Sunday, March 25, 2012

Morgan Stanley & Co., Inc. v. Archer Daniels Midland Co. case brief

Morgan Stanley & Co., Inc. v. Archer Daniels Midland Co.
United States District Court, Southern District of New York, 1983
570 F.Supp 1529.
"Standardized Reading to Contract Provisions"

-D issued $125M of 16% sinking fund debentures with stipulation that D could not redeem debentures through lower cost interest debt.
-D raised money on a couple occasions afterward with a lower interest rate than 16%
-D also raised money through 2 common stock offerings.
-At this time, P purchased some of the debenture's at more than face value, but following day D announced plans to redeem the 16% debentures.
-P sought to enjoin D from redemption, arguing that D violated the debenture agreement because they used money raised from their lower-interest debentures.
-P also argued that D violated federal and state securities laws b/c D withheld material facts from SEC, notably that D was interpreting language of borrowing agreement narrowly as only to be prohibited from directly financing a redemption with lower interest debt.
-P stated that they would have never purchased debt at the above market rate if P believed that D could call for a redemption under the current circumstances.

-Redemption provisions will be given their plain language meaning to encourage uniformity.

-Court denies P's application for preliminary injunctive relief.

-The plain language of the lending agreement is preferred over any arguments of implied or unwritten language.
-Problems dealing with early redemption are common in the bond market. Corporations use a variety of techniques to get around early redemption when current interest rates make it favorable to escape from high-interest obligation bonds. When corporations have financial obligations that have turned sour, companies may go as far to engage in deliberate actions which lead to a default. Once the default has been established, the issuers are required to redeem under the default provisions, and it is not important where the issuer obtained the funds and/or how much they paid for them.

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