Sunday, April 29, 2012

Sharon Steel Corp. v. The Chase Manhattan Bank, N.A. case brief

Sharon Steel Corp. v. The Chase Manhattan Bank, N.A.
United States Court of Appeals for the Second Circuit, 1982.
691 F.2d 1039, cert. denied, 460 U.s. 1012, 103 S.Ct. 1253, 75 L.Ed.2d 482 (1983)


Judicial Interpretation of Covenants - Successor Obligor Provision
FACTS
-UV had $155M of long term debt outstanding pursuant to five separate indentures.
-Each indenture provided for redemption at a premium prior to maturity, and contained a Successor Obligor provision allowing UV to assign its debt to a corporate successor which purchased “all or substantially all” of UV’s assets.
-UV owned 3 lines of businesses.
    1.  Federal Electric: 61% revenues, 81% profits, 44% book value assets
    2.  Oil and Gas: 2% revenues, 6% profits, 5% book value.
    3.  Mueller Brass: 38% revenues, 13% profits, 34% book value.
1979- UV submitted to shareholders plan to sell (1. Federal) for $345M and within 12 months sell rest of assets and liquidate.

→ Shareholders approved plan, and sale consummated by end of March.
-UV contracted to sell (2. oil and gas) for $135M in July.  

-UV made $18/share dividend to shareholders in April, after agreeing w/ trustees of bonds to set aside $155M to pay down bonds.
-November: UV changed course, entered into asset purchase agreement with Sharon Steel (P), to which P would purchase rest of UV’s assets (3. Mueller Brass) and $322 in cash, in exchange for $107M cash and $411M face amount of debentures.
→ Sale to P included agreement that P would assume UV’s liabilities including obligations outstanding under indentures.

-Sharon and UV took position that Sharon was purchasing all or substantially all of UV’s assets within the meaning of the Successor Obligor Clause.
-Executed supplemental indentures provided for and tendered them to trustees, trustees refused to sign and brought action for redemption of debentures.
 

ISSUE
-Was the asset purchase agreement with Sharon Steel for the purchase of the rest of UV’s assets a sale of “all or substantially all” of UV’s assets within the meaning of the Successor Obligor Clause?
 

HOLDING
No, here it was not ‘all or substantially all” of UV’s assets.  

-Boilerplate successor obligor clauses do not permit assignment of the public debt to another party in the course of litigation unless “all or substantially all” of the assets of the company at the time the plan of liquidation is determined upon are transferred to a single purchaser.

ANALYSIS

-Here the court is dealing with a boilerplate provision.
-Court says that the creation of enduring uncertainties as to the meaning of boilerplate provisions would decrease the value of all debenture issues and greatly impair the efficient working of capital markets.
-Re: Long Term Debt Financing: the rights of holders of the debt securities are largely a matter of contract.  

-There is no governing body of statutory or common law that protects the holder of unsecured debt securities against harmful acts by the debtor except in the most extreme situations.
-The debt security holder can do nothing to protect himself against actions of the borrower which jeopardize its ability to pay the debt unless he establishes his right through contractual provisions set forth in the indenture.

-One purpose of the successor obligor clause was to insure that the principal operating assets of a borrower are available for satisfaction of the debt.
-Court also says that the redemption premium must be paid.

---Further Notes---
-Here the debt was paying a low rate.  UV wants to have the rate.
-If the debt was expensive, UV would probably want to pay it off.
Issue:  Did UV property assign the debt obligations to Sharon Steel?  No.
-Sharon did not satisfy the elements to be considered a success obligor, and therefore UV could not assign its debentures to Sharon.

Courts Analysis
-Clauses like “successor obligor clause” are boilerplate and must be given a consistent and uniform interpretation.
-Their interpretation is a matter of law rather than fact.
-Should be interpreted in a way that balances the rights of all interested parties.
-Uniformity in interpretation is important to efficiency of capital markets.
-A uniform interpretation allows market participants to adjust their affairs according to uniform interpretations.

-Looks to actual clause and its plain language (standardized) meaning.
-Holds that clauses provide a level of protection for both borrowers and lenders.
-Borrower is able to sell and liquidate; merge; or sell assets (including debenture liability) and enter new field free of debt; Lender is assured a degree of continuity.
-In interpreting boilerplate “successor obligor clause” it determine that clause does not permit the assignment of public debt to another party in course of liquidation unless “all or substantially all” assets of company at time of liquidation plan are transferred to single purchaser.
           Not the Case here - only 51% being transferred to P.
Court:  UV is in default and the debentures are due and payable.

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