Corporate Finance Outline – Mitchell – Spring 2011 I. Limited Liability’s Effect on Corporate Finance
Parties are confined to the terms of their Indenture Contract
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| Parties are confined to the terms of their Indenture Contract
Reasoning: Fiduciary Duty requires an equitable, ownership, property interest Looking at convertible debt instrument, it is not equitable interest until conversion occurs into shares—that is an expected, future event that isn’t applicable now Issues with Opinion: 1. What is a Fiduciary Duty Here, the Court looks at the debt instrument, while Fiduciary Duty, created at common law, looks at relationships Incorrect interpretation Nature of Fiduciary Duty: Power disparity, where party made an agent, to exert power over something on behalf of another party The dominant party does so for the benefit of the subordinate party Relationship between party of loyalty Fairness is more modern approach then loyalty 2. Court Says the Focus is on Equitable Interest/Ownership that Stock Has and Debt Does Not—But, Distinction is not that clear A. Stockholder is not really an “owner” Has Limited Attributes: Residual right Right to dividends, if declared Right to Vote Right to Sell for greater price then purchased However, these are it…these are the attributes Not that much of an equitable/ownership interest Shareholders, in reality, are not “owners” but entitled to these limited attributes So: Court’s equitable interest analysis, in reality, does not apply to shares B. Additionally, debt holder could have an equitable/property interest For instance, a secured/lien bond has an ownership interest Overall: The Court’s analysis and reasoning of “equitable interest” is flawed What Reasoning supports Lack of Fiduciary Duty to Debt holders? 1. Contractual Argument: Unlike Shares, which have these limited attributes and no more, Debt is a creature of contract Lack of Ability: Shares are not able to negotiate the attributes, and therefore a fiduciary duty is imposed at common law to bolster the attributes they do have They are unable to negotiate for heightened protection In Debt The ability to negotiate for what you want is inherent In Public Placement: Perhaps less of ability to negotiate with company, but there are variety of bonds available with different attributes In Private Placement: Able to negotiate on rather even level, as both parties have something the other wants Self Protection Since you are able to negotiate, negotiate for what you want Ability to contract with party that will be in control of $ unlike shares 2. Shares more at Risk: Because shares are not contractually obligated to be repaid, and only have a residual right—rather then required repayment, they have more risk Therefore, Fiduciary Duty imposed to support them Counter Argument: Depends on where risk and ownership are evaluated During operation, risk of non-dividend payment is one thing, but risk may be different between creditors and debtors Could argue, debt, during operation more at risk w/o voting At liquidation, even though they have residual claim, both creditors and shareholders are relatively in same position Both want repayment, and both trying to get it 3. Certainty in Bond Market is Needed: If we left each bond to be determined if breach of fiduciary duty on case by case basis, certainty would leave the market Prices would be affected, and discounted Sharon describes it Therefore: Avoiding factual, fiduciary analysis outright is beneficial to debt market 2. Key Provisions of an Indenture Contract Generally: Creditors lock in their “Risk Profile” When they enter this indenture contract These Provisions ensures adequate protection, and that they contracted for enough protection Note: See Page 4, infra, “Oil Can Problem” for example of how these provisions apply in indenture Use of Covenants and Indenture Contract to avoid “Fundamental Conflict” between shareholders and creditors see, infra, “Limited Liability’s effect…p. 1-3 1. “Promise to Pay and Supporting Provisions” A. Collateralize Secure the debt if the issuer defaults (See infra on securitization) Debtholder seizes asset as collateral, sells it, uses proceeds Almost any asset can be collateral B. Guarantee Debtholder is protected by the promise of a 3rd party to pay if the issuer fails to Can be either “Payment by 3rd party” or “Equity infusion” by 3rd party May be premised on Debt/Equity Ratio altering too much C. Sinking Fund Period payments are put into a fund Assures creditor’s $ is available to repay when maturity occurs Issue: This locks of $ that could be valuably used by the corporation 2. “Ranking” While ranks among collateralized assets occur (Secure, Senior, Junior), different classes of debt can also be ranked among each other Negotiated by the parties Hierarchy:
3. Covenants Purpose: Ensures an issuer continues to operate in a way most conducive to repaying debt promise due to the fact that the creditor is “locked in” Affirmative Covenants: A promise of specified affirmative acts the borrower will do Examples Include: Maintain the property, pay taxes, deliver financials at periodic dates, allow inspection by lender, get insurance, notify over certain events Negative Covenants: A promise to not do something 1. Limitation on Incurrence of Indebtedness This covenant will state that the borrower cannot undertake additional debt unless Consent Certain Cashflows generated Ratios met May be allowed for certain maximum levels 2. Restricted Payments This covenant will state the borrower cannot let cash leave company Dividend payments, repurchases of stock, buy back of debt…etc… May be based on ratios or if “reasonable” Keeps $ in company to service debt 3. Asset Sales Prohibits the isser from selling assets unless 1. Will not cause default 2. Consideration received is > FMV 3. High % of payment is cash or cash equivalent Typically will have a carve out for “de minimus” sales May require that when sale occurs, proceeds be reinvested and if not debt accelerated 4. Merger, Consolidation, Sale of Assets Prevents issuer from consolidating, merging, or selling assets unless certain conditions met 1. Suviving entity must assume liabilities and obligations of indenture, pursuant to a supplemental indenture 2. No default after transaction This prevents transaction where the company doesn’t survive, or is too weak to pay off debt See, infra “Successor-Obligor” clause 5. Payment Restrictions on Subsidiaries This may typically apply when 1 company, the borrower, reiles on its subsidiaries for their $ coming to them Because the company uses them to service its debt, this covenant prevents holding company from sending money back to subsidiaries 6. Restrictions on Liens (Negative Pledge Clause) When a secured loan is incurred, this covenant prohibits the issuer to allow additional liens on that asset unless minimum conditions are in place 7. Line of Business: May restrict the issuer from leaving line of business which debt holder lent $ to 4. Redemption Generally: A bond, or debt has a maturity date, however, that bond or debt may be able to be redeemed prior to that date Once a date for redemption is set, debt does not earn interest beyond that date (See Rudbart, infra) It is in best interest to turn in debt security as quickly as possible to avoid not getting return Optional Redemption The issuer receives the ability to redeem early As a compromise between issuer and lender, Option to redeem may only vest after Call Period Call Period: Vests after fixed minimum years, prior to which no redemption is allowed Will be negotiated as to what causes redemption and what payback is For Example: If interest rates may drop, this option to redeem will be negotiated by the issuer, so that they can get another loan at more favorable rate Investors don’t want this, as they then lose their above-market return Protection: What may be used to redeem Bond/What may not be (Morgan Stanley) Mandatory Redemption Due to certain, negotiated events Examples include: Cash flows > Then what was thought pay back early Asset sales: if proceeds have not been reinvested by certain time frame, may require mandatory redemption Change in Control: A common event that creates mandatory redemption, if the company’s control changes, issuer may have to buy back all debt at 101% + unpaid interest May be: Sale of all or substantially all of the assets If any person becomes a beneficial owner to specified % Any time continuing directors, or directors who were members at the issuance date, do not comprise a majority, may trigger this clause 5. Events of Default The Indenture Contract will define, and specifically list the events contemplated Result: “Automatic Acceleration:” The debt principal and interest due immediately Typical Examples Include: 1. Default in Payment or Principal Triggers “Acceleration Clause” 2. Breach of Covenant, Representation or Warranty If any of the Covenants or Representations or Warranties are not met, may trigger accelaration clause 3. Bankruptcy or Insolvency 4. Cross-Default: If the issuer has any other debt, and defaults on it, this loan will be in default Acceleration Clause 3. Judicial Interpretation of Debt Contracts and Key Provisions: “Successor/Obligor Clause” in Covenants Section Sharon Steel Corp. v. Chase Manhattan Bank (2d Cir. 1982) F: UV issued debt to Chase. It had a “successor/obligor” clause which allowed UV to assign its debt to any one who purchased “all or substantially all” of its assets. If it was not assigned, UV had to pay it off. UV engaged in a liquidation of its assets. It sold several lines of its business. Then, it sold the final line and remaining assets to Sharon Steel. Sharon bought all remaining assets and assumed liabilities, paying $578M for assets and cash. It then tried to invoke the “successor/obligor clause” but lender Chase rejected. I: Whether interpretation of the clause is matter of law, or factual inquiry for jury? R: The original borrower will borrow money from lender, entering into: (1) Indenture Contract: With the lender (2) Debenture Contract: with the individual bondholders The Successor/ Obligor Clause A very common clause that is in boilerplate, that allows a successor company to step into the shoes of the original borrower if merger, acquisition, asset sale… Contents: “Nothing in the indenture or debenture shall prevent any merger, transaction, sale of assets…provided that Any transaction, or “sale of all or substantially all of assets” leads to the assumption of liabilities by the successor corporation Just as if successor was original party to transaction Novation occurs, where successor steps into shoes Except, does not step into liability of debentures Effect: 1. Successor steps into the Shoes of the indenture The successor/new borrower has the same terms as if it had been the original party Note: While there may be additional terms, standard context is that same terms apply 2. However, the Former Borrower is not entirely off the hook: The former borrower is still liable for the debentures, or the original debt owed if not repaid The former essentially becomes a guarantor if new party defaults Reason: The successor steps into the shoes of the indenture because both parties—the successor and lender agree to it However, the debenture is with each individual bondholder, and you cannot, as a matter of basic contract law, unilaterally change a contract How does Novation occur: (1) A Purchase of Asset Contract will be entered into Between the buyer and seller/original borrower Will contain successor/obligor clause (2) Supplemental indenture entered into: Between the Buyer and the Lender is entered into Amends the original indenture Use: 1. Protects Lender: Assures there are assets to service the debt 2. Protects Borrowing Company: Allows them to enter into transactions, and not worry about what will occur with debt—Certainty Allows them to subsequently continue their operations, or move on free of debt Note: The lender could prohibit the transaction to occur, thus avoiding any worry But—this would lead the borrower finding someone to give it more beneficial terms Also, transaction may be beneficial to lender giving it (1) better party with better credit, (2) may lead to better viability of the borrower, making easier to repay debt depending on transaction structure Why Transaction Occurred: Sharon wanted the debt as interest rates were climbing. They could have borrowed, but would have been much higher interest rate then current debt To make sure, it purchased assets and cash to be “all or substantially all” Bondholders disagreed, as worried about ability to repay **Because Clause is common, uniformity is needed and decided as a matter of Law 1. This standardization and Certainty are necessary to the Capital Markets Uniformity is necessary for comparison of investments 2. Uncertainty would decrease value of all debenture issues The case-by-case analysis of debenture contracts would create uncertainty, and this would decrease their value as they would be discounted Price to finance debt would increase—cost to borrow increases Interpretation: “All or Substantially all of Assets” At the time the plan of liquidation is determined upon are transferred to a single purchaser Here: All of remaining assets on date purchased were transferred, but they amounted for about 51% of book value of total assets, and 38% of revenues and 13% of profits This was not “all or substantially all” Redemption premium and Acceleration Provision applies: UV said that it no longer had an obligation and did not pay—defaulted Here: Default “Acceleration Provisions” and the “Redemption” provisions apply together Are not exclusive of other remedies Because it was a voluntary sale of assets, albeit unsuccessfully The Purpose of Redemption provision is to price the voluntary satisfaction of debt before maturity Cannot be avoided because debtor made a mistake and defaulted The Redemption Provision may not be owed if involuntary Redemption Provision and Notice: Rudbart v. NJ District Water Supply (NJ 1992) F: The Commission operates a Public Water system and authorized the issuance of $75M in new notes. Fidelity bank bought $73.8M of them, selling them for $75M, making the 1.2M spread. The bonds had a callable redemption option, with clause specifically listing terms of redemption payment. “Notice Provision” only required they be put in Newspaper of their redemption. In 1985, wanted to redeem them, and put notice in newspaper. Redemption Date was June 23rd. However, not all debenture holders got notice of the redemption in Newspaper. Fidelity hand-notified its own customers, however by phone. Π’s Argument: They argue that from redemption date of June 23rd until it was actually redeemed they should be owed interest, as they didn’t redeem and otherwise its free money. They argue that they didn’t get to negotiate notice terms so it is a Contract of Adhesion R: 1. Contract of Adhesion is: A take-it-or-leave-it contract, with standard form, and inability to negotiate Look at: Economic Pressure Disparate Bargaining Positions Public Interests Economic necessity of contract The Bond Indenture and Debenture Contracts fit this 2. Policy Ramifications make it unwise to call Bonds/Debt Adhesion Contracts 1. There is no economic pressure: There are many investments that can be chosen, and none are forced Many different debt, and equity investments have many different attributes 2. This is not Economic Necessity This is unlike consumer goods, which are necessary for daily life Rather, it is an investment which can or cannot be undertaken Counter Argument: Debt is vital to the capital markets and every day life Effects cars, homes, etc… If it were stripped away, the Capital markets would simply cease to operate… 3. No Disparate Bargaining Position because it was not necessity, and there are many variations which can be bought from many parties without pressure, there is no disparate bargaining position 3. Why we want Indenture Contracts to be Enforced 1. Standardization is beneficial to Securities Markets We want debt, which is common, to be standard and common so that people get what they know and are familiar with Allows for comparison of debt to debt, with standardized forms and terms 2. Certainty in Debt creates stability in Capital Markets 3. If each contract was susceptible to judicial interpretation on factual inquiry: Increases risk/uncertainty in debt Raises cost of debt, as each debt contract would price this risk in Raises costs to borrower Raises Risks to the lender of toss-up interpretation In turn, increasing cost to borrow 4. Notice Clause of Publication is Fair: Newspaper notice is common form, standard in Debt Contracts For policy reasons, Judicial Interference is not warranted Notice Provision is Fair Note: Court will differentiate between lack of contract’s informing parties of “the type of notice that will be given” for redemption But, notice provision that is within a contract will be enforced Issues: Seems concerned with slippery slope of judicial inquiry into indenture contract “Restraint of judicial oversight in publically held securities” needed No Interest after Redemption Date Dissent: Indenture Contract is contract of adhesion The uncertainty, standardization, and worry of the Court is not warranted Issue is Fairness and reasonableness of Notice Provision Dissent argues Court is not interpreting the substantive, financial provision of the debentures Only Interpreting the Notice fairness Here: Indenture Trustee informed its own customers, but not non-customers Mailing is encouraged by the SEC and practice Overall: Because Fairness of Notice does not interfere with substantive, financial provisions, and is restricted to this case: Should require fair notice, individually to each party Redemption Provision Vesting Period: Covenant restricting repayment with new debt: Morgan Stanley v. Archer Daniel Midland: F: ∆ issued bonds at 16%, allowing for early option redemption. However, there was a vesting period, before which the bonds could not be called if the funds used to call were from new debt at rate less than the interest rate on the bonds. In year proceeding, ADM borrowed twice at <16%, and then issued IPO. Within 1 day of Morgan Stanley buying the bonds, ADM called as interest rates plummeted. I: Whether the IPO and juggling of funds to redeem is allowable, or ∆’s construction applies R: 1. Preliminary Injunction Sought: Requires: 1. Irreparable harm, and either: a) Liklihood of success or b) serious question of merits and balancing of hardships tipping torwards relief requesting party Note: No irreparable harm will be found when $ damages are adequate 2. The Provision: “Company may not redeem debentures from proceeds, or in anticipation of debt if the interest rate or cost of debt is less than __%” The Purpose of the Provision: Protects the creditor/bondholder from being called when interest rates drop Unlocking of return by using cheaper debt, at which point in time the creditor must then go and issue debt at a lower rate 3. Interpreted as a matter of Law Per Sharon Steel, need to interpret language as matter of law for consistency Avoid jury case-by-case inquiry of contractual provision interpretation Would bring intolerable uncertainty to Capital Markets Cost of Capital would increase Paramount interest in uniform construction of boilerplate 4. The “Source Rule” The Contract language is interpreted: Redemption is barred when the direct or indirect source of the funds is a debt instrument issued at a rate lower than that it is paying on the outstanding debentures When can point directly to a non-debt source of the funds, the general redemption schedule applies However: Still need to make finding of the true source of the proceeds Look at facts to show when prohibited debt was source of proceeds Look at what directly funded the redemption Here: Clear that proceeds from bond offering were used for other purchases Facts show no debt was used, but instead was equity Issues with the Opinion and Alternative Arguments: a) Judicial Restraint to overbroadly interpret Better be clear and unambiguous in indenture or else you won’t get it While Court does not want to get into factual inquiry of where $ comes from, Source rule does get into this b) Leads to added and more demanding provisions by the creditor For instance: Demand debt and equity be in separate accounts so that you can trace where the redemption proceeds came from c) Finding where the $ comes from is almost impossible It is unlikely that you can point to exactly where the funds used to repay are coming from Proving it is unlikely, as you simply cannot begin to argue that all of the $ came from only equity or part debt, vica-versa May only be probable if separate accounts used However: While court interprets construction consistently, the factual inquiry into proving the “source” rule is almost impossible Alternative Argument: WACC: [Weight x ROD] + [Weight + ROE] The provisions seeks to protect creditors from being unlocked from higher paying debt It does this by prohibiting redemption with lower cost of capital We could simply look at if the WACC changed If the WACC, after redemption is > rate prohibited in provision The redemption would be allowed If the WACC, after redemption is < rate prohibited The redemption would not be allowed This would mean that after the redemption, cost of redemption lowered the debtor’s interest rate Effect: Avoids need to check blend of $, where funds came from Protects both parties adequately Rather then going into factual inquiry of blend of $ Flaws: ROE changes quarter to quarter, and may taint the equation, in addition to the weight of debt lowering due to another issuance maturing…leading to a lowering WACC, and in breach of the negative indenture covenants Synopsis of Courts’ interpretation of boilerplate and avoidance fiduciary duty: Retains the idea of negotiability (Avoids Factual Inquiry and Sticks to the Contract) Simons says no “equitable” interest of creditor But, see infra, as shareholders really don’t own anything either Creditor/Issuer Freedom of Contract protected Bargains for protection in best way to structure relationship in their opinion Most efficient manner of allocating resources to each other Allows allocation of risks efficiently Adequate protections Negotiate for self-protections Avoids arbitrary limitations Parties may flexibly exercise their discretion in order to maximize wealth Unlike Stock, with limited attributes Assumes Parties are financially sophisticated Thus, because sophisticated, no need for court to interject Because of this, there is not as much need for Court to interject fiduciary duty Construe Boilerplate Narrowly: Narrows Courts Equity and Factual Analysis Promotes certainty in contractual terms Avoids jury determination on case-by-case basis—which would create uncertainty Predictability in Contract Language Standardization of Terms for comparison Lowers cost of debt Construing consistently in “hands off” judicial restraint approach 4. Implied Covenant of Good Faith and Fair Dealing: Generally: Many courts accept the Delaware Test of implied covenant Katz v. Oak Industries, Inc (Del. Ch.): F: Oak has 3 segments, and is doing terribly financially. To correct itself, seeks to reduce annual debt payment. Exchanged old debt for new recapitalization of stock, warrants, and debt. However, the debentures have condition that “Cannot issue new debt.” So, Oak must get their consent to amend this to issue new debt to save company. Amendment would end protective covenants Π: argue that breach of implied duty of good faith because the offer and consent was forcing debenture holders to consent. Failure to do so would have risked owning a security without any protections. So, smart thing, and in reality only thing would be to consent and tender for new recapitalization. Collective Action Issue R: 1. Preliminary Injunction sought of the Offer and Consent Court will not grant injunction, an extraordinary remedy, when: To do so threatens enjoined party with irreparable harm that is > then injury π seeks to avoid Note: What really is going on is that the debtholders want the company to go bankrupt because they think they will get more that way Judge knows this, and does not want to let happen—π cannot win Judge makes his own judgment that bankruptcy is not right, that duties and laws in bankruptcy should not apply, actively avoids it by denying π claim 2. Because Contract, There is Implied Covenant of Good Faith: Reason: Because Contract, contract law applies Some things are so fundamental, that parties need not negotiate them or write them When Court invokes implied covenant, it is saying that spirit of that bargain, the unspoken term, cannot be violated Test: “is it clear from the express terms that parties would have agreed to proscribe the act later complained of had they thought to negotiate it?” Look at provisions to determine what would have been agreed to Here: Not clear they would have agreed to otherwise Grant would create harm > then that sought to be avoided Issues with the “Implied Covenant of Good Faith” Test: 1. Judicial Activism: Test may include determination of what Contract’s Economic Efficient Result is, and meaning is in Determining what is implied by the terms in determination Indenture should Control: Belief that the efficient allocation of resources is best interest of parties Each gives up something the other wants, and believes it is efficient Economically efficient argument As Judge determines what this is, it can guide his analysis 2. Subjectivity of Test: This determination is solely discretion of Judge Here, judge determines that because it is economically efficient to keep company in business, this is what they would have agreed to Therefore, it is not “clear from the terms” they would have proscribed the recapitalization Essentially, you can argue anything is more or less economically efficient 3. Creditors have priority and should be protected But Court holds otherwise The creditors have every right to be protected At insolvency and bankruptcy, equity is already wiped out, and now their capital is at risk Law is designed to protect them at this point Also Note: Inherent Conflict between Creditors and Shareholders (See infra) Here, The Corporate restructuring is to protect shareholders at the expense of debtholders Transfers loss and risk of loss from shareholders to creditors At this time, the creditors should be primarily in line—but, conflict benefits shareholders, and need to get around covenant protections to do so However, Judge makes his own subjective determination otherwise Judicial activism 5. Other Parties, The Indenture Trustee and Right to Sue of Debenture Holders: A. The Underwriter/Investment Banker: Traditional Role: Places the debt into the public markets for a commission “Spread” Policy Arguments: Underwriter May protect the debt holders 1. Incentive to negotiate to increase indenture protections, allowing it to sell for a higher price 2. Incentive to protect its own reputation May not Protect debt holders: Underwriter is selected by the issuer Underwriter wants to gain business, appease issuer, and have repeat customer Probably What Occurs: This characteristic has led to the slow erosion of indenture protections over the years and marks the reason that Underwriters/Investment Bankers probably will not protect the debt holders in public debt more then it needs to B. The Rating Agency: Generally: The Issuer will pay to have its debt rated Why: Assesses liklihood of repayment That repayment will be (1) on time and (2) full amount Not required, but practical necessity so that risk of debt can be quantified and priced into the value of the debt issuance The legal protections of Indenture Contract do not affect rating typically Historically: AAA rated bonds have declined in occurrence Why: Deregulation, Competition, Leveraged transactions Companies belief that it can operate at a more optimal level with a higher level of debt that may not put it in AAA rating Ratings Effect Shareholder: Analyst downgrades due to debt condition lead to market reaction, and sell off Federal Regulation: May register as Nationally Registered Statistical Rating Agency Include: Performance, statistics, procedures, methods, conflicts, lists of issuers customers SEC oversees Once Registered: Maintain files, records, financial reports filed with SEC annually Post-Dodd Frank Mandates new SEC office to oversee, with new SEC rules governing Compliance, Conflicts of Interest, Liability, Methods Used, allowing Private Cause of Action (Scienter of Knowing or Reckless) C. The Indenture Trustee: General Attributes: A party in between Issuer and debenture holders with administrative ability Represents the Bondholders The Court, as we see above, will not interject the common law in a reaching manner into interpreting the contract and the Underwriter/Investment Banker probably won’t protect either, although there is some argument they may…So someone needs to represent the Debt Holder Reason for Existence: Collective Action Issues: As individual holders of debentures are dispersed, the trustee eases issue of collective action—lack of communication, and collaboration The Trustee is the party who oversees the issuance on behalf of debt holders However, Modernly Institutional Investors are holders of debt Because of lack of collective action issue, and their sophistication: Use of Trustee is in question: Not as Needed Leads to narrow construction of contracts Narrow duties and responsibilities apply Unlike a typical trustee: Typically does for the convenience of the clients Does not mandate large fee Very limited duties and obligations But, the “Trustee” title has remained over the years, causing confusion about duties and responsibilities The Right to Sue: A. Generally: Under the Debenture Contract: Debenture Holders can sue under Debenture Contract for payment when it is due Absolute Right of Debenture Holder To Bring Suit under Indenture Contract Debenture Holders must Demand Trustee to Sue The Debenture holders cannot sue individually under indenture unless: 1. Contractual conditions precedent, like below, are met or 2. In narrow instances can bypass conditions precedent B. Model “No Action Clause” Am. Bar Foundation Model Debenture Indenture Provisions: No debenture holder can sue under indenture unless (1) Given written demand notice to trustee of default (2) Holders of at least 25% of debentures have made written demand to sue (3) Indemnity offered to trustee (4) Trustee has failed to bring suit for at least 60 days (5) No other request, inconsistent with demand of suit, made by majority in 60 days C. Purpose: 1. The restriction on individual debenture holders bringing suit under indenture is a) To avoid unjustifiable, unreasonable, and frivolous claims b) Limits suits to those that are meritorious, as if it is, it’s likely that 25% will agree c) Avoids 1 bondholder causing expense to company, diminishing assets at expense of all 2. Standard indenture provision When can Debenture Holder bypass provision, Bringing Suit under Indenture: Rabinowitz v. Kaiser-Frazer (NY): F: π owned debentures of Graham-Paige. BOA was trustee. Covenant in indenture required “Successor obligor” assume debt, and that a sinking fund be paid into. Kaiser-Frazer bought Graham-Paige, agreed in contract to pay back debt, but did not enter into supplemental indenture—This bypassed sinking fund—Effect was to get money cheaper, even though bondholders now had more risk as their sinking fund was gone. Then, BOA—Trustee leant $ to Kaiser, and developed its own sinking fund for it. Π argue that trustee should have gotten supplemental indenture, and breached duty. ∆ argues that they lack standing as didn’t demand through correct provisions R: 1. Debenture Holder can bring suit under indenture if: Trustee acts in bad faith Abdicates its function or Declines to act at all 2. Demand Futility Creates this Ability: If the debenture holders had demanded that the trustee bring suit, they would have been demanding that the trustee sue itself as it was the wrongdoer alleged So, in this instance, can bypass the “No Action” provision The Trust Indenture Act of 1939: Generally: In 1930s, financial industry had much financial regulation shoved down its throat To fully complete the regulatory scheme, debt was regulated under TIA Purpose and Effect of TIA: The main problem: Trustee often times was aligned with issuer, and not debt holders Because of Collective Action problem of individual holders, nothing could be done about it 1. Provide standards of Trustee, and disclosure to debt holders 2. Ability to organize by the debt holders, to protect themselves 3. Ensure disinterested trustee provides services Application: Only applies to Public Debt Requires registration 1990 Amendments: Trust Indenture Reform Act: **Assumes that the TIA is incorporated in indentures whether actually explicitly listed or not TIA Provisions: Directory: outlines outlines -> Chabot College Fall 2010 Course Outline for Computer Application Systems 60 business software applications/general accounting outlines -> Adil Khan Contracts Midterm outline- waldron outlines -> Remedies for breach of promise (1) The Interests Protected outlines -> Basic Process for Assessing Damages: 97 Select interest that deserves vindication 97 a. Restitution 97 outlines -> Chapter Five: Written Documents 1 Unsigned Documents 1 outlines -> Cases and Materials on Contracts outlines -> College of Science and Health outlines -> Evidence outline outlines -> 2. Act, Omission, Status or Circumstances 4 Consequences and Causation 8 Introduction to Mens Rea and Intent 10 Levels of Fault 11 Download 0.63 Mb. Share with your friends:
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