Simons v. Cogan

549 A.2d 300 (1988)

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Nature of the Case

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Facts

Hansac, Inc. (Hansac) and Knoll (D) merged leaving Knoll, the surviving corporation, as the wholly owned subsidiary of Knoll Holdings. The merger caused the minority shareholders of Knoll to be eliminated through a $12 cash tender offer. The merger resulted in the execution of a supplemental indenture which eliminated the right of D's convertible debenture holders to convert their debentures into shares of its common stock. The supplemental indenture, which was executed by Dand the indenture trustee, provided that in lieu of the right to convert into the common stock of D, the debentures would be convertible into $12.00 cash for each $19.20 principal amount of debenture. An additional supplemental indenture was also executed increasing the interest rate on the debentures from 8 1/2 percent to 9 7/8 percent per annum. P filed a class action on behalf of the holders of D's convertible debentures asserting that Ds breached a fiduciary duty to the debenture holders. The complaint alleges: (1) Cogan (D), as the controlling shareholder of both D and Hansac, unilaterally set the $12 conversion price without negotiating with a representative of the debenture holders; (2) there were conflicts of interest among D's directors and no special committee of independent directors was formed to evaluate the transaction; (3) D's directors did not seek other offers to acquire D; and (4) the transaction was timed to take advantage of the 1986 low point in the trading price of D's shares and debentures. P claimed that the $12 conversion price was unfair and inadequate. P also claimed a breach of contract because D changed the conversion feature without the approval of all debenture holders as required by section 15.02 of the indenture. P claims D also violated section 15.02 by entering into a supplemental indenture without obtaining the required consent of the holders of not less than a majority of the aggregate principal amount of debentures outstanding. D claimed fraud in a 1983 prospectus published in connection with the original distribution of debentures and in the 1986 offering circular issued pursuant to the tender offer portion of the merger. Ds filed a motion to dismiss the complaint on the grounds that it failed to state a valid cause of action. The Chancellor ruled that P, as a debenture holder, did not share in a fiduciary relationship with the issuing corporation or its directors and the complaint failed to plead facts necessary to maintain an action for fraud. He also held that the 'no recourse' provision of the indenture barred an action based on breach of indenture against all Ds except the issuing corporation and the terms of the indenture barred P from bringing suit on the indenture without initially making a demand on the indenture trustee on behalf of 35 percent of the outstanding debentures. P appealed.