Roseton OL, LLC v. Dynegy Holdings, Inc., C.A. No. 6689-VCP (Del. Ch. July 29, 2011) (Parsons, V.C.)
In this memorandum opinion, the Court of Chancery denied the plaintiffs’ (Roseton OL LLC and Danskammer OL, LLC) motion seeking to temporarily restrain the consummation of a transaction pursuant to which defendant Dynegy Holdings, Inc. (“DHI”) would transfer its most profitable power plants from existing subsidiaries to new bankruptcy remote subsidiaries. Because the challenged reorganization would not involve disposition of the assets “substantially as an entirety” or affect DHI’s indirect ownership of those assets, and would allow DHI to obtain a new credit facility, the Court held that the proposed transaction would not breach a successor obligor provision or constitute a fraudulent transfer.
In 2001, subsidiaries of DHI and the plaintiffs entered into a sale-leaseback arrangement, and DHI agreed to related guaranties with the plaintiffs. The guaranties required the lessees to make payments from revenue generated by the power plants subject to the leases, in addition to obligating DHI, on “a senior unsecured basis . . . [i]n the case of any failure by the Lessees to perform . . . to cause such performance or observance to be done.” The guaranties also included a successor obligor provision prohibiting DHI from merging, consolidating, conveying, transferring, or leasing its “properties and assets substantially as an entirety” to any person unless such person assumed DHI’s obligations under the guaranties. In 2011, DHI announced plans for an internal reorganization, by which it would transfer substantially all of its coal- and gas-fired power generation facilities from existing subsidiaries to two new bankruptcy-remote entities that would be indirectly controlled by a wholly-owned subsidiary of DHI. In connection with that reorganization, DHI proposed to seek lenders for a new credit facility that would avail the bankruptcy remote entities of $1.7 billion, six-year senior secured term loan facilities.
The plaintiffs moved for a temporary restraining order, but the Court determined that the record was sufficiently developed to warrant application of the more rigorous preliminary injunction standard, which requires plaintiffs to demonstrate (i) the likelihood of success on the merits, (ii) irreparable harm, and (iii) a balance of hardships favoring the movant.
With respect to the first part of the preliminary injunction analysis, the Court held that the plaintiffs were unlikely to succeed in proving that the proposed transaction would breach the guaranties. First, the Court found that the plaintiffs were not likely to succeed in showing that the successor obligor provision was ambiguous, but rather that the plain and commercially accepted meaning of “its properties and assets” refers to assets that DHI owned directly. Second, the Court found that the proposed transaction did not violate the plain meaning of the successor obligor provision, because DHI only planned to transfer its equity interests in subsidiaries that directly or indirectly owned those physical assets, which would not affect its control over those assets. Third, the Court held that even if the successor obligor provision were ambiguous, it was unlikely that the plaintiffs would succeed in demonstrating that DHI transferred its assets “substantially as an entirety.” The Court found that the proposed transaction did not qualitatively affect DHI’s corporate purpose and existence of holding indirect interests in power companies, or quantitatively reduce the value of assets that DHI would continue to hold in its corporate structure. Finally, the Court found that DHI’s construction of the successor obligor provision, which included only directly-owned assets, was not absurd and could reasonably reflect the commercial reality that the plaintiffs negotiated in the sale-leaseback transaction.
The Court also held that the plaintiffs were unlikely to succeed in showing that the proposed transaction would constitute a fraudulent transfer of assets under the Delaware Uniform Fraudulent Transfer Act (“DUFTA”). The Court found that the DUFTA claim would likely fail because, for the reasons just described, the transaction would not involve a “transfer” of DHI’s directly-owned assets, as required by the Act. Even if the proposed transaction constituted a “transfer,” the Court stated that the plaintiffs would likely fail to show that DHI had violated the Act, because the reorganization would not transfer any value from its corporate structure, would improve DHI’s liquidity by allowing it to obtain a more favorable credit facility, and DHI was not and would not become insolvent. Finally, the Court found that the plaintiffs had not adduced any evidence that DHI had an actual intent to undergo the reorganization to hinder the plaintiffs’ ability to collect payment if the subsidiary-lessees defaulted.
On the second part of the preliminary injunction standard, the Court held that the plaintiffs had not demonstrated irreparable harm. The Court acknowledged that DHI’s control of its new bankruptcy remote subsidiaries could be expected to complicate the plaintiffs’ effort to enforce the guaranties. The Court stated, however, that this speculative claim, which depended on various contingencies, did not support a finding of irreparable harm.
With respect to the balance of hardships, the Court held that the balance did not tip in the plaintiffs’ favor, but was neutral or weighed slightly against granting the plaintiffs’ motion. The Court noted that even a minor delay in the proposed transaction could cause DHI to lose its new credit facility, which could cause DHI to violate a covenant and ultimately file for bankruptcy. The Court found that this threat of substantial harm to DHI at least counterbalanced the speculative harm to the plaintiffs.