Opinion ID: 2301005
Heading Depth: 2
Heading Rank: 1

Heading: The Successor Obligor Provision

Text: Whether the Sale Transaction complies with the Successor Obligor Provision presents a question of contract law. Seven of the Indentures select New York law to govern their terms. The eighth selects Florida law. The parties have not identified any material difference between New York and Florida law. Because New York law is far more developed, I rely on authorities applying New York law to analyze the case.
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 .
As reported in its annual report on Form 10-K for the year ended December 31, 2010, the most recent annual filing before the announcement of the Sale Transaction, Bancorp's assets as of that date had a book value of $338.8 million. Bancorp's 100% ownership of the stock of BankAtlantic had a book value of $286.6 million. Using these figures, Bancorp will convey 85% of its assets in the Sale Transaction. As reported in its annual report on Form 10-Q for the quarter ended September 30, 2011, the most recent quarterly filing before the Sale Transaction, the corresponding book value for all of Bancorp's assets was $341.4 million. The book value for all of Bancorp's BankAtlantic stock was $306 million. Using these figures, Bancorp will convey 90% of its assets in the Sale Transaction. Measuring Bancorp's ownership of BankAtlantic on a book value basis applies a conservative metric by ignoring BankAtlantic's value as a going concern. Nothing in New York law suggests that a court is limited to book value when evaluating a parent corporation's 100% equity interest in an operating subsidiary. A court readily could value a 100% equity interest using other methodologies, such as a discounted cash flow analysis, comparable transactions analysis, or comparable company analysis. A court could take into account factors such as earnings potential and goodwill. Yet even under the conservative book value metric, Bancorp will transfer 85-90% of its assets. Bancorp objects to these calculations because they use figures for BankAtlantic that include the value of the Retained Assets. Bancorp points out that in the Sale Transaction, it will sell BankAtlantic but keep the Retained Assets. Having structured the Sale Transaction in this manner, Bancorp takes the view that BankAtlantic's stock has negative value at the time of the Sale Transaction and that BB & T is paying zero for BankAtlantic. This theory forms the centerpiece of Bancorp's case. [7] To get this result, Bancorp starts with a pre-closing book value for BankAtlantic's stock of $306 million. Bancorp then subtracts the $606.9 million net book value of the Retained Assets that will leave BankAtlantic an instant before BB & T acquires its shares, causing BankAtlantic's equity at that climactic moment to have a book value of negative $301 million. Because no cash or other asset will come directly from BB & T's balance sheet, Bancorp argues that BB & T will not pay anything. Consequently, Bancorp concludes it must be conveying zero percent of its assets. As a threshold matter, Bancorp's position rests on the illogical and counter-factual premise that BankAtlantic (the good bank) is worth nothing, while Retained Assets LLC (the bad bank) is worth $606.9 million. Bancorp has it precisely backwards. Buyers actually wanted and were willing to pay a premium for BankAtlantic. Buyers were scared away from and did not want to purchase the Retained Assets. The idea that BankAtlantic will be made less valuable, rather than more valuable, by shedding the Retained Assets is counterintuitive and inherently suspect. In reality, the Retained Assets constitute the consideration for the Sale Transaction. The evidence at trial established this point. Levan, the architect of the transaction, explained in a July 7, 2011, email to his son Jarett and CFO Toalson that the transfer of the [c]lassified loans to Bancorp would be the [p]urchase price consideration. JX 119. In a July 13, 2011, memorandum explaining the structure in greater detail, Levan again stated that Bancorp would retain all the classified loans as part of the purchase consideration. JX 121. At trial, Levan testified that the purchase price consideration that BB & T was paying [was] the retained assets that they were allowing Bancorp to obtain at the same time that the deal closed. Tr. 852. Jarett Levan testified that the transfer of Retained Assets LLC was the purchase price that's being paid by BB & T. Tr. 35. He elaborated: [T]hey're not paying cash; they're paying with retained assets. . . . They're just transferring the retained assets as the effective purchase price. Id. at 36. Bancorp's financial advisors understood this fact as well. Cantor Fitzgerald rendered an opinion on the financial fairness of the transaction to Bancorp's stockholders. Its underlying analyses confirm[ed] the fairness of the consideration to be received across a variety of metrics, and Cantor Fitzgerald concluded that the consideration reflected a [h]igh premium to book value. JX 186 at 9. Cantor Fitzgerald calculated the premium by dividing the net book value of the Retained Assets (computed to be $607 million) by the $306 million book value of Bancorp's investment in BankAtlantic, yielding a Price/Book ratio of 198% ($607 million/$306 million). According to Cantor Fitzgerald, the Sale Transaction favored Bancorp because, in exchange for selling a subsidiary with a positive book value of $306 million, Bancorp received assets with a value that implied an above-market premium based on comparable companies and precedent transactions. Cantor Fitzgerald did not think that Bancorp was getting zero for BankAtlantic. Sandler O'Neill also rendered an opinion on the financial fairness of the transaction to Bancorp's stockholders. It too understood that Bancorp was receiving positive value from BB & T. When describing the transaction, Sandler O'Neill noted that BB & T bears the cost of filling the negative asset value of ($300.9) million plus the cost to recapitalize the balance sheet of $224.3 million (assuming a [Tangible Common Equity/Tangible Assets] ratio of 6.84%) or a total of $538.8 million. JX 194. Sandler O'Neill treated the $538.8 million as an alternative measure of the purchase price that Bancorp received. I therefore find as a factual matter that the Retained Assets represent the consideration paid by BB & T, just as Levan and his advisors understood it. I would reach the same conclusion as a matter of economic substance. The Sale Transaction is a single, integrated transaction, as Bancorp finally conceded in its post-trial brief. See BPTB 1 n. 2 (this is an integrated transaction). At the effective time, during the lifespan of a decaying muon, three interrelated transactions will happen sequentially: first, BankAtlantic will transfer the Retained Assets to Retained Assets LLC; second, BankAtlantic will distribute membership interests in Retained Assets LLC to Bancorp; and third, Bancorp will transfer shares of stock in BankAtlantic to BB & T. Contractually under the Stock Purchase Agreement and legally under the Cease and Desist Orders, none of the transactions can take place unless all three take place. In this integrated transaction, Bancorp gives the stock of BankAtlantic and gets membership interests in Retained Assets LLC. One is consideration for the other. To make this fact plainer, assume that in lieu of criticized assets with a book value of $606 million, the Retained Assets will consist of $606 million in cash. In other words, at closing BankAtlantic would transfer $606 million in cash to Retained Assets LLC, then distribute the equity of Retained Assets LLC to Bancorp an instant before Bancorp would transfer the stock of BankAtlantic to BB & T. Compare this scenario with a sale transaction in which the only events to take place at closing would be the transfer of BankAtlantic stock to BB & T in return for the transfer of $606 million in cash from BB & T to Bancorp. No one would be fooled into thinking there was any difference in the economic substance of these transactions. Everyone would see that cash was exchanged for stock with the only differences being timing and route. In the first scenario, the cash transfer would occur just before stock transfer, come from BankAtlantic's balance sheet, and be replaced by BB & T post-closing. In the second scenario, the cash transfer would occur just after stock transfer and come directly from BB & T's balance sheet. The same $606 million would change hands in each case. In the Sale Transaction as actually structured, Retained Assets LLC will own criticized assets with a book value of $606 million rather than $606 million of cash. Reasonable minds can debate whether the Retained Assets are worth $606 million, but no one can legitimately dispute that the Retained Assets are the consideration for the sale of BankAtlantic, just as Levan envisioned and the financial advisors understood. But see BPTB 2 (asserting that treating the Retained Assets as consideration has no factual foundation). With the Retained Assets properly recognized as consideration for the sale of BankAtlantic's stock, it becomes clear that the percentage of assets sold on a book value basis must be calculated by comparing the book value of Bancorp's BankAtlantic stock including the Retained Assets with the book value of all of Bancorp's assets. To use the book value of BankAtlantic's stock without the Retained Assets would incorporate into the calculation the consideration that Bancorp received. Under New York law, a court cannot count the consideration the seller received when determining whether a transaction constitutes a sale of substantially all of the seller's assets. Indeed, if the percentage of assets sold were to be calculated as the difference between the value of pre-sale assets, on the one hand, and the value of post-sale assets plus sale proceeds, on the other, an entity would almost never be deemed to have sold substantially all of its assets.... HFTP, 2004 WL 5641710, at ; accord Sharon Steel, 691 F.2d at 1049 (rejecting literalist interpretation that proceeds from sale of assets are assets such that after a transaction a company would continue[] to own `all' its `assets'... since the proceeds ... went into the [company] treasury). That the currency for the transaction took a form other than cash ( viz., ownership interest in Retained Assets LLC) does not change this principle. If accepted, Bancorp's zero consideration argument would pave an easily traveled superhighway around the substantially all test. Bancorp has conceded that if it sold BankAtlantic to BB & T for $606 million in cash, the transaction would constitute a sale of substantially all its assets. As previously explained, there is no economic difference between a direct stock-for-cash transfer and the Sale Transaction. If routing the consideration through the subsidiary enabled a seller to circumvent a successor obligor provision, future transaction planners could sidestep the restriction whenever a subsidiary had sufficient assets to distribute consideration to the parent. Moreover, transaction planners could create a gift subsidiary with sufficient assets for distribution through the simple expedient of having the subsidiary borrow funds. The subsidiary then would have cash to transfer to Retained Cash LLC, and the subsidiary could distribute the equity in Retained Cash LLC to its parent just before the parent transferred the stock of the subsidiary to the acquirer. At the moment of transfer, by dint of the outstanding loan, the subsidiary conveniently would have negative book value. Channeling the consideration through a subsidiary does not change the nature of the deal. From a quantitative standpoint, Bancorp is selling 85-90% of its assets in the Sale Transaction.
BankAtlantic always has been Bancorp's principal asset and, since February 2007, has been Bancorp's only operating asset. Bancorp was created to hold BankAtlantic, and Bancorp has presented itself to investors on a consolidated basis with BankAtlantic. Although Bancorp previously held Levitt Corporation and Ryan Beck, those entities constituted only a small portion of Bancorp's total assets and were divested before the issuance of the last two series of TruPS. Bancorp has relied at all times on BankAtlantic to service the Debt Securities. As a practical result, substantially all of [Bancorp's] property, as set forth in Indentures, is synonymous with BankAtlantic. The Sale Transaction will change fundamentally the nature of Bancorp's business. According to the first page of Bancorp's most recent annual report on Form 10-K, Bancorp is a Florida-based bank holding company and own[s] BankAtlantic and its subsidiaries. JX 96 at 1. The Form 10-K describes BankAtlantic as Bancorp's principal asset[]. Id. The annual report focuses overwhelmingly on the assets and operations of BankAtlantic and minimally on Bancorp's other assets. Through the Sale Transaction, Bancorp will exit the banking business, lose its status as a federally regulated bank holding company, and divest itself of BankAtlantic and its subsidiaries. Bancorp currently owns 100% of an entity with the following characteristics:  a valuable brand that is widely recognized as Florida's Most Convenient Bank;  the best [banking] franchise in Florida (Tr. 749);  $3.3 billion in deposits that are recognized as one of the best deposit bases in the nation (Tr. 750);  $2.1 billion in performing loans;  over 1,000 employees;  78 physical branches;  a 180,000 square foot corporate headquarters. After the Sale Transaction, Bancorp will own 100% of an entity with no brand, no banking franchise, no deposit base, no branches, eight current employees, and a portfolio of criticized assets. It is difficult to imagine a transaction that would have a greater qualitative impact on Bancorp. Despite this overwhelming evidence, Bancorp contends that it will maintain a degree of continuity of assets, as ... Retained Assets LLC will continue to hold, invest in, and actively manage a commercial real estate portfolio, wholesale residential loans, and investments including tax certificates. BPTB 25. As a result, Bancorp claims, Retained Assets LLC will continue most of the lines of business that [Bancorp's] subsidiaries have historically engaged in. Id. at 39. Admittedly there are high-level similarities between the lines of business that BankAtlantic currently conducts and the lines of business in which Retained Assets LLC will engage. That is necessarily true, because the purpose of the Sale Transaction is to strip out the bad assets that BankAtlantic's business has generated and leave them with Retained Assets LLC. But a continuing conceptual resemblance is not sufficient. The guiding inquiry when evaluating a transaction qualitatively is whether the debtor would cease to operate the business to which, in practical effect, the debentureholders have looked for payment of the debentures. Commentaries at 423. Institutions can share similarities yet have fundamental differences. The Cunard Line and the Cape May-Lewes Ferry both operate ships. Le Bec Fin and Lucky's Coffee Shop both serve dinner. The Massachusetts Institute of Technology and Mt. Pleasant Elementary School both teach students. A regulated commercial bank and an unregulated investment management company may both be financial institutions, but a lender would not lump them together when evaluating their creditworthiness. In this case, after the Sale Transaction, Bancorp's will have a radically altered risk profile, a transformed asset portfolio, and no regulatory restrictions. It will cease to operate the business to which, in practical effect, the holders of Debt Securities looked for payment. Although Bancorp's attorneys did their best to argue the contrary, Levan pulled back the curtain at trial. He testified that he had spent [his] entire life working at [BankAtlantic] to make it successful, thought of BankAtlantic as a Levan family enterprise, and hoped it would remain so for generations. Tr. 731. If Bancorp's business amounted to holding a real estate portfolio, purchasing residential loans, and managing tax certificates, then selling BankAtlantic would be of no moment. Instead, Levan found it incredibly distressing. Tr. 821.
From a quantitative perspective, using a conservative book value metric, the Sale Transaction will convey 85-90% of Bancorp's assets. From a qualitative perspective, the Sale Transaction will transform completely the nature of Bancorp's operations. The Sale Transaction is far outside the ordinary course of Bancorp's business. Taken as a whole, the evidence at trial establishes that the Sale Transaction will constitute a transfer of substantially all of Bancorp's assets. Because BB & T is not assuming the Debt Securities, the Sale Transaction will breach the Successor Obligor Provision.