Delaware Supreme Court Clarifies When a Series of Dispositions will not Trigger an "All or Substantially All" Indenture Covenant

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In The Bank of New York Mellon Trust Co., N.A., v. Liberty Media Corp., No. 284, 2011 WL 4376552 (Del. Sept. 21, 2011), the Delaware Supreme Court held that Liberty Media Corp's proposed split-off was not sufficiently connected to previous transactions to warrant aggregation of both the proposed and previous transactions, and thus the proposed split-off did not constitute a sale of "substantially all" of its assets. Bond indentures issued by corporate borrowers typically contain a covenant that the issuer will not sell "all or substantially all" of its assets without the substitution of the purchaser as successor obligor or without otherwise causing a default and acceleration. This landmark ruling should allow corporate issuers accessing the debt capital markets greater flexibility to manage assets and dealmakers’ increased clarity in interpreting a standard indenture provision.

The dispute arose out of Liberty Media Corp's proposed split-off of its Capital Group and Starz Group. Bondholders argued that the proposed split-off would violate the "all or substantially all" covenant in the indenture unless the recipient assumed Liberty's obligations. While the parties agreed that the proposed split-off did not, in isolation, violate the covenant, the trustee, acting on behalf of the bondholders, maintained that the proposed split-off should be aggregated with three previous transactions, which, together constituted a sale of "substantially all" of Liberty's assets. Liberty brought an action for declaratory judgment and injunctive relief to resolve the issue of whether aggregation of the transactions was appropriate in interpreting the language of the indenture.

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