March 7, 2012

Delaware Chancery Enjoins Sale Based on Indenture Covenants

From John Grossbauer of Potter Anderson: Recently, Delaware Vice Chancellor Laster delivered this opinion in In re BankAtlantic Bancorp, Inc. Litigation. In his opinion, the Vice Chancellor grants a permanent injunction against the sale of BankAtlantic Bancorp’s sale of its federal saving bank subsidiary to BB&T because it would violate covenants in several indentures for Trust Preferred Securities that prohibit the sale of “all or substantially all” of the Bancorp assets unless the purchaser assumed the obligations under the indentures.

BankAtlantic argued that the sale did not meet the “all or substantially all” test under New York law because it was retaining “criticized assets” as the consideration for the sale, and that the value of the retained assets rendering the sold banking subsidiary worth zero at closing. The Court rejected this argument, saying that the retained assets should be considered as part of the value of the subsidiary bank being sold, and that, qualitatively, the sale of the bank subsidiary represented the sale of Bancorp’s only operating asset and would fundamentally change the nature of Bancorp’s business. The Vice Chancellor relied extensively on the American Bar Foundation Commentaries on the Model Debenture Indenture.

Francis Pileggi also blogged about this case.