Recent Second Circuit Decision Underscores Importance of Careful Consideration
of Indenture Terms

February 25, 2010

In a recent Second Circuit decision, Law Debenture Trust Co. of New York v. Maverick Tube Corp and Tenaris S.A., the court rejected the plaintiff’s argument that a reference to "a class of common stock traded on a United States national securities exchange" should be read to include American Depositary Shares ("ADSs") trading on the New York Stock Exchange ("NYSE"), underscoring the importance of clearly defining terms in indentures.


At issue was the interpretation of the indenture's "Public Acquirer Change of Control" definition, which depends in relevant part on whether: "a Person who … acquires the Company … has a class of common stock traded on a United States national securities exchange or the Nasdaq National Market."  The trustee argued that "common stock" would include ADSs because they are traded on the NYSE and, as a matter of custom and usage, the trading of ADSs is a form of trading common stock.  The trustee also argued that to exclude ADSs from the Public Acquirer definition would be a commercially unreasonable interpretation because there was never any intention to exclude foreign issuers from the Public Acquirer definition.


The court, however, refused to find that ADSs implicitly qualified as "a class a common stock traded on a national securities exchange" for purposes of the Public Acquirer definition.  Noting that the indenture included more than 100 defined terms and explicitly referred to ADSs in other provisions, the court asserted that it was not its role to rewrite the Public Acquirer definition to give it a commercially reasonable effect but rather to give effect to intentions expressed in the agreement's own language, particularly in light of the "pains taken by the parties to have the Indenture set out detailed definitions of numerous terms."


The phrase "common stock traded on a United States national securities exchange or the Nasdaq National Market" is usually relevant in convertible debt to define repurchase rights or conversion rights (typically at a make-whole premium) upon a "change of control," "fundamental change" or similar event.  Many indentures specifically include ADSs as part of that definition, which is an important term issuers should consider in structuring their convertible debt.  More generally, this decision underscores that courts in New York are generally reluctant to apply the "intent" or "spirit" behind a contract provision but instead apply the literal terms of the contract.  Companies entering into complicated credit arrangements such as indentures should make sure they hire experienced counsel to ensure that the language does in fact reflect the intent behind the provisions.



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