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Morrison v. Madison Dearborn Capital Partners III L.P.

September 19, 2006

LARRY MORRISON, APPELLANT
v.
MADISON DEARBORN CAPITAL PARTNERS III L.P.; MADISON DEARBORN SPECIAL EQUITY III L.P.; MADISON DEARBORN PARTNERS III L.P.; MADISON DEARBORN PARTNERS LLC; XM SATELLITE RADIO HOLDINGS INC.



On Appeal from the United States District Court for the District of Delaware (D.C. No. 04-cv-00010) District Judge: Honorable Kent Jordan.

The opinion of the court was delivered by: Sloviter, Circuit Judge

PRECEDENTIAL

Submitted Under Third Circuit LAR 34.1(a) September 14, 2006

Before: SLOVITER, WEIS, and GARTH, Circuit Judges

OPINION OF THE COURT

I.

Larry Morrison, a shareholder of XM Satellite Radio Holdings, Inc. ("XM"), brought a derivative suit under Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), to recover alleged short-swing profits realized by corporate insiders Madison Dearborn Capital Partners III, L.P, Madison Dearborn Special Equity III, L.P., Madison Dearborn Partners III, L.P., and Madison Dearborn Partners, LLC (collectively "Madison Dearborn"). The District Court dismissed the complaint for failure to state a claim on which relief can be granted. Fed. R. Civ. P. 12(b)(6). Morrison appeals.

II.

In August 2000, Madison Dearborn purchased 50,000 shares of "8.25% Series C Convertible Redeemable Preferred Stock Due 2012" (hereinafter "Preferred Stock") issued by XM for $1000 per share. Combined with other purchases, Madison Dearborn was the beneficial owner of 13.58% of the underlying XM Common Stock.

Holders of Preferred Stock are entitled to exchange their shares for XM Common Stock. The Certificate of Designation for the Preferred Stock set the conversion price at $26.50 per share, but also contained "anti-dilution" provisions which automatically decreased the conversion price when certain events occurred, such as a stock split, payment of dividends, or issuance of additional Common Stock. By 2003, the conversion price had decreased to $19.68. On and subsequent to January 28, 2003, XM issued additional Common Stock, which further reduced the conversion price to $8.96 per share as of June 30, 2003. Prior to the adjustment, Madison Dearborn was entitled to convert its Preferred Stock into 2,540,650 shares of Common Stock. Afterwards, it was entitled to 5,580,357 shares but never exercised its right to convert those shares.

In June 2003, Madison Dearborn sold 2,674,154 shares of XM Common Stock that it had acquired independently of the Preferred Stock. Morrison requested that XM bring suit against Madison Dearborn to recover the alleged short-swing profits realized by this sale. When XM declined to do so, Morrison brought this derivative shareholder lawsuit.

III.

The District Court had jurisdiction over this action under 15 U.S.C. § 78aa. We have jurisdiction over this appeal from the final judgment of the District Court under 28 U.S.C. § 1291. We exercise plenary review over the order dismissing the complaint, as well as the District Court's interpretation of securities law. In re Rockefeller Ctr. Properties, Inc. Sec. Litig., 311 F.3d 198, 215 (3d Cir. 2002). When reviewing a motion to dismiss, "we accept all factual allegations in the complaint ...


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