Mechala, a Jamaican corporation that is a holding company for several operating subsidiaries, realized that it would be unable to repay the full principal amount of $75 million due on certain notes it had issued (the "Notes"). Following extensive negotiation between Mechala and an informal committee of noteholders (the "Creditors' Committee"), the Creditors' Committee, faced with the prospect of what it believed to be imminent liquidation, agreed to Mechala's proposal to a tender offer for the Notes at less than 50% of face value.
The tender offer clearly stated that it was part of a corporate and financial restructuring of the company and its subsidiaries. It was conditioned on receipt of exit consents for amendments that would modify the two indentures governing the notes (the "Indentures"), thereby making possible the proposed reorganization. The tender offer provided that, if consent to the amendments is obtained by a vote of the majority of noteholders, Mechala would immediately enter into a series of transactions with its subsidiaries to achieve the planned reorganization. The amendments would have deleted covenants in the Indentures that require Mechala to: (i) maintain an agent for service of process in New York; (ii) consent to jurisdiction in New York; (iii) waive immunities available to the company, (iv) maintain its corporate existence; and (v) have limited ability to conduct transactions with its affiliates. Additionally, the amendments would have eliminated certain events of default designated in the Indentures, including the covenant default, cross-default, judgment default, bankruptcy default, bankruptcy proceedings, and the requirement for subsidiary guarantees.
Analyzing the effect of the complex series of transactions that would constitute the proposed reorganization, the court observed that all of Mechala's assets would be transferred to its subsidiaries, control of the subsidiaries would be transferred to another entity, and Mechala would forgive the debt owed to it by its former subsidiaries. After the reorganization, Mechala would be a holding company without assets. Moreover, once the amendments obtained the consent of a majority of noteholders, without further action by Mechala, the subsidiaries would be released and unconditionally discharged from their obligations under the guarantees. Thus, noteholders would be left without meaningful recourse to Mechala and divested of the subsidiary guarantees.
Although approximately 77% of the noteholders tendered their Notes and consented to the amendments, Federated Strategic Income Fund and certain of its affiliates, beneficial owners of the Notes, brought suit to enjoin Mechala from closing the tender offer on the ground that the tender offer violates both the Indentures and the Trust Indenture Act of 1939. Federated pointed out that the Indentures afford the same rights contained in section 316(b) of the Trust Indenture Act, which provides that: "the right of any holder of any indenture security to receive payment of the principal of and interest on such indenture security . . . or to institute suit for the enforcement of any such payment shall not be impaired or affected without the consent of such holder." Thus, Federated argued that both the Indentures and the Trust Indenture Act require unanimous consent of all noteholders when the right to receive payment of principal and the right to institute suit for the enforcement of payment are impaired.
In response, Mechala argued that unanimous consent to the tender offer was not required because the offer neither impaired the noteholders' right to receive payment nor their right to institute suit against the company. Mechala contended that the planned reorganization was separate from the proposed amendments and, therefore, the consent of a simple majority was sufficient to adopt the amendments.
Faced with the question of whether the proposed amendments impair the noteholders' right to receive payment or their right to sue for the enforcement of payment, the district court compared the terms of the tender offer to the plain language of the Indentures and the Trust Indenture Act. The court focused on the effect of the amendments, not merely their terms, and observed that Mechala would be able to complete the reorganization described in the offer as soon as the amendments became effective.
The court reasoned that Mechala's disposition of all meaningful assets and its simultaneous elimination of the guarantees would effectively eliminate the noteholders' ability to recover and would remove the "safety net" provided by the guarantees, which obviously was an investment consideration from the outset. Having found that a holder wishing to sue for payment upon the Note's maturity "will no longer, as a practical matter, be able to seek recourse from either the assetless defendant or from the discharged guarantors," the court concluded that the offer and proposed amendments would constitute an impairment of the right to sue for payment. Additionally, the court concluded that the noteholders' inability to recover monetary damages as a result of Mechala's planned insolvency constituted irreparable harm. Accordingly, the court granted a preliminary injunction to enjoin Mechala from immediate conclusion of the tender offer.
Federated Strategic Income Fund v. Mechala Group Jamaica, Ltd., No. 99 Civ. 10517 HB, 1999 WL 993648, Fed. Sec. L. Rep. (CCH) 6 90,707 (S.D.N.Y. Nov. 2, 1999).