Opinion ID: 2301005
Heading Depth: 3
Heading Rank: 1

Heading: The Interpretation Of A Successor Obligor Provision

Text: Successor obligor provisions in bond indentures consist of market-facilitating boilerplate language. Bank of N.Y. Mellon Trust Co. v. Liberty Media Corp., 29 A.3d 225, 241 (Del. 2011) (applying New York law). Boilerplate terms in indentures are not the consequence of the relationship of particular borrowers and lenders and do not depend upon particularized intentions of the parties to an indenture. Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d 1039, 1048 (2d Cir. 1982). Therefore, in interpreting boilerplate indenture provisions, courts will not look to the intent of the parties, but rather the accepted common purpose of such provisions. Liberty Media, 29 A.3d at 241 (internal quotation omitted). Courts strive to give indenture provisions a consistent and uniform meaning because uniformity in interpretation is important to the efficiency of capital markets. Concord Real Estate CDO 2006-1, Ltd. v. Bank of Am. N.A., 996 A.2d 324, 331 (Del. Ch.2010) (internal quotation omitted), aff'd, 15 A.3d 216 (Del.2011) (TABLE). Courts enhance stability and uniformity of interpretation by looking to the multi-decade efforts of leading practitioners to develop model indenture provisions. Id. The authoritative commentary on indenture provisions begins with a 1971 volume, published by the American Bar Foundation, entitled Commentaries on Model Debenture Indenture Provisions 1965, Model Debenture Indenture Provisions All Registered Issues 1967, and Certain Negotiable Provisions [hereinafter the Commentaries ]. The Commentaries provide powerful evidence of the established commercial expectations of practitioners and market participants. Concord Real Estate, 996 A.2d at 331. Article Eight of the Commentaries addresses successor obligor provisions and sets out a model provision comparable in all material respects to those in the Indentures. It states: The Company shall not. . . convey or transfer its properties and assets substantially as an entirety to any Person. . . . Commentaries at 292. The Commentaries explain that a covenant of this type is necessary because, if the issuer transferred substantially all of its assets, then the obligor named in the indenture would cease to operate the business to which, in practical effect, the debentureholders have looked for payment of the debentures. Id. at 423. Courts have described successor obligor provisions in similar terms. In the seminal Sharon Steel case, the United States Court of Appeals for the Second Circuit explained that the provisions protect lenders . . . by assuring a degree of continuity of assets. Sharon Steel, 691 F.2d at 1050. The decision to invest in the debt obligations of a corporation is based on the repayment potential of a business enterprise possessing specific financial characteristics. . . . Obviously, if the enterprise is changed through . . . disposition of assets, the financial characteristics and repayment potential on which the lender relied may be altered adversely. Id. (quoting Commentaries at 290). [A] borrower which sells all its assets does not have an option to continue holding the debt. It must either assign the debt or pay it off. Id. At the same time, successor obligor provisions ensure that borrowers have the flexibility to to sell entire businesses and liquidate, . . . or to liquidate their operating assets and enter a new field free of the public debt, so long as the debt is transferred along with substantially all of the assets or is otherwise paid. Id. at 1051. New York law teaches that when determining whether a transaction conveys substantially all of a company's assets for purposes of a successor obligor provision, courts consider both quantitative and qualitative factors. HFTP Invs., L.L.C. v. Grupo TMM, S.A., 2004 WL 5641710, at  (N.Y.Sup.Ct. June 4, 2004), aff'd, 18 A.D.3d 369, 795 N.Y.S.2d 555 (2005). At times, the quantitative percentage of assets sold may be so low that examining the qualitative factors is unnecessary. See, e.g., Sharon Steel, 691 F.2d at 1051. In the typical case involving a significant sale, however, a court will need to weigh both quantitative and qualitative factors as a totality. Qualitative factors include whether the transaction results in a fundamental change in the nature or character of the entity, involves the entity's primary operating assets, or is out of the ordinary course of business. See HFTP, 2004 WL 5641710, at .