#16518 - Covenants Change Of Control - Corporate Bonds and Credit Agreement

H. Change of Control

Freeport-McMoran Indenture, Section 4.08

BMS Indenture, Section 13.01-13.05

Petrohawk Indenture, Section 4.11

FMC Credit Agreement, Section 7.01(k)

McMahan v. Wherehouse Entertainment, 900 F.2d 576 (1990) (P. #1)

San Antonio Fire & Police Pension Fund v. Amylin, (P. #1)

Change of Control Covenants [Class 25]

• Structure: Put right upon defined “change of control” trigger

  • Similar to Asset Sale (also put right/Offer)

  • Similar to Merger and Asset Sale (overlapping triggers)

• Definition to trigger varies among indentures

  • Convertible versus regular

  • Base trigger

  • Rating Decline trigger

• Trigger

  • Cash Merger

    • Is this a functional change in control?

    • Why do bondholder care?

    • Is it a trigger? BMS, FM

  • Stock Merger

    • Same Questions

    • What if merger structured as triangular merger with Subsidiary of Company merging with XYZ?

  • Change in Board/Management

• Case Law: McMahan

  • Literal accuracy can be misleading

  • Makes life hard for lawyers

• Note the term “change of control” doesn’t necessarily mean actual change of control

• But would give Bondholder a put right

• Rationale: company can do what it wants but bondholders are protected by the put right

BMS 4.05 Control by Majority

• “Holders of a majority in Principal Amount of the outstanding Securities may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it…”

• Non-convertible bond: effect of the change on the credit volume

• A “Fundamental Change” means

  • (ii) any transaction with all Common Stock is exchanged into something other than listed stock bondholder would get put right

    • Rationale: BMS’s stock is volatile and liquid good for bondholder

  • Important event that may have no/ positive/ negative effect

    • bondholders get option to exercise put right (need not exercise when event has no or positive effect; can exercise if there is a negative effect)

  • (i) Change of controlling shareholder

    • E.g. if bond traded 90% of par as a result of change of control increased to 95% good effect won’t exercise put right

    • (or e.g. if big increase between pre-fundamental change on bond value and par bondholder wants to get out they can still exercise put right)

Freeport 4.08 Change of Control

• Convertible bond: effect of transaction on conversion right

• If bondholder is convertible to stock good to be able to convert into something volatile (bad to convert into sth less volatile, e.g. cash)

• Change of Control means

  • (a) any Person, other than the Company or a Sub, becomes the “beneficial owner” of more than 50% of total Voting Stock

    • Issue: may be triggered because entity of the company may be changed, but provision didn’t provide for stock purchase

  • (b) change of board: during any period of 2 consecutive year, individuals who at the beginning of such period constituted the board of directors cease to constitute a majority of the board

    • Prof: seems overly encumbrance, unclear why such events are harmful to bondholders, some similar events are treated differently

  • (c) adoption of plan relating to liquidation of the Co; or

  • (d) merger/ sale of substantial assets of the Company to another person

    • Merger to 2 companies If securities outstanding prior to merger are changed into cash, securities, or property unless the old shareholders have majority of stock in the new company

    • Always triggered if under cash merger

    • If A and B wish to merge

      1. A can be merged into B’s sub give A’s stockholders B’s stocks A would be B’s sub and B holds more than 50% of A trigger change of control under (a) and (b)

      2. Merge B into A’s sub give B’s stockholder A’s stock if B’s stockholders get minority/ majority stocks no problem as there is no merger or consolidation of A

      3. Direct merger of A and B

         • If B is surviving company, A may have majority of B

         • But don’t need to worry if A is surviving corporation

    • “The merger or consolidation of the Company with or into another Person or the merger of another Person with or into the Company, or the sale of all or substantially all the assets of the Company to another Person,

    • and, in the case of any such merger or consolidation, Company’s securities outstanding immediately prior to and represent 100% of the aggregate voting power of the Voting Stock of the Company are changed into or exchanged for the securities of the Company that are outstanding immediately prior to such transaction and which represent 100% of the aggregate voting power of the Voting Stock of the Company are changed into or exchanged for cash, securities or property,

    • unless pursuant to such transaction such securities are changed into or exchanged for, in addition to any other consideration, securities of the surviving Person or transferee that represent, immediately after such transaction, at least a majority of the aggregate voting power of the Voting Stock of the surviving Person or transferee.”

Problem Set # 16

1. Which of the following transactions results in a Change of Control or a Fundamental Change under the Freeport-McMoran, Petrohawk and BMS indentures? Which of the transactions have adverse economic effects on the bondholders? What kind of adverse effects?

1. Company merges with XYZ. In the merger, each share of Company stock is exchanged for $25 in cash.

2. Company merges with XYZ, a subsidiary of ABC, a publicly traded company. In the merger, each share of Company stock is exchanged for one share of the stock of ABC. What if XYZ merges into a subsidiary of Company?

3. The board of directors of Company is replaced in a proxy contest.

4. The three top officers of the Company resign, are fired, or die.
   2. What remedy do bondholders obtain if a change of control and/or repurchase event has occurred. Under what circumstances does the remedy protect bondholders against any adverse effects resulting from the change of control and/or repurchase event.

3. What is the purpose of the “notwithstanding” clause in s13.01(a) of the BMS indenture?

4. What is the effect of the McMahan case on the way in which indenture sections should be drafted and disclosed in prospectuses? Is this effect good or bad?

• Facts: co. have a Change of Control provision, but has proviso that it would not be a change if the transaction is approved by majority of the independent director. Lawyer takes an indenture and re-formatted it into prospectus

• Held: prospectus can be materiality misleading if it creates confusion

  • Literal accuracy can be misleading

  • By promoting it in this way, create the wrong impression that the covenant offers important protection, but in fact the provision did not offer any protection

  • Court: should be decided by the jury

• Consequence: Makes life hard for lawyers, cannot draft in a misleading way

5. What is the effect of the Amylin case on change of control covenants in indentures?

6. What is the effect of a Change of Control in the FMC Credit Agreement? What is the effect of the Amylin case on change of control covenants in the credit agreement?

• Opportunity but not obligation to get paid right way

  1. Event of default standard remedy: right to accelerate (like a collective put right – all creditors want to get paid now)

     • 7.01(k) “there shall occur any Change of Control”

     • 7.01(g) “Any ERISA Event shall have occurred” i.e. failure to fund a employee pension plan under the Employee Retirement Income Security Act

     • But not all default will generate a put right event of default on senior debt can send payment notice to company to prohibit co. from paying junior debt

  2. Covenants that prohibits an acting:

     • e.g. violated provision no change of control make it into event of default accelerate it to get paid

     • but not always generate event of default

  3. Covenants that provide a put right in change of control want to get paid

I. Other Covenants

Newpage Credit Agreement, Section...