Friday, November 16, 2012

Morgan Stanley & Co. v. Archer Daniels Midland Company case brief

Case Brief
1      Morgan Stanley & Co. v. Archer Daniels Midland Company

a.       Facts – Archer Daniels Midland Co. sought to redeem $125 million in debentures, and Morgan Stanley sought a preliminary injunction against the proposed redemption.
b.       Rule – Using the funding obtained with proceeds of common stock issued by a bond issuer is a lawful means of redeeming outstanding debentures, notwithstanding the fact that the debtor corporation had also obtained funding that was prohibited from being used to effect a redemption.
c.       ANALYSIS
Relied on Franklin (S.D. Ill. 1978).
                                                              i.      Redemption terms contained in an indenture or stock agreement are contractual and, therefore, courts considering disputes between security holders and security issuers with respect to redemption provisions generally apply contractual principles to resolve the disputes.
                                                            ii.      “Because a court construing a contract must try to give meaning to all of the contractual terms, the Edison court closely examined the language of the non-refunding provision which provided that the Company could not redeem the preferred stock ‘through refunding.’  The court reasoned that this limiting language prohibited the Company’s preferred stock redemption only if the Company obtained the funds necessary for the redemption through a refunding operation by which the Company incurred debt.  The Edison court agreed with the Company’s conclusion that obtaining funds through a sale of common stock was equity financing, not a refunding operation, and, therefore, redeeming the preferred stock with the proceeds of a common stock sale did not violate the preferred stock’s non-refunding provision.
                                                          iii.      The stockholder must realize that, as the Edison court emphasized, an issuing company’s right to redeem outstanding preferred stock depends on the language of the stock contract’s redemption provision.
                                                          iv.      Court basically applied the Franklin holding to this case.

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