Philadelphia National Bank v. B.S.F. Co.

Supreme Court of Delaware · 1964 · Corporations

Corporationsindenture interpretationsubstantially all assetsdebenturesconversion rightssupplemental indenturecash saleasset sale

Facts

B.S.F. issued subordinated debentures under an indenture after a prospectus disclosed that American Hardware stock constituted at least 75% of B.S.F.'s assets and generated most of its income. In 1963, after losing working control of American Hardware and facing financial pressures, B.S.F. sold all of its American Hardware stock to Glen Alden for cash only. Glen Alden executed a supplemental indenture guaranteeing principal and interest on the debentures, but it did not assume any obligation to permit conversion of the debentures into Glen Alden stock. The trustee claimed that the sale was of substantially all of B.S.F.'s assets and that failure to provide conversion into Glen Alden stock put B.S.F. in default.

Issue

Whether B.S.F.'s cash sale of its American Hardware stock to Glen Alden was a sale of "substantially all" of its assets under the indenture, and if so, whether B.S.F. defaulted by failing to secure a supplemental indenture allowing debenture holders to convert into Glen Alden stock.

Rule

In construing an indenture, the court looks to the circumstances of its making, the parties' situation, and the contingencies they intended to address. A sale of an asset constituting more than 75% of the corporation's assets and its only substantial income-producing asset may be a sale of "substantially all" assets within the indenture. But conversion-protection provisions requiring post-sale conversion into the acquirer's stock, securities, or property apply only when the acquiring corporation's securities or other property are issued or payable to the seller's stockholders by virtue of their holdings as part of the transaction; they do not apply to a sale solely for cash paid into the seller's treasury where debenture holders retain the right to convert into the seller's stock.

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Lakeview Ventures, a Delaware corporation based in Chicago, issued subordinated debentures under an indenture after a prospectus disclosed that 78% of its assets consisted of shares in North Harbor Tools and that dividends from those shares produced most of Lakeview's income. A year later, Lakeview sold all of those shares to Copper Ridge Holdings in Denver for cash and retained several smaller investments.

Under the majority's approach, is the sale most likely a sale of "substantially all" of Lakeview's assets within the indenture?

Explanation. The majority construed the indenture in light of the circumstances of issuance, the parties' situation, and the protections intended for debenture holders. Where the sold asset constituted more than 75% of total assets and was the only substantial income-producing asset highlighted to investors, its sale can qualify as a sale of substantially all assets. Continued business operations do not negate that conclusion.