## Facts

- Louise Simons held Knoll International, Inc.’s convertible subordinated debentures and sued on behalf of a class of debenture holders.
- Knoll entered a related-party merger with Hansac, Inc., an entity controlled by Marshall S. Cogan; Knoll survived and became a wholly owned subsidiary of a holding company.
- The merger eliminated Knoll’s minority common shareholders through a $12 cash tender offer.
- Knoll executed a supplemental indenture eliminating debenture holders’ right to convert into common stock and instead allowing conversion into $12 cash for each $19.20 principal amount of debentures.
- A further supplemental indenture increased the debentures’ interest rate from 8.5% to 9.875% per year.
- Simons alleged Cogan set the $12 conversion price without negotiating with a representative of debenture holders, that directors had conflicts and did not use an independent committee, and that the conversion price was unfair.
- Simons also alleged the supplemental indentures violated the indenture’s consent requirements and that offering materials contained actionable omissions or misstatements.

## Issues

1. Whether the issuing corporation and its directors owe fiduciary duties to holders of convertible debentures concerning a transaction affecting conversion rights.
2. Whether the complaint stated a claim for breach of the indenture notwithstanding “no recourse” and procedural restrictions (including demand-on-trustee and minimum holder-percentage requirements).
3. Whether the complaint pleaded common-law fraud with sufficient particularity, including scienter and detrimental reliance.

## Decision

- The Delaware Supreme Court affirmed dismissal for failure to state a claim.
- The court held the corporation and its directors owed no fiduciary duties to convertible debenture holders because they are creditors whose rights are defined by contract.
- The court held the indenture’s “no recourse” clause barred indenture-based claims against defendants other than the issuing corporation and that the indenture’s procedural preconditions (including a trustee-demand mechanism tied to a minimum percentage of holders) were not satisfied.
- The court held the fraud claim was inadequately pleaded, particularly as to scienter and detrimental reliance.

## Legal Principles

- Holders of convertible debentures are creditors; until conversion occurs, their protections arise from the indenture’s contractual terms rather than fiduciary-duty doctrines applicable to stockholders.
- Courts will enforce indenture limitations on remedies and on who may be sued (including “no recourse” clauses), as well as procedural prerequisites to suit (such as demand on the indenture trustee and minimum holder thresholds).
- A common-law fraud claim requires well-pleaded allegations of a material misrepresentation or omission, scienter, reliance, and resulting damages; conclusory allegations lacking scienter and detrimental reliance are insufficient.

## Conclusion

The court treated the debenture holders’ dispute as one of contract rather than fiduciary law, enforced the indenture’s remedy and procedure restrictions, and dismissed the disclosure-based fraud claim for failure to plead scienter and reliance.


Simons v. Cogan, 549 A.2d 300 (Del. 1988)