Corporate Finance Outline – Mitchell – Spring 2011 I. Limited Liability’s Effect on Corporate Finance
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Duties Prior to Default: (1) Trustee is only liable for performance of duties in indenture Note: because of this, very few provisions and duties of Trustee will be included 1. The Demand of Suit Provision 2. Obligation to Authenticate Debentures by comparing an exhibit attached to the indenture to the actual debenture to make sure it’s accurate (2) Trustee can rely on indenture and exhibits therein Can rely on the exhibits as accurate Duty of Notice of Default: (1) Indenture Trustee must give debenture holders notice of defaults known to trustee within 90 days after occurrence of default of payment of principal or interest or sinking fund only Otherwise, trustee may withhold notice if “in good faith determines in best interest to not notify” At Default: (1) Trustee must act as reasonable person, in circumstances would, with duties in the indenture Note: because only liable for those duties, won’t be many Overall Responsibility: Trustee cannot include provision in indenture that “relieves trustee from liability of negligent action, willful misconduct” except that: 1. Only liable for duties in the indenture (which will be nill) 2. Not liable for error in judgment if good faith by officer of trustee unless “negligent in ascertaining facts” 3. Not liable if action taken or omitted was at direction of majority of holders Overall: The Trustee has relatively little duties and liability The duties are restricted to those in the indenture Judicial Interpretation of Trustee and Use of the Indenture Contract: Overall: The Trustee solely needs to fulfill the indenture contract Nothing more need be done However: As the TIA limits liability to what is in the contract, the duties are minimal—there is not much required So, Trustee takes position of Stakeholder/Administrator but not more Pre-Default: Indenture is only thing that matters But There Cannot be Conflict of Interest Post-Default May be fiduciary duty that is implied in and around Indenture Contract Pre-Default: 1. Trustee as Competing Creditor is Allowed Morris v. Cantor: F: Company issued debentures, with Bank as Trustee. Indenture agreement provided that if trustee becomes creditor, it is subordinated like all debt. Bank, however, then lent $90M line of credit to issuer, which was senior to debentures. Π argues breach of fiduciary duty and “willful misconduct.” R: 1. There is Private Cause of Action for Substantive Duties TIA mandates The contract does create liability for provisions mandated Common Law claim is also a Cause of Action TIA is not sole cause of remedy 2. TIA Allows Trustee to Become Creditor in certain scenarios It is ok if : “ trustee who is also creditor within 4 months prior to default of bonds or after, who receives preferential treatment, hold proceeds for the bondholders” This is an accepted Conflict of Interest by Congress Congress new it may be good at times for trustee, who is also bank, to lend to company in order to keep it afloat May be preferred or senior as well 3. Still may be liable for Willful, Intentional Misconduct Though Conflict of Interest still can be actionable If circumstances show it is intentional, or willfully against the interests of the debenture holders 2. Trustee Only Needs to Fulfill Indenture: No More Broad v. Rockwell: R: A Trustee has no duty to do anything other then contracted for Does not have to do anything greater then indenture contract 3. Pre-Default, Unless Conflict of Interest Trustee limited to terms of the Indenture Elliot Assoc. v. J. Henry Schroder Bank: F: Elliot held convertible debentures of Centronics. The indenture required that the company, to redeem early, had to give written notice to the trustee and debenture holders. It had to give trustee “50 days notice unless shorter notice was satisfactory to trustee.” It had to give debenture holders 15 days notice. Company discussed redemption with Trustee—who said less than 50 days was satisfactory. Company offered conversion day before next interest payment, and said redemption would occur as well. Conversion made debenture holders much more $ then holding for redemption. Πs Arg: πs argue that Trustee breached fiduciary duty by failing to use full 50 days, which would have gotten them another interest payment, worth $1.2M. I: Did Trustee have fiduciary duty to weigh financial interests and benefits? R: 1. The Indenture Contract is strictly defined and duties limited to it §315 states “only liable for what’s in it” There are no additionally duties, as long as fulfills express obligations 2. However: Trustee must not engage in “Conflicts of Interest” Intentional, Willful Misconduct Preferring its interests over that of the debenture holders Absent Conflict of Interest, Trustee is only bound by indenture contract 3. The Notice Requirement Indenture required Notice to Trustee This is intended for trustee’s benefit If Complete redemption than company can simply make call to debenture holders But, if partial redemption—trustee must perform administrative tasks in preparation (select which ones, etc…) Determination of time required is for Trustee Here: was satisfactory to do in less than 50 days. Note: We see the consistent thinking of the Court that the Trustee does not need to do anything above and beyond which Indenture Contract States Not even if, as above, could simply wait a few more days to increase wealth of debenture holders More like a stakeholder However: There is a Conflict of interest, as the issuer is probably paying the trustee’s bills, and he, in essence, preferred the issuer’s interests over that of the debenture holders Post-Default: 1. US Trust of NY v. First National: F: Trustee eventually issued a line of credit to the issuer. Trustee was under duty, by indenture, to give notice of default to debenture holders, and to accelerate the payments putting them in default. However, the trustee only accelerated its line of credit but did not accelerate the debentures until afterwards. I: Did the ∆ breach a fiduciary duty, post-default—willful misconduct or negligence? R: 1. Post-Default, a fiduciary duty exists for the Trustee This conflict of interest was actionable Overall Duties of Trustee Synopses: 1. Harriet & Henderson v. Castle: F: Company financed a new company, Star with help of IB. It was a combination of 2 old companies. Law firm was trustee. New notes were issued in the new firm, and the old creditors were told they would have an additional lien on the equipment—senior to, and secured above the new creditors. However, the lien was never filed and Star went bankrupt. I: πs argue that the trustees breached a fiduciary duty by failing to correctly file the lien. R: 1. The Indenture Trustee is Unique, and Different than Ordinary Trustee A. The Indenture Trustee arises out of contract Unlike ordinary one, which is common law creature B. Indenture Trustee must consider interests of the issuer and debenture holders C. Purchasor of debt is offered, voluntarily accepts security The terms are highly specific Thus, common law injection of factual, abstract “fiduciary duty” do not have constructive role when contract is Negotiated, and Commercial in nature 2. While the Indenture Contract controls the Indenture Trustee, and there are no implict duties: There are 2 narrow exceptions: 1. Post-Default: The loyalties of indenture trustee are to the debenture holders Fiduciary duty exists 2. Pre: Indenture Controls: But Avoid Conflicts of Interest: Elliot a) When trustee sacrifices interests of debenture holders for his own must be clear possibility based on evidence not just hypothetical or assertions without fact Here: Neither of these were apparent, and there was no express duty to perfect the lien in the indenture contract E. Bankruptcy: Generally: As we see above, during operation and solvency, there is no fiduciary duty owed out of common law to the creditors and limited standing to sue However At Bankruptcy, the situation changes Equity prevails to avoid the inherent conflict between creditors and shareholders Reorganization Agreement will be entered into: (1) Must Be Fair, Equitable and Feasible Fair and Equitable: Agreement If disagreement, Cram Down can occur if: (1) Get full value or (2) Absolute Priority Rule: No lesser claimant gets anything Feasibility: Will company continue as a going concern based on this plan. Going forward, bankruptcy’s point is to reorganize so that the corporation is still viable Viability means that it will not need to liquidate, or reorganize again Overall Goal: To reorganize, and clean up the capital structure so that the new structure consists of securities that company can afford Adjust payments so that Corporation can afford costs of capital Feasibility of Corporation continuing as a going concern viability Continued viability of stakeholders who rely on bankrupt firm Background: What Options are available at Bankruptcy: 1. Non-Bankruptcy Restructuring 1. Exchange offer of new security for old debt Exchange for new debt, equity, higher ranking, higher rate of interest, Does not bind non-exchanging debt holders Debtor cannot require them to accept offer Delaware Exception: If put in AIC, Chancery Court may oversee meeting of creditors, and if minimum amount agree to exchange offer, may bind all 2. Consent-Solicitation Solicitation of creditor consent to modify the indenture contract Note: What we saw in Katz Purpose: Avoid the default or acceleration provisions To Do: Indenture will typically have: Non-Key Provisions: “Majority vote of debt” to consent to a modification Key Provisions: Principal, interest, maturity “Unanimous vote” Pre-Package Chapter 11 Plan: Plan of bankruptcy reorganization developed before chapter 11 is filed, in negotiation with creditors Lower Voting Requirements: Approval by creditors holding 2/3 of amount of debt and ½ in number of claims See In Re Zenith Corp, infra 2. Chapter 11 Bankruptcy Reorganization Voluntary: Debtor may file without regard to financial condition Involuntary: 3 or more creditors may file Allege: failure to pay Effect: “Debtor in Possession” Old management will continue to operate business, unless creditors request trustee be appointed Court will only displace for cause Fraud, dishonesty if “in the best interest of creditors” Automatic Stay Debtor gets time to make operating decisions All actions against debtor are enjoined, except governmental actions Secured creditors are stayed from demanding repossession They can appeal if “not adequately protected” Reorganization Agreement Can be negotiated by parties Generally debtor has exclusive period of 120 days to come up with and negotiate Approval: Approved by: Majority in number and 2/3 actually voting accept it Negotiated for Agreement is acceptable If negotiated for agreement, APR not applicable Or, If No Approval: “Cram Down Rule” “fair and equitable” by being” (1) Paid in full of claim or (2) Absolute Priority Rule: no junior claimant will receive anything under the plan Solicitation: Must be adequate with adequate disclosure of information Pre-Package: Disclosure is adequate if compliance with non-bankruptcy law regulating disclosure After Filing: Disclosure must be certified by the court that it was “adequate” 1. The Debtors in Possession Owes Fiduciary Duty Which is Enforceable at Bankruptcy: Pepper v. Litton (US 1939): F: Litton was sole shareholder of Dixie Corp. He caused it to confess to judgment that it owed him and withheld salary. He then transferred all the assets to another corporation, leaving just enough money in Dixie to satisfy his judgment creditor position. Pepper, a creditor, thus had nothing to recover and brought suit. I: A jurisdictional issue over bankruptcy court’s power…But develops fiduciary duty as well. R: 1. The Bankruptcy Court has the power to Equitable Subordination Court has equitable power to subordinate based on equity/fairness If Fairness concerns arise Bankruptcy Court may subordinate claims to ensure equity is reached 2. Fiduciary Duty is Owed to Creditors, Enforceable at Bankruptcy A fiduciary duty is owed by controlling shareholder, officer or director at bankruptcy for protection of the entire community of interests –creditors and shareholders Test: “It is sufficient that violation of rules of fair play and good conscience occurs” Whether an arms length transaction occurs Good Faith, fairness of transaction, Generally Is what occurred Fair? A question of pure equity Burden: On the ∆ When Does Fiduciary Duty become active? A Fiduciary duty exists in inchoate fashion before bankruptcy The conduct occurred before the bankruptcy filing This means that a fiduciary duty must exist before bankruptcy, but we know from Simons v. Cogan, the Corporation does not owe fiduciary duty during that time absent special circumstances (Only Indenture matters) At Bankruptcy there is a special circumstance Enforced: Enforceable at bankruptcy A Court of equity has the power to go back to “sift through the circumstances surrounding the claim” to avoid unfairness Why is fiduciary duty enforceable at Bankruptcy: 1. Merely a Function of Contract The Creditors negotiated for priority at bankruptcy, and thus because of giving up, and limited liability structure, fiduciary duty to fulfill 2. At Bankruptcy, Economic Circumstances have Changed Equity Ownership: Equity has been wiped out of the company Because the Debt is what is risk capital left, the debt holders own the company A-L = (SE) Thus Simons requirement of “equitable” interest is met Even though the Indenture Contract has not changed, the economic substance and reality of the event does Thus, because the creditors are the owners of the corporation, a fiduciary duty to act in their best interest kicks in Here: What occurred was unfair, even though each was technically legal Was a fraudulent scheme which makes breach almost automatic Note: Judgment creditor paid prior to all Issues with Opinion 1. Pure Equity While each of the actions that occurred were “legal,” Douglas believes that are unfair, and as a matter of pure equity, Court may overturn or subordinate 2. No precedent, authority, or facts Douglas makes up law out of thin air He synthesizes general corporate law, to create a duty here to promote the pure equity 3. More of literary essay than applying law to facts Be weary of judicial opinions that are gray, and literary Overall Concept of Fiduciary Duty: Following Pepper v. Litton, fiduciary rights do exist “to the community of interests,” including all parties, but are only enforceable by creditors at bankruptcy (1) This is In Line with Simons v. Cogan: Premised the concept of a “fiduciary duty” on equitable interest but did have carve out for “insolvency” (2) At bankruptcy, the only equitable interest that exists is the creditors Shareholders equity has been wiped out So this does meet Simons “Equity” interest argument So, fiduciary duty must exist pre-bankruptcy because you are suing for conduct that occurred pre-bankruptcy (3) What Creditors Negotiated for Primacy at Bankruptcy The Confusion stems from Factually Specific Case Law: Because of case law, with fact-specific shareholder claims of breach in 80s, that were such land-mark cases, their holdings of owing fiduciary duty to the shareholders was read as meaning only to the shareholders... Fiduciary Duties Exist to All “The Community of Interests” of the Corporation Just a matter of when they are enforceable Pre-Bankruptcy: By shareholder/Inchoate duty to creditor Post-Bankruptcy: By creditor 2. Valuation at Bankruptcy, The Absolute Priority Rule and “Cram Down” Rule: Consolidated Rock v. Du Bois (US): F: Consolidated held stock of subsidiaries Union and Consumers, Inc. They had issuances outstanding of 1.87M at 6%, and 1.358 @ 6%. Consolidated had common and preferred shareholders. Agreement that subsidiaries would pass all earnings to parent holding company. Subsidiaries also gave $5M to Consolidated. Plan of Reorganization: New Company created. All assets transferred. Gave old bondholders 50% bonds, and preferred shares. Cancelled their interest owed, and lowered rate paid. Preferred shareholders given warrants to buy shares, and common shareholders split 5:1. The $5M claim was cancelled, the new bonds were only income bonds—payable if earnings. 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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