In re BankAtlantic Bancorp, Inc. Litig., Consol. C.A. No. 7068-VCL (Del. Ch. Feb. 27, 2012) (Laster, V.C.)
In this case, the Court granted plaintiffs, which were the holders of various debt securities (the “Debt Securities”) issued by defendant BankAtlantic Bancorp, Inc. (“Bancorp”), a permanent injunction enjoining Bancorp from selling its only substantial asset, BankAtlantic, a federal savings bank (“BankAtlantic”) to BB&T Corporation (“BB&T”) because the terms of the proposed sale would result in an event of default under the indentures pursuant to which the Debt Securities were issued (the “Indentures”), which the Court determined would result in irreparable harm to the plaintiffs if the proposed sale were permitted to proceed. Bancorp is a bank holding company whose primary asset consists of 100% of the equity in BankAtlantic. Between 2002 and 2007, Bancorp sponsored several trust preferred (“TruPS”) transactions, pursuant to which Bancorp would form trust subsidiaries (the “Trusts”) that would issue TruPS to investors and the Trusts would then use the proceeds of the sales of the TruPS to purchase Debt Securities issued by Bancorp. The plaintiffs in this case are trustees of certain of those Trusts that own the Debt Securities, as well as several investors of those Trusts that own the TruPS. The terms of the TruPS mirror the terms of the Debt Securities. Under the terms of the Indentures, Bancorp is prohibited from selling or transferring all or substantially all of its assets unless the purchaser or transferee of such assets expressly assumes Bancorp’s obligations under the Indentures (the “Successor Obligor Provision”). Failure to comply with the Successor Obligor Provision constitutes an “Event of Default” under the Indentures, upon the occurrence of which the trustees have several remedies, including accelerating the payment on all of the Debt Securities or seeking other legal or equitable relief.
Bancorp’s financial health depended on BankAtlantic. Bancorp had previously disclosed that its ability to repay the Debt Securities, was largely dependent on BankAtlantic’s ability to pay dividends to Bancorp. BankAtlantic’s business suffered significantly from 2008-2010 as a result of the downturn in the Florida real estate market. As a result, BankAtlantic was unable to declare and pay dividends to Bancorp, and Bancorp, as a result, began deferring interest payments on the Debt Securities (which in turn forced the deferment of interest payments on the TruPS). When Bancorp’s efforts to raise additional capital failed, it sought to sell, initially, several of the BankAtlantic branches and then, when parties showed interest, BankAtlantic in its entirety. While there were several potential bidders for BankAtlantic, there was a securities action pending in Florida and a separate complaint filed by the SEC that gave the bidders some amount of concern, which affected the purchase price those bidders were willing to pay. Since Bancorp’s CEO, Alan Levan (“Levan”), did not like the terms of a whole-company offer it had received, he convinced Bancorp’s board to terminate negotiations with the only remaining bidder and stop the whole-company sale process. In 2011, Levan devised a new structure to sell BankAtlantic, a “good bank/bad bank” structure. In the good bank/bad bank structure, Bancorp would agree to sell only the “good” assets of BankAtlantic – namely, its deposits and performing loans – and, as consideration for the sale of the “good” assets, Bancorp (through a subsidiary) would retain the “bad” (or criticized) assets – nonperforming loans, classified loans and the Debt Securities and corresponding TruPS (collectively, the “Retained Assets”), which Retained Assets had a book value of approximately $600 million. By transferring the Retained Assets to Bancorp, BankAtlantic would have approximately $3.4 billion in liabilities (consisting almost entirely of bank deposits) and $3.1 billion in assets. Bancorp refused to consider alternative structures at this point in time, including whole-company sales or sales which would allow the acquirer to assume the Debt Securities (which, to some potential bidders, was an attractive asset), and required that any offer have an “effective deposit premium in excess of 10%.”
BB&T was the only potential bidder that met Bancorp’s demand for a 10% deposit premium. In November 2011, BB&T and Bancorp entered into a definitive stock purchase agreement (the “SPA”), pursuant to which BankAtlantic would transfer the Retained Assets to a newly-formed subsidiary, Retained Assets LLC, and then transfer its membership interests in Retained Assets LLC to Bancorp, upon receipt of which Bancorp would sell its BankAtlantic stock to BB&T. The consideration for the sale of BankAtlantic would not have been cash, but rather the Retained Assets that were to be transferred from BankAtlantic to Bancorp. Upon the announcement of the execution of the SPA, Wilmington Trust Company, as Indenture Trustee under three of the Indentures, and Wells Fargo Bank, N.A., as institutional trustee of two of the Trusts, issued notices of default to Bancorp. Several TruPS holders brought suit seeking (i) a decree of specific performance mandating that Bancorp comply with the Successor Obligor Provision, or (ii) a permanent injunction against the proposed sale. Wilmington Trust Company and Wells Fargo Bank, N.A. later intervened in the action as additional plaintiffs on behalf of the respective Trusts for which they serve as institutional trustees.
The questions facing the Court in this action were: (i) does the proposed sale violate the Successor Obligor Provision? and (ii) if the Successor Obligor Provision is violated, what is the appropriate remedy? Because seven of the eight Indentures involved in this case are governed by New York law (the eighth is governed by Florida law, and the parties did not identify any material difference between the laws of those two states), the Court relied on authority applying New York law to analyze the case. The Court noted that the Successor Obligor Provision is a boilerplate term found in indentures and, therefore, in interpreting the provision, the Court should look not to the “intent of the parties, but rather [to] the accepted common purpose of such provisions.” Both case law and authoritative commentary on this subject note that the purpose of provisions such as the Successor Obligor Provision is to “protect lenders . . . by assuring a degree of continuity of assets” because, if an obligor sells or transfers all of its assets, then “the obligor named in the indenture would cease to operate the business to which, in practical effect, the debentureholders have looked for payment of the debentures.”
In determining whether a transaction results in the conveyance of substantially all of a company’s assets, New York law requires both a qualitative and quantitative analysis. The Court first looked to the quantitative factors in determining whether Bancorp’s proposed sale to BB&T constituted a sale of substantially all of its assets. Relying on the information contained in Bancorp’s annual reports and using Bancorp’s book value, the Court found that the proposed sale would, conservatively, result in the transfer of 85-90% of Bancorp’s assets. The Court noted, however, that "[n]othing in New York law suggests that a court is limited to book value when evaluating a parent corporation’s 100% equity interest in an operating subsidiary.” Bancorp argued that the Retained Assets should not be used in calculating the value of BankAtlantic, since the Retained Assets would be transferred to Bancorp immediately prior to closing the sale. Taking that into consideration, Bancorp argued that the BankAtlantic shares actually had a negative value after subtracting the value of the Retained Assets from the book value of BankAtlantic, and, because BB&T would not be transferring any cash or assets to Bancorp in connection with the proposed sale, Bancorp therefore “must be conveying zero percent of its assets.” The Court rejected Bancorp’s argument as illogical and inherently suspect. BB&T was paying consideration for the proposed sale – the Retained Assets that Bancorp was allowed to obtain at closing. The transfer of the Retained Assets out of BankAtlantic actually made BankAtlantic more valuable, not less valuable (contrary to Bancorp’s arguments). Because the Retained Assets constituted the consideration for the sale, in calculating the percentage of assets sold on a book value basis, the book value of BankAtlantic stock including the Retained Assets must be used, according to the Court, otherwise, the result would be to incorporate into the calculation the consideration that Bancorp received in connection with the sale, which would be contrary to New York law. Bancorp admitted that had it received cash in the same amount of the value of the Retained Assets rather than the actual Retained Assets, then the proposed sale would have constituted a sale of substantially all of its assets. The Court noted that there was “no economic difference between a direct stock-for-cash transfer and the [structure of the proposed sale from Bancorp to BB&T].” Because “channeling the consideration through a subsidiary does not change the nature of the deal,” the Court found that, from a quantitative perspective, Bancorp was transferring 85-90% of its assets to BB&T.
In analyzing the qualitative factors of a transaction, the Court noted that New York courts look to “whether the transaction results in a fundamental change in the nature or character of the entity, involves the entity’s primary operating assets, or is out of the ordinary course of business.” The Court found that, applying these factors, the proposed sale qualitatively constituted a sale of substantially all of Bancorp’s assets. Bancorp, prior to the proposed sale, was a bank holding company whose primary asset had always been BankAtlantic. The Court found that, following the consummation of the proposed sale, the nature of Bancorp’s business would fundamentally change. Upon the sale of BankAtlantic, Bancorp will no longer be in the banking business and will lose its status as a bank holding company. The Court noted that, after the proposed sale, “Bancorp will own 100% of an entity with no brand, no banking franchise, no deposit base, no branches, eight current employees, and a portfolio of criticized assets,” and the Court found it “difficult to imagine a transaction that would have a greater qualitative impact on Bancorp.” The Court rejected Bancorp’s argument that its retention of the Retained Assets resulted in a “degree of continuity of assets,” positing that “a continuing conceptual resemblance is not sufficient.” Because the Court found that the proposed sale would, from a qualitative perspective, “transform completely the nature of Bancorp’s operation” and was a transaction that was “far outside the ordinary course of Bancorp’s business,” the proposed sale qualitatively constituted a sale of substantially all of Bancorp’s assets. Given that the proposed sale, both qualitatively and quantitatively, constituted a sale of substantially all of Bancorp’s assets, and because BB&T would not be assuming Bancorp’s obligations under the Indentures, the Court found that the proposed sale would result in the breach of the Successor Obligor provision.
Having ruled that the consummation of the proposed sale would result in a breach of the Successor Obligor Provision and an Event of Default under the Indentures, the Court then determined whether the plaintiffs were entitled to two equivalent remedies of a decree of specific performance enforcing the Successor Obligor Provision and a permanent injunction against the proposed sale. In determining whether the plaintiffs were entitled to this relief, the Court noted that the parties agreed, citing Delaware law, that the plaintiffs would be entitled to a permanent injunction “if they have prevailed on the merits, shown that they will suffer irreparable harm if injunctive relief is not granted, and demonstrated that the balance of hardships favors injunctive relief.” The Court found that the plaintiffs satisfied the requirement of success on the merits, having ruled that the proposed sale would breach the Successor Obligor Provision.
The Court also found that the plaintiffs had demonstrated that they would suffer irreparable harm if a permanent injunction were not awarded. Proceeding with the proposed sale would trigger an Event of Default under the Indentures, upon the occurrence of which the trustees could accelerate the payment of all of the Debt Securities, which would total an amount of approximately $290 million (assuming Bancorp would have already paid the approximately $39 million in deferred interest upon consummation of the proposed sale as contemplated in the SPA). The evidence at trial clearly demonstrated that Bancorp would have no way of paying off this accelerated debt. In addition, because Bancorp chose to accept a lesser purchase price for BankAtlantic in exchange for payments being made to Bancorp’s executives in excess of $10 million (which the Court noted was an amount greater than the total book value of Bancorp’s equity), “the payments divert[ed] a portion of the deal consideration to Bancorp’s controlling stockholders, vaulting them over the Debt Securities and other corporate constituencies,” which violated the absolute priority rule. The Court also noted that New York law “recognizes that ‘a shift in bargained-for risk may constitute irreparable harm where the lender’s only recourse is against the borrower.’” The TruPS investors relied on Bancorp’s status as a regulated bank holding company and looked to its underlying asset, BankAtlantic, for repayment of Bancorp’s obligations under the Indentures. Without that underlying asset, Bancorp would be shifting the risk of repayment of the Debt Securities to the holders, which is not what the plaintiffs bargained for in investing in the TruPS. As such, the plaintiffs were entitled to injunctive relief under New York law.
Finally, the Court found that balancing the hardships weighed in favor of granting injunctive relief. Bancorp argued that issuing a permanent injunction against the proposed sale would result in the failure of Bancorp, which would irreparably harm all parties involved, including the holders of the Debt Securities, and this factor weighed against issuing a permanent injunction. The Court, however, disagreed with the “apocalyptic picture painted by Bancorp.” First, the Court noted that in the sale process itself, Levan had told the directors that if it did not receive an acceptable offer, he would table the sale process until the market improved – evidence that Levan did not foresee the immediate failure of Bancorp if the proposed sale did not close. In addition, the Court noted that Bancorp had several Indenture-compliant alternatives, including a whole-company sale, for which Bancorp had previously received an offer but rejected because it did not satisfy Levan’s “personal bottom line.” Finally, the Court noted that “a party cannot ‘abrogate a contract, unilaterally, merely upon a showing that it would be financially disadvantageous to perform it,’” and that “financial difficulty or economic hardship, even to the extent of insolvency or bankruptcy,” will not excuse performance of a contract. Taking into consideration the risk to Bancorp and weighing that risk against the irreparable harm to be suffered by the plaintiffs, the Court found that the balance weighed in favor of granting the permanent injunction. Having succeeded on the merits, proven irreparable harm in the absence of injunctive relief and shown a balancing of the hardships weighing in favor of injunctive relief, the Court granted plaintiffs’ request for a permanent injunction enjoining the proposed sale.