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Former shareholders who bought preferred stock in a once financially troubled Colorado fertilizer company whose stock sold for as low as $5 a share have reaped another $1 million harvest five years after the company was acquired by a Canadian business. Delaware Chancellor William B. Chandler III ordered Nu-West Industries Inc. — which was acquired in 1995 by one of the top three North American fertilizer companies, Agrium Inc. of Calgary, Alberta — to pay the owners of 100,000 shares an additional $10.43 per share. This comes on top of the cash crop of $171.50 per share paid when the Class A preferred shares were redeemed in December 1996. Chandler ruled that the extra $10.43 per share is for unpaid dividends accrued during most of 1996 — a period when Agrium was trying to buy up the Class A preferred, which accumulated dividends at a handsome annual rate of $11 per share. No dividends were paid for 1996 even though the stock was not redeemed until the end of the year. “They were essentially junk bonds issued to compromise the debt,” said Dorothy Bowers, an attorney with Agrium in Calgary, who handled the original Nu-West acquisition and redemption of the stock. The case — to which Chandler granted class action certification in September — illustrates how shares issued in bankruptcy can haunt the new owners, Bowers said. Because the certificate of incorporation was badly crafted in regards to the shares, shareholders were successful in pressing their claim in Delaware Chancery Court that dividends accrue up to the day they are redeemed, Bowers said. Craig B. Smith of Smith Katzenstein & Furlow of Wilmington, which represented Roger B. Smith, a beneficial owner of 18,500 shares of Class A preferred, said the case is also interesting in that it deals with the issue of when dividends accrue and when they are payable. Nu-West maintained that it did not have to pay dividends for the more than 11 months leading up to the redemption because dividends do not accrue daily, but in full at the end of each full fiscal year. But Chandler said that Nu-West’s certificate “clearly, and unambiguously, mandates a finding that dividends accrue daily and are payable at the time of redemption.” THE STORY BEGINS The saga began before Agrium entered the picture. Nu-West, which produced and sold concentrated phosphate-based fertilizer in the western United States, had leveraged the company “beyond levels appropriate when the cash flow started to fall off,” said James Pendergast, who handles investor relations with Agrium. The company went through reorganization, during which creditors were given the Class A preferred shares in Nu-West, said Bowers. The creditors then sold the shares to investors. Shares originally sold at about $90 a share, but fell to between $5 and $10, Bowers said. Dividends on the Nu-West Class A preferred stock accumulated at an annual rate of $11 per share. Under the certificate of incorporation dividends on Class A preferred stock were payable only to the extent there was excess cash flow. Unpaid dividends would be cumulative, the certificate said. What’s more, the certificate provided that the shares of Class A preferred stock could be redeemed at the price of $100 per share, plus an amount equal to all accrued and unpaid dividends. “Time passed and Nu-West never paid the dividends — it was in grave financial condition,” said Bowers. “They constantly had dividends in arrears. The value of the preferred shares dropped considerably. We stepped in and bought a bunch.” Agrium attempted to buy as many shares as possible for about a year prior to the redemption, she said. The company then issued a notice of redemption. Prior to the redemption, there were approximately 290,000 shares of the Class A stock issued and outstanding. Agrium U.S., the controlling shareholder in Nu-West, held 190,000 shares. When the shares were redeemed on Dec. 13, 1996, the company gave shareholders $100 and an additional $71.50 per share in accrued dividends from 1990 to mid-1995. The company did not pay dividends from Jan. 1 to Dec. 13, 1996, however. Several days later, Andrew E. Shapiro, the formerly named plaintiff, filed a class action suit seeking the extra money. Speaking of Nu-West Smith said, “They made a conscious decision to redeem the shares at a point in time so as not to have to pay accrued dividends for the year. It’s as if I borrow money from you and because I pay it off before the end of the year I don’t have to pay all the interest accrued.” Nu-West sought broad discovery from Shapiro to determine whether he was a proper class representative. Bowers said Shapiro was an investor who brought together a group of investors to invest in Nu-West. “I think he owned some, and I think he owned on behalf of others,” said Daniel A. Dreisbach of Richards Layton & Finger, which represented Nu-West. After a year of various discovery disputes in 1998, Shapiro decided that he could no longer serve as a class representative because that would require him to disclose the identity of certain clients and their investments. “He felt his ethical obligations precluded him from being the plaintiff,” said Smith. In 1999, Roger Smith, who was the beneficial owner of preferred shares as of the redemption date, was substituted for Shapiro as the named plaintiff. In his decision, Chandler said the root of the controversy was when dividends accrue and when they are payable. “While Nu-West’s certificate is clear on when these preferred dividends are payable and that they cumulate if unpaid, the certificate is silent on whether the shareholders’ rights to the dividends accrue daily up to the date of redemption,” Chandler said in his opinion. “Mindful of this Court’s duty to seek the intent of the parties from reading the contract as a whole, I find that other provisions of the certificate would led a ‘reasonable person in the position of the parties’ to conclude that the parties intended the preferred dividends to accrue daily.” Chandler cited from articles in the certificate which said that dividends do not accrue from and after the notice of redemption. “Logically, dividends can only cease to accrue ‘from and after the Class A Redemption Date’ if they have been accruing continuously up to that date,” Chandler wrote. Another article states that upon dissolution, liquidation and winding up, Class A preferred shareholders are entitled to “all cumulative dividends … accrued and unpaid thereon to the date of final distribution.” “The date of final distribution may or may not occur at the end of a fiscal year,” the opinion said. “Reading the certificate of incorporation as a whole, I conclude that a reasonable person in the position of the parties would conclude that the preferred dividend accrues daily until the occurrence of an extraordinary events stops the accrual — here the redemption of the shares,” the opinion stated. Attorney Smith has filed a motion in Chancery Court asking that the pre-judgment interest be compounded monthly. Besides Smith, David A. Jenkins and Michele C. Gott of Smith Katzenstein represented the plaintiff. Daniel A. Dreisbach and Srinivas M. Raju of Richards Layton & Finger of Wilmington represented the defendants, along with Jonathon D. Bergman of Davis Graham & Stubbs of Denver. The case is Roger B. Smith v. Nu-West Industries Inc. et al., C.A. No. 15442.

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