## Facts

- Collins Radio Co. issued $40 million of 4⅞% convertible subordinated debentures due 1987 under a 1967 indenture; the debentures were convertible into Collins common stock at one share per $72.50 principal.
- The indenture’s merger provisions required a surviving corporation to assume Collins’s indenture obligations and execute a supplemental indenture specifying what the debentures would become convertible into after a merger.
- The indenture provided that, after a merger, a converting debentureholder would receive the same kind and amount of securities or property (including cash) that a Collins stockholder would have received if conversion occurred immediately before the merger.
- Collins’s business declined after issuance, and its stock price fell substantially.
- In 1973, Rockwell acquired Collins in a cash merger in which Collins common stockholders received $25 per share and the common stock ceased to exist.
- Rockwell, as the surviving corporation, executed a supplemental indenture providing that debentureholders could convert into the cash equivalent of what stockholders received (cash based on $25 per share applied to the fixed $72.50 conversion price).
- A class of debentureholders alleged that the merger structure improperly eliminated the conversion feature without compensating for its potential equity value and asserted claims for breach of the indenture, breach of fiduciary duties, and violations of federal securities laws (including § 10(b) and Rule 10b-5).
- The district court granted a directed verdict for Rockwell, Collins, the indenture trustee, and other defendants; the Fifth Circuit heard the case en banc on appeal.

## Issues

1. Whether the cash merger and supplemental indenture breached the debenture indenture by extinguishing the conversion right without additional consideration.
2. Whether defendants owed debentureholders extra-contractual fiduciary duties limiting merger structuring beyond the indenture’s terms.
3. Whether the evidence supported § 10(b)/Rule 10b-5 liability, including whether defendants acted with the required scienter (including recklessness).

## Decision

- The en banc Fifth Circuit affirmed the directed verdict for defendants.
- The court held the indenture, properly construed, authorized conversion after a merger into the same consideration (including cash) that stockholders would have received upon a hypothetical immediate pre-merger conversion.
- The court rejected efforts to impose implied or fiduciary protections that would alter the negotiated indenture terms governing convertible debt.
- The court found the proof insufficient to establish securities fraud under § 10(b)/Rule 10b-5 under the governing scienter standard.

## Legal Principles

- Rights of holders of publicly issued debentures are primarily defined by the indenture’s text; courts generally will not add protections inconsistent with the negotiated instrument.
- Where an indenture’s merger clause provides that, after a merger, conversion yields the same “securities and property (including cash)” a stockholder would have received upon an immediate pre-merger conversion, a cash-out merger can satisfy the conversion right by substituting the stockholders’ cash consideration.
- For Rule 10b-5 scienter in the Fifth Circuit, recklessness can suffice when it is an extreme departure from ordinary care presenting an obvious risk of misleading investors; absent evidence meeting that standard, directed verdict is proper.

## Conclusion

The Fifth Circuit held that a cash merger that cashes out the issuer’s common stock does not, by itself, violate a convertible debenture indenture when the indenture expressly permits post-merger conversion into the same cash consideration stockholders receive, and it affirmed judgment for defendants on both the contract and federal securities-fraud claims for lack of breach and insufficient proof of scienter.


Broad v. Rockwell Int’l Corp., 642 F.2d 929 (5th Cir. 1981) (en banc)