## Facts

- Jayhawk Capital Management entities and their principal held LSB’s $3.25 Convertible Exchangeable Class C Preferred Stock, Series 2, and were also significant common shareholders.
- The parties’ rights were governed by a certificate of designation that (1) left dividend declarations to board discretion, (2) required pro rata distribution if dividends were declared, (3) permitted redemption at $50 per share plus accrued and unpaid dividends (declared or not) to the redemption date, and (4) allowed conversion at a set ratio into common stock, with conversion holders not receiving redemption consideration for converted shares.
- Jayhawk placed two designees on LSB’s board and participated in company governance while the company considered transactions affecting the preferred stock.
- LSB conducted a partial exchange offer under which preferred shares could be exchanged for common stock; Jayhawk exchanged only part of its preferred holdings.
- Jayhawk later sought payment of accrued but unpaid dividends in connection with its remaining preferred shares and asserted that LSB’s communications surrounding the exchange offer and subsequent handling of the preferred shares were misleading.
- LSB declined to pay the additional dividends Jayhawk claimed, and Jayhawk sued under securities, fraud, fiduciary-duty, and contract theories.
- After litigation and a bench trial, the court issued findings of fact and conclusions of law and entered judgment.

## Issues

1. Whether LSB made materially false or misleading statements or omissions in connection with the exchange offer actionable under federal and state securities laws, and whether Jayhawk proved scienter, reliance, loss causation, and damages.
2. Whether the certificate of designation required LSB to pay accrued and unpaid dividends to Jayhawk in connection with shares Jayhawk converted or otherwise removed from preferred status, and whether LSB breached any contractual obligation.
3. Whether LSB and its directors owed and breached fiduciary duties to Jayhawk as a preferred shareholder in structuring or disclosing the exchange offer and related actions.
4. If liability existed, what remedies or damages were available.

## Decision

- The court entered judgment for LSB on all claims after the bench trial.
- The court rejected the contract claim, holding that the certificate’s redemption provisions did not apply to shares Jayhawk elected to convert and that no separate contractual promise required the claimed dividend payments.
- The court rejected federal and state securities-fraud claims, finding no proven materially misleading statements or omissions and, in any event, insufficient proof of reliance, causation, and damages.
- The court rejected common-law fraud for failure to establish the required misrepresentation-based elements.
- The court rejected fiduciary-duty claims, treating Jayhawk’s alleged injury as governed by the certificate and finding no independent fiduciary breach.

## Legal Principles

- Preferred shareholders’ rights are primarily contractual and are defined by the certificate of designation; courts enforce clear contractual allocations of redemption, conversion, and dividend rights.
- Conversion and redemption are distinct: when a holder elects conversion, it relinquishes rights tied to redemption consideration for those shares absent an express contractual provision.
- Rule 10b-5 liability requires proof of a material misstatement or omission, scienter, reliance, loss causation, and damages; sophistication and access to information may bear on reliance and causation.
- Under Delaware corporate law principles applied by the court, fiduciary duties generally run to the corporation and common stockholders; claims seeking benefits beyond contractual preferred terms typically sound in contract rather than fiduciary duty.

## Conclusion

After trial, the court concluded that the governing certificate did not entitle Jayhawk to the additional accrued-dividend payments it sought in connection with its choices to convert or otherwise dispose of preferred shares, and that Jayhawk failed to prove actionable misrepresentations, reliance, causation, or any independent fiduciary breach; judgment was entered for LSB on all theories.


Jayhawk Cap. Mgmt., LLC v. LSB Indus., Inc., No. 08-2561-EFM, 2011 WL 1626581 (D. Kan. Apr. 28, 2011)