Out of Many Can Come One: Supreme Court Considers Transaction Aggregation Doctrines
Recently, the Delaware Supreme Court issued an opinion resolving a dispute between an indenture trustee and the issuer of bonds pursuant to an indenture governed by New York law arising out of the issuer's business plan of divesting certain assets. While any example of the Supreme Court's analysis of a contractual provision is helpful to drafters of those contracts, it was the Supreme Court's emphasis on uniform interpretation of boilerplate provisions that makes this opinion noteworthy.
The indenture language at issue in the Sept. 21 opinion in The Bank of New York Mellon Trust Co. N.A. v. Liberty Media Corp. permitted Liberty Media Corp. to sell assets, but prohibited Liberty from divesting "all or substantially all" of its assets in a "transaction or series of transactions," unless the successor entity assumed Liberty's obligations under the indenture (the successor obligor provision). After Liberty announced it planned to split off into a new publicly traded company certain of its businesses, assets and liabilities, counsel for an anonymous bondholder argued that three prior divestitures of assets by Liberty were evidence that Liberty had pursued a "disaggregation strategy" designed to transfer the assets securing bondholders' claims from Liberty to the stockholders in violation of the successor obligor provision.
Liberty filed an action against the indenture trustee, the Bank of New York Mellon Trust Services N.A. (the trustee) for a declaratory judgment that its planned split off transaction did not violate the successor obligor provision. After a trial, the Court of Chancery found that the proposed split off did not violate the successor obligor provision. The trustee appealed.
On appeal, the Supreme Court noted that although the question has not been addressed by the New York Court of Appeals, or any lower New York state court, other courts applying New York law have concluded that under certain circumstances multiple transactions can be aggregated together when determining whether a transaction constitutes all or substantially all of a corporation's assets. The seminal case on the subject was the 2nd U.S. Circuit Court of Appeals' 1982 case Sharon Steel Corp. v. Chase Manhattan Bank N.A. In Sharon Steel, after consummating a series of asset sales in furtherance of a liquidation plan, the seller sold its remaining assets to Sharon Steel, which sought to assume the seller's obligations under an indenture with a successor obligor provision. Sharon Steel argued it was permitted to do so because it had acquired all of the seller's assets in the final sale of the seller's liquidation plan.
The 2nd Circuit disagreed, holding that because all of the sales were designed to "accomplish the predetermined goal of liquidating UV under a formal plan of liquidation, even though only one asset sale had been identified at the time the liquidation plan was adopted," it would be inappropriate to review the transaction with Sharon Steel in isolation.
Notably, the 2nd Circuit distinguished a plan of liquidation from sales of assets in the regular course of business that stand on their own merits without reference to each other. Applying Sharon Steel to the facts of the case on appeal, the Supreme Court affirmed the Court of Chancery's conclusion that there was no basis in the trial record to aggregate the four separate divestitures of assets by Liberty between 2004 and 2011.
The Supreme Court ultimately confirmed that the Sharon Steel analysis was the proper basis for determining whether to aggregate a series of transactions under New York law. Because the Court of Chancery also applied the step-transaction doctrine as a second layer of analysis the Supreme Court used its review of that aspect of the lower court's decision to provide guidance to drafters of indentures.
On appeal the trustee argued that the Court of Chancery erred by applying the step-transaction doctrine because the 2nd Circuit in Sharon Steel did not require that a series of transactions meet the step transaction test to be aggregated. To support this argument, the trustee cited language in model indentures that showed that the evolution of the successor obligor provision in the case did not incorporate the step-transaction doctrine.
The Supreme Court rejected this argument, finding that the model indenture provisions actually supported the result reached by the Court of Chancery. The Supreme Court noted that successor obligor provisions are "market-facilitating boilerplate language" which should be interpreted consistently with the accepted common purpose of the language rather than the intent of the parties. Although the language of this specific provision was not found in any of the various model indentures, Liberty and the trustee both agreed that the "series of transactions" language in Liberty's indenture was the result of comments to a model indenture that first appeared in a model indenture five months after Sharon Steel was decided, indicating it was added in response to the decision. Liberty's indenture was executed many years after that decision.
Moreover, commentators have noted that any deviations from boilerplate provisions be explicit in their nature, else they would be unlikely to yield additional rights. Based on this record, the court concluded that the successor obligor provision did not create any additional rights and that "it is important to the efficiency of capital markets that language routinely used in indentures be accorded a consistent and uniform construction."
The court also noted that there were more rigorous model provisions available to protect the bondholders' interest, such as a provision that expressly included "all prior conveyances" in determining whether there was a conveyance of all or substantially all of the assets. The indenture here, however, contained only the standard boilerplate successor obligor provision, and no provision regarding debt ratios, dividends or repurchases. The court repeated a familiar refrain to those familiar with Delaware contract interpretation jurisprudence: The court will not rewrite a provision to include by implication additional protections that a party could have, but did not, obtain in negotiations. Drafters of indentures should keep this thought in mind when dealing with boilerplate provisions in the future.