Thank You For Submiting Feedback!
To the extent that a decision to sell off some properties is not part of an overall scheme to liquidate and is made in the regular course of business it is considerably different from a plan of piecemeal liquidation, whether or not followed by independent and subsequent decisions to sell off the rest. A sale in the absence of a plan to liquidate is undertaken because the directors expect the sale to strengthen the corporation as a going concern. The fact that piecemeal sales in the regular course of business are permitted thus does not demonstrate that successor obligor clauses apply to piecemeal liquidations, allowing the buyer last in time to assume the entire public debt.
Consistent with its position of using its minority investments to acquire controlling stakes in mutually supporting operating businesses that would generate cash flow, the corporation proposed to split off certain businesses into a new public entity. After the corporation announced the proposed splitoff of certain businesses and assets, it received a letter from counsel for an anonymous bondholder. In that letter, counsel for the bondholder stated that the corporation has pursued a "disaggregation strategy" designed to remove substantially all of the corporation’s assets from the corporate structure against which the bondholders have claims, and shift those assets into the hands of the corporation’s stockholders. Therefore, the bondholder contended that the transaction might violate the Successor Obligor Provision in the Indenture and threatened to declare an event of default. In response to that threat, the corporation commenced the present action against the Trustee under the Indenture, seeking injunctive relief and a declaratory judgment that the proposed Capital Splitoff will not constitute a disposition of "substantially all" of the corporation’s assets in violation of the Indenture. The Court of Chancery ruled in favor of the corporation, holding that the proposed splitoff was not sufficiently connected to the prior transactions to warrant aggregation for purposes of the Successor Obligor Provision. The Trustee challenged the judgment.
Did the proposed splitoff violate the successor obligor provision in the Indenture?
The State Supreme Court found, inter alia, that the proposed splitoff, standing alone, did not constitute "substantially all" of the corporation's assets. Although the transactions shared the same theme of distributing assets to the corporation's stockholders, because each transaction was the result of a discrete, context-based decision and not as part of an overall plan to deplete the corporation's asset base over time, the splitoff was not "sufficiently connected" to the prior transactions to warrant aggregation. The corporation engaged in acquisitions and divestitures as part of the regular course of its business. It did not engage in an "overall scheme" to sell substantially all of its assets. Accordingly, the splitoff did not violate the successor obligor provision in the indenture.