You are on page 1of 4

Common Law Rubric

1. Facts of Van Gemert v. Boeing:


Plaintiffs are owners of $1.5 m convertible debentures of Boeing issued in 1958.
Debenture holders entitled to covert 2 common stock of Boeing for each $100.
The debentures, Indenture Agreement and NYSE documents set forth the redemption
by Boeing and notice to be given not less than 30 days or more than 90.
28 February 1966, Boeing Board authorizes president, vice president finance or
treasurer to call for redemption of debentures on a date to be decided. Press release
the same date but gave no possible dates for redemption.
March 8 publication of first formal notice in Wall Street Journal with April 8 as
redemption date and March 29 as date on expiration of conversion right. March 18
publication of second formal notice in Wall Street Journal. Accepted this satisfies the
notice requirement in debentures/Indemnture Agreement.
NYSE first notified about redemption in telephone call on March 7. NYSE not sent a
general publcity release. Moreover, there was no general news release as required by
the NYSE Listing Agreement and NYSE Company Manual until 25 March and then
more adverts placed on 28 March.
The plaintiffs allege they were not aware of the date for conversion and Boeings
redemption as a result to inadequate and unreasonable notice.
The plaintiffs did not convert to common stock and so the debentures were redeemed
rate of $103.25 for each $100. This was less than the 2 common stock at a value of
$316.25 on March 29, the date of expiration of conversion right.

Facts of Metropolitan Life Insurance Co. v. RJR Nabisco:


Plaintiffs causes of action stem from the consequences of the proposed LBO, namely
that shareholders of RJR would receive a windfall at the expense of Defendant
lenders. Defendants offered an initial $75 per share buyout, and after a bidding war,
the offer was eventually raised to $109. Defendants were going to finance the buyout
with little equity and a lot of debt. The financing of the LBO through junk bonds
would lower RJRs credit rating, which in turn lessened the value of the bonds held by
Plaintiff lenders. Although the agreement between Defendants and Plaintiffs did not
expressly prohibit such a buyout, Plaintiffs maintain that the buyout involved such an
egregious amount of additional debt that it breached an implied covenant of good
faith and fair dealing. Defendants counter that the terms advocated by Plaintiffs were
never bargained for during the formation of the agreement.

Facts of this case:


The government of Urbania issued bond in the amount of $750 million.The
government offered a amendment to exchange the old bonds which are due to mature
at the end of 2008 for new bonds with a maturity date in 2018. The new bonds will
have less face value but higher rates than the old ones. The face value will fall from
$1000 to $450 and the interest rate will rise from 4.5% to 6%.

The majority bondholders who hold 78% of all bonds has accepted this change while
the minority 22% bondholders indicate that they are not willing to participate in this
rescheduling. The majority bondholders who are institutional investors agreed this
because they believe it is a better way for them to avoid the possibilities such as
declaring bankruptcy and not receiving any payments.

In order to encourage the minority bondholders to give up their old bonds, the
government is planning to delete the tax gross-up clause in the old bonds so as to
make the old bonds become less attractive. The majority has agreed with this advice.

2.The Application of Law in Van Gemert v. Boeing:


Boeing say notice in debentures satisifed and debenture holders take risk of non
awareness. This is not accepted by the court.

Boeing should be civilly liable in federal law for failure to comply with NYSE Listing
Agreement and NYSE Company Manual. Private parties have rights to bring suit for
violations of the Securities and Exchange Act 1934 and SEC rules and regualtions
this includes violations of stock exchange and dealers rules to protect investors.

The appeal court did not agree with trial court that held breach of exchange rule could
never give raise to a claim under federal acts. This is inconsistent with recent
statements of the court and developing caselaw.

Two deficiencies of the Boeing notice. First, debenture holders were not told on any
materials that they could receive mail notice if they registered there debentures.

Second, the newspaper notice was inadequate. Although complied with requirements
of Indenture, it was simply insufficient to give fair and reasonable notice to the
debenture holders. This notice requirement arises from the contract between Boeing
and the debenture holders. In particular, there should be a necessity to protect
unsophisticated investors. Boeing could have easily advertised in the press or
provided details with proxy material.

The purchaser of a convertible debenture receives the debt obligation and the
expectation that the stock price will increase sufficiently that the conversion right
shall be worth more than the debt. The debenture holder relies on the opportunity to
make a proper conversion on due notice.

The debenture holders expectation is to receive reasonable notice and it is the holders
reliance on this that the courts will protect.

The Application of Law in Metropolitan Life Insurance Co. v. RJR Nabisco:


Plaintiffs were sophisticated parties who contemplated the possibility of inserting a
provision that would have protected them from such a possibility, but they declined
out of fear of losing the business. Defendants were living up to their end of the
bargain, but they were under no duty to ensure that Plaintiffs reaped any more benefits
from the contract than what was expressly promised in the agreement. Any future
concerns that Plaintiffs have can be avoided by demanding protection in future
transactions.

3. The advice to the client


In accordance with the facts and reasoning of the above cases, we can safely come the
following conclusions:

If the plaintiffs are sophisticated parties such as institutional investors who


contemplated the possibility of inserting a provision that would have protected them
from such a possibility, the implied covenant of good faith and fair dealing will not be
applied. If the plaintiffs are ordinary shareholders, then they will be protected by the
doctrine of good faith and fair dealing. In this case, the minority shareholders are the
latter one, so they will be protected by the implied covenant of good faith and fair
dealing. Therefore, we suggest the government of Urbania no to cut the tax gross-up
clause.

You might also like