff's right
of conversion.
Plaintiff argues that the right of conversion is a substantive
right and an important inducement for the purchase of such a
security. Mueller v. Howard Aircraft Corp., 329 Ill. App. 570,
70 N.E.2d 203 (1946) ("Plaintiff's option to convert his
debenture . . . represented a substantial right, as did
defendant's option to redeem said debenture"). This is
undoubtedly true, for the right to convert at a fixed price into
common stock enables the company to pay a lower interest rate
than it otherwise would be able to. Note, Convertible Securities:
Holder Who Fails to Convert Before Expiration Of the Conversion
Period, 54 Cornell Law Review 271, 273 (1969) (hereinafter "Note,
Convertible Securities"). Plaintiff then reasons that this
substantial right was deprived by the title of the debenture
which is misleading in omitting to indicate that the conversion
right could be terminated by a redemption. Hence, plaintiff would
have the defendant clearly indicate in equivalent type and
emphasis as the title the company's right of redemption.
Supporting this contention is his view that investors reasonably
expect their conversion right to continue until the maturity date
and are unaware that such right may be terminated by the company.
Finally, plaintiff believes that the debenture is an adhesion
contract and should therefore be construed in light of what an
investor might reasonably expect.
The seriousness of this situation is indicated by the New York
Stock Exchange, Company Manual, § A12(1), "Securities Having
Limited Conversion Rights":
In the case of a security having a right of
conversion which is not exercisable through the
entire life of the security, the word "convertible"
shall not be used as part of the formal title of the
security. Instead, attention should be called to the
conversion rights by means of a sub-heading, such ...