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Copyright (c) 2000 American Bar Association
The Business Lawyer
May, 2000
55 Bus. Law. 1115
REVISED MODEL SIMPLIFIED INDENTURE
Ad Hoc Committee for Revision of the 1983 Model Simplified Indenture
INTRODUCTION
In 1983, The Business Lawyer published the Model Simplified Indenture, n1 which included
both a form of indenture (the 1983 MSI) and a commentary (the 1983 Notes). The 1983 MSI and
the 1983 Notes were promulgated with the hope that having a common form for the most standard
provisions of indentures would reduce the need for significant negotiation of such provisions, and,
in large part, the 1983 MSI accomplished that objective.
n1 38 BUS. LAW. 741 (1983).
In 1995, a subcommittee on the Committee on Developments in Business Financing began work
on a revision of the 1983 MSI. As did the 1983 MSI committee, the subcommittee's focus was on
the non-covenant provisions of a "standard" convertible, subordinated indenture. Indentures are one
of the most ancient of legal forms, and one of the secrets of their pervasiveness and continued utility
is the ability of the form to change and adapt to new issues and areas of concern. n2 Although new
indenture technology since 1983 has focused primarily on covenants, there have been enormous
changes as well in other areas, particularly in subordination and trustee provisions. The 1999 Model
Simplified Indenture (the Model Simplified Indenture) generally updates the 1983 MSI, with particular attention to those articles.
n2 See generally Churchill Rodgers, The Corporate Trust Indenture Project, 20 BUS.
LAW. 551 (1965).
The subordination article presented a challenge to the subcommittee, as it does for lawyers negotiating such provisions. The increasing complexity of corporate capital structures and issues
raised by the spate of bankruptcies and restructurings of the late 1980s and early 1990s have resulted in indentures containing an increased number of provisions, and provisions that are more elaborate than those generally found in indentures of the early 1980s. As with covenants, subordination
provisions are therefore frequently the subject of fact-specific negotiations focused on the issuer, its
capital structure, and the security purchasers' own requirements. This Model Simplified Indenture
contains a fairly straightforward (read simplified) version of subordination provisions, such as
might be found in a corporate indenture for a high credit rated issuer, rather than a more elaborate
version such as would be found in unrated debt for a highly leveraged issuer. The best source of the
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current state of play for more elaborate subordination provisions will be recent indentures for comparable offerings.
As was the 1983 MSI, the new Model Simplified Indenture is accompanied by Notes. Because
the Model Simplified Indenture and its Notes are designed to be used as a stand-alone resource,
without requiring reference to the 1983 MSI and 1983 Notes, where the language of the 1983 Model
Simplified Indenture and of the Model Simplified Indenture are essentially identical, the Notes to
the Model Simplified Indenture are unchanged or have been updated solely for cross-references and
the like. In other Notes to the Model Simplified Indenture we have tried to highlight particular areas
of change between the 1983 MSI and this Model Simplified Indenture and to draw attention to new
legal developments. Obviously, the seminal works for any lawyer attempting to understand the
meaning and origin of particular provisions include the American Bar Foundation's Commentaries
on Indentures, n3 and the basic background afforded by that work is not repeated in this draft.
n3 AMERICAN BAR FOUNDATION, COMMENTARIES ON INDENTURES (1971).
This Model Simplified Indenture represents a variety of views, and, it is hoped, in the aggregate
favors no particular party, whether issuer, trustee, or security holder. As a result, however, users
should be aware that as to any particular provision, parties' positions may vary. In addition, the substantive positions taken in the Model Simplified Indenture do not necessarily represent the views of
any individual member of the Committee. Lastly, it should be noted that changes to a form of provision contained in the 1983 MSI are not intended to be used as a frame of reference for evaluating
or interpreting indentures which use the 1983 MSI provisions.
This project was begun in 1995, by the Ad Hoc Committee for Revision of the 1983 MSI, under
the aegis of the Committee on Developments in Business Financing of the American Bar Association's Section of Business Law. In 1998, two other Committees joined the effort and helped push it
to completion--the Committee on Trust Indentures and Indenture Trustees and the Business Bankruptcy Committee's Subcommittee on Trust Indentures. As a result, the number of contributors to
the project was significant, and greatly improved the strength of the draft. Although we list everyone who contributed on the attached list, we want to thank in particular the following who provided
significant assistance in the final drafting stages of the project: Hollace T. Cohen, Timothy C.
Crane, Byran H. Hall, Harold L. Kaplan, J. Andrew Rahl, Jr., David Reynolds, Felicia Smith and
Steven M. Wagner. Special cite-checking assistance was provided by Jo Christine Reed, Touro
College, Jacob D. Fuchsberger Law Center ('01).
In addition, one person should get special recognition--Morey McDaniel. Morey, one of the
principal drafters of the 1983 Model Simplified Indenture, is a nationally recognized expert on indentures and issues related to their interpretation and application, initiated this updating project, and
provided his guidance, moral support and great learning throughout the drafting process. Those who
worked on the project, and the greater legal community, owe Morey our debt of gratitude both for
the 1983 MSI and for his continuing efforts to ensure that this evolution of the Indenture form incorporates a thoughtful approach to the issues securityholders, issuers and trustees face under today's indentures.
Ad Hoc Committee for
Revision of the 1983
Model Simplified Indenture
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Ruth E. Fisher, Chair
Committee on Trust Indentures
and Indenture Trustees
Ben B. Floyd, Chair
James Gadsden, Vice Chair
Subcommittee on Trust Indentures
James Gadsden, Chair
Paul H. Amiel
Dallas, TX
Alex C. Bancroft
New York, NY
Hollace T. Cohen
New York, NY
Timothy C. Crane
Brewster, MA
Kirk A. Davenport
New York, NY
Ruth E. Fisher
Los Angeles, CA
James Gadsden
New York, NY
Ben B. Floyd
Houston, TX
Bryan H. Hall
New York, NY
Kris F. Heinzelman
New York, NY,
Harold L. Kaplan
Chicago, IL
Morey W. McDaniel
Danberg, CT
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J. Andrew Rahl, Jr.
New York, NY
David Reynolds
New York, NY
Nick P. Saggese
Los Angeles, CA
Marsha Simms
New York, NY
Janice Sharry
Dallas, TX
Felicia Smith
New York, NY
Steven M. Wagner
Chicago, IL
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INDENTURE
UNIVERSAL BUSINESS CORPORATION and
GREATER BANK AND TRUST COMPANY
___ Trustee
Dated as of ___
$ ___ % Convertible Subordinated Debentures Due
INDENTURE dated as of ___, between UNIVERSAL BUSINESS CORPORATION, a [Delaware] corporation ("Company"), and GREATER BANK AND TRUST COMPANY, a [New York]
[banking/trust] corporation ("Trustee").
Each party agrees as follows for the benefit of the other party and for the equal and ratable benefit of the Holders of the Company's ___% Convertible Subordinated Debentures Due ___ ("Securities"):
ARTICLE 1
DEFINITIONS AND RULES OF CONSTRUCTION; APPLICABILITY OF THE TRUST INDENTURE ACT
Section 1.01. Definitions.
"Affiliate." Any Person controlling or controlled by or under common control with the referenced Person. "Control" for this definition means the power to direct the management and policies
of a Person, directly or indirectly, whether through the ownership of voting securities, by contract,
or otherwise. The terms "controlling" and "controlled" have meanings correlative to the foregoing.
"Agent." Any Registrar, Paying Agent or Conversion Agent.
"Board." The Board of Directors of the Person or any officer or committee thereof authorized to
act for such Board.
"Business Day." A day that is not a Legal Holiday.
"Company." The party named as such above until a successor which duly assumes the obligations upon the Securities and under the Indenture replaces it and thereafter means the successor.
"Debt" means, with respect to any Person, (i) any obligation of such Person to pay the principal
of, premium of, if any, interest on (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company, whether or not a claim for such
post-petition interest is allowed in such proceeding), penalties, reimbursement or indemnification
amounts, fees, expenses or other amounts relating to any indebtedness, and any other liability, contingent or otherwise, of such Person (A) for borrowed money (including instances where the recourse of the lender is to the whole of the assets of such Person or to a portion thereof), (B) evidenced by a note, debenture or similar instrument (including a purchase money obligation) including securities, (C) for any letter of credit or performance bond in favor of such Person, or (D) for the
payment of money relating to a capitalized lease obligation; (ii) any liability of others of the kind
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described in the preceding clause (i), which the Person has guaranteed or which is otherwise its legal liability; (iii) any obligation of the type described in clauses (i) and (ii) secured by a lien to
which the property or assets of such Person are subject, whether or not the obligations secured
thereby shall have been assumed by or shall otherwise be such Person's legal liability; and (iv) any
and all deferrals, renewals, extensions and refunding of, or amendments, modifications or supplements to, any liability of the kind described in any of the preceding clauses (i), (ii) or (iii).
"Default." Any event which is, or after notice or passage of time would be, an Event of Default.
"Exchange Act." The Securities Exchange Act of 1934, as amended.
"Holder" or "Securityholder." A Person in whose name a Security is registered.
"Indenture." This Indenture as amended from time to time, including the terms of the Securities
and any amendments.
"Officers' Certificate." A certificate signed by two Officers, one of whom must be the President,
the Treasurer or a Vice-President of the Company. See Sections 12.03 and 12.04.
"Opinion of Counsel." Written opinion from legal counsel who is acceptable to the Trustee. See
Sections 12.03 and 12.04.
"Person." Any individual, corporation, partnership, joint venture, association, limited liability
company, joint stock company, trust, unincorporated organization or government or other agency or
political subdivision thereof.
"Principal" of a Security means the principal of the Security plus the premium, if any, on the
Security which is due or overdue or is to become due at the relevant time.
"Proceeding." A liquidation, dissolution, bankruptcy, insolvency, reorganization, receivership or
similar proceeding under Bankruptcy Law, an assignment for the benefit of creditors, any marshalling of assets or liabilities, or winding up or dissolution, but shall not include any transaction permitted by and made in compliance with Article 5.
"Representative." The indenture trustee or other trustee, agent or representative for an issue of
Senior Debt.
"SEC." The U.S. Securities and Exchange Commission.
"Securities." The Securities described above issued under this Indenture.
"Senior Debt." Debt of the Company whenever incurred, outstanding at any time except (i) Debt
that by its terms is not senior in right of payment to the Securities, (ii) Debt held by the Company or
any Affiliate of the Company, and (iii) Debt excluded by Section 12.09.
"TIA." The Trust Indenture Act of 1939 (15 U.S.C. §§ 77aaa-77bbbb), as amended, as in effect
on the date of this Indenture, except as provided in Sections 1.04 and 9.03.
"Trust Officer." Any officer or assistant officer of the Trustee assigned by the Trustee to administer its corporate trust matters or to whom a matter concerning the Indenture may be referred.
"Trustee." The party named as such above until a successor replaces it and thereafter means the
successor. See also Section 11.14.
"U.S. Government Obligations." Securities that are direct, noncallable, non-redeemable obligations of, or noncallable, nonredeemable obligations guaranteed by, the United States for the timely
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payment of which obligation or guarantee the full faith and credit of the United States is pledged, or
funds consisting solely of such securities, including funds managed by the Trustee or one of its Affiliates (including such funds for which it or its Affiliates receives fees in connection with such
management).
Section 1.02. Other Definitions.
Term
"Bankruptcy Law"
"Common Stock"
"Conversion Agent"
"Custodian"
"Defaulted Interest"
"Distribution"
"Event of Default"
"Junior Securities"
"Legal Holiday"
"Notice"
"Officer"
"Paying Agent"
"Payment Blockage Period"
"Proceeding"
"Quoted Price"
"Registrar"
"Senior Debt Default Notice"
"Senior Debt Payment Default"
Defined in Section
6.01
10.01
2.03
6.01
2.13
11.14
6.01
11.13
12.06
12.01
12.09
2.03
11.14
1.01
10.11
2.03
11.14
11.14
Section 1.03. Rules of Construction.
Unless the context otherwise requires:
(1) a term defined in Section 1.01 or 1.02 has the meaning assigned to it therein,
and terms defined in the TIA have the meanings assigned to them in the TIA;
(2) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles in the United States;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and words in the plural include the singular;
(5) provisions apply to successive events and transactions;
(6) "herein," "hereof" and other words of similar import refer to this Indenture as a
whole and not to any particular Article, Section or other subdivision; and
(7) "including" means including without limitation.
Section 1.04. Trust Indenture Act.
The provisions of TIA Sections 310 through 317 that impose duties on any Person (including
the provisions automatically deemed included herein unless expressly excluded by this Indenture)
are a part of and govern this Indenture upon and so long as the Indenture and Securities are subject
to the TIA. If any provision of this Indenture limits, qualifies or conflicts with such duties, the imposed duties shall control. If a provision of the TIA requires or permits a provision of this Indenture
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and the TIA provision is amended, then the Indenture provision shall be automatically amended to
like effect.
[Any reference to a requirement under the TIA shall only apply upon and so long as the Indenture is qualified under and subject to the TIA.]
ARTICLE 2
THE SECURITIES
Section 2.01. Form and Dating.
The Securities and the certificate of authentication shall be substantially in the form of Exhibit
A, which is hereby incorporated in and expressly made a part of this Indenture. The Securities may
have notations, legends or endorsements required by Section 2.11, law, stock exchange rule, automated quotation system, agreements to which the Company is subject, or usage. Each Security shall
be dated the date of its authentication.
Section 2.02. Execution and Authentication.
Two Officers shall sign the Securities for the Company by manual or facsimile signature.
If an Officer whose signature is on a Security no longer holds that office at the time the Security
is authenticated, the Security is still valid.
A Security shall not be valid until an authorized signatory of the Trustee manually signs the certificate of authentication on the Security. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture.
The Trustee shall authenticate Securities for original issue up to the amount stated in paragraph
4 of Exhibit A in accordance with an Officers' Certificate of the Company. The aggregate principal
amount of Securities outstanding at any time may not exceed that amount except as provided in
Section 2.07.
The Trustee may appoint an authenticating agent acceptable to the Company to authenticate
Securities. An authenticating agent may authenticate Securities whenever the Trustee may do so.
Each reference in this Indenture to authentication by the Trustee includes authentication by such
agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate.
Section 2.03. Agents.
The Company shall maintain an office or agency where Securities may be presented for registration of transfer or for exchange ("Registrar"), where Securities may be presented for payment
("Paying Agent") and where Securities may be presented for conversion ("Conversion Agent").
Whenever the Company must issue or deliver Securities pursuant to this Indenture, the Trustee shall
authenticate the Securities at the Company's request. The Registrar shall keep a register of the Securities and of their transfer and exchange.
The Company may appoint more than one Registrar, Paying Agent or Conversion Agent. The
Company shall notify the Trustee of the name and address of any Agent not a party to this Indenture. If the Company does not appoint another Registrar, Paying Agent, or Conversion Agent, the
Trustee shall act as such.
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Section 2.04. Paying Agent To Hold Money in Trust.
On or prior to each due date of the Principal and interest on any Security, the Company shall
deposit with the Paying Agent a sum sufficient to pay such Principal and interest when so becoming
due. The Company shall require each Paying Agent (other than the Trustee) to agree in writing that
the Paying Agent will hold in trust for the benefit of Securityholders or the Trustee all money held
by the Paying Agent for the payment of the Principal of or interest on the Securities, will notify the
Trustee of any Default by the Company in making any such payment, and will comply with Article
11. While any such Default continues, the Trustee may require a Paying Agent to pay all money
held by it to the Trustee. The Company at any time may require a Paying Agent to pay all money
held by it to the Trustee and to account for any funds disbursed by the Paying Agent. Upon complying with this Section, the Paying Agent shall have no further liability for the money delivered to
the Trustee. If the Company or any Affiliate acts as Paying Agent, it shall segregate the money held
by it as Paying Agent and hold it as a separate trust fund.
Section 2.05. Securityholder Lists.
The Trustee shall preserve in as current a form as is reasonably practicable the most recent list
available to it of the names and addresses of Securityholders. If the Trustee is not the Registrar, the
Company shall furnish to the Trustee, in writing at least 10 Business Days before each interest
payment date and at such other times as the Trustee may request, a list in such form and as of such
date as the Trustee may reasonably require of the names and addresses of Securityholders.
Section 2.06. Transfer and Exchange.
The Securities shall be issued in registered form and shall be transferable only upon surrender of
a Security for registration of transfer. When a Security is presented to the Registrar with a request to
register a transfer or to exchange them for an equal principal amount of Securities of other denominations, the Registrar shall register the transfer or make the exchange if its requirements for such
transactions are met and the Security has not been redeemed. The Company may charge a reasonable fee for any registration of transfer or exchange but not for any exchange pursuant to Section
2.10, 3.06, 9.05 or 10.02.
All Securities issued upon any transfer or exchange pursuant to the terms of this Indenture will
evidence the same debt and will be entitled to the same benefits under this Indenture as the Securities surrendered upon such transfer or exchange.
Section 2.07. Replacement Securities.
If the Holder of a Security claims that the Security has been lost, destroyed or wrongfully taken,
then, in the absence of notice to the Company that the Security has been acquired by a protected
purchaser, the Company shall issue a replacement Security. If required by the Trustee or the Company, an indemnity bond must be provided which is sufficient in the judgment of both to protect the
Company, the Trustee and the Agents from any loss which any of them may suffer if a Security is
replaced. The Company or the Trustee may charge the Holder for its expenses in replacing a Security.
Every replacement Security is an additional obligation of the Company.
Section 2.08. Outstanding Securities.
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Securities outstanding at any time are all Securities authenticated by the Trustee except for those
canceled by the Registrar, those delivered to it for cancellation and those described in this Section
as not outstanding. A Security does not cease to be outstanding because the Company or an Affiliate
holds the Security.
If a Security is replaced pursuant to Section 2.07, it ceases to be outstanding unless the Company receives proof satisfactory to it that the replaced Security is held by a protected purchaser.
If Securities are considered paid under Section 4.01, they cease to be outstanding and interest on
them ceases to accrue.
Section 2.09. Treasury Securities Disregarded for Certain Purposes.
In determining whether the Holders of the required Principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by the Company or an Affiliate shall be
disregarded and deemed not to be outstanding, except that, for the purposes of determining whether
the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities
which the Trustee knows are so owned shall be so disregarded. Securities so owned which have
been pledged in good faith shall not be disregarded if the pledgee establishes to the satisfaction of
the Trustee the pledgee's right to deliver any such direction, waiver or consent with respect to the
Securities and that the pledgee is not the Company or any other obligor upon the Securities or any
Affiliate of the Company or of such other obligor.
Section 2.10. Temporary Securities.
Until definitive Securities are ready for delivery, the Company may use temporary Securities.
Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Company considers appropriate for temporary Securities. Without unreasonable delay,
the Company shall deliver definitive Securities in exchange for temporary Securities.
Section 2.11. Global Securities.
The Company may issue some or all of the Securities in temporary or permanent global form.
The Company may issue a global Security only to a depository. A depository may transfer a global
Security only to its nominee or to a successor depository. A global Security shall represent the
amount of Securities specified in the global Security. A global Security may have variations that the
depository requires or that the Company considers appropriate for such a security.
Beneficial owners of part or all of a global Security are subject to the rules of the depository as
in effect from time to time.
The Company, the Trustee and the Agents shall not be responsible for any acts or omissions of a
depository, for any depository records of beneficial ownership interests or for any transactions between the depository and beneficial owners.
Section 2.12. Cancellation.
The Company at any time may deliver Securities to the Trustee for cancellation. The Paying
Agent and Conversion Agent, if not the Trustee, shall forward to the Trustee any Securities surrendered to them for payment or conversion. The Trustee shall cancel all Securities surrendered for
registration of transfer, exchange, payment, conversion or cancellation and shall dispose of canceled
Securities according to its standard procedures or as the Company otherwise directs. The Company
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may not issue new Securities to replace Securities that it has paid or which have been delivered to
the Trustee for cancellation or that any Securityholder has converted.
Section 2.13. Defaulted Interest.
If the Company defaults in a payment of interest on the Securities ("Defaulted Interest") such
Defaulted Interest shall cease to be payable to the Securityholder on the relevant record date and
shall be paid by the Company, at its election, under either (1) or (2) below:
(1) The Company may pay the Defaulted Interest together with interest thereon to
the Persons which are Securityholders on a subsequent special record date. The Company shall notify the Trustee of the amount of Defaulted Interest together with interest
thereon to be paid and pay over such amount to the Trustee. The Trustee shall then fix a
special record date and at the Company's expense shall notify Securityholders not less
than 10 days prior to such special record date of the proposed payment, of the special
record date, and of the payment date.
(2) The Company may make payment of Defaulted Interest together with interest
thereon in any lawful manner not inconsistent with the requirements of any securities
exchange or automated quotation system on which the Securities may be listed or designated for issuance. The Company shall give prompt notice to the Trustee and Securityholders that it intends to make payment pursuant to this Section 2.13(2) and of the
special record date of the proposed payment, and of the payment date.
ARTICLE 3
REDEMPTION
Section 3.01. Notice to Trustee.
If Securities are to be redeemed, the Company shall notify the Trustee of the redemption date,
the Principal amount of Securities to be redeemed and the provision of the Securities permitting or
requiring the redemption.
The Company may reduce the Principal amount of Securities required to be redeemed pursuant
to Paragraph Six of the Securities if it notifies the Trustee of the amount of the credit and the basis
for it by delivery of an Officers' Certificate. If the reduction is based on a credit for redeemed, converted or canceled Securities that the Company has not previously delivered to the Trustee for cancellation, the Company shall deliver such Securities to the Registrar before the selection of securities to be redeemed.
The Company shall give each notice provided for in this Section at least 50 days before the redemption date unless a shorter period is satisfactory to the Trustee. If fewer than all the Securities
are to be redeemed, the record date relating to such redemption shall be selected by the Company
and given to the Trustee, which record date shall be not less than 15 days prior to the redemption
date.
Section 3.02. Selection of Securities To Be Redeemed.
If less than all the Securities are to be redeemed, the Trustee shall select the Securities to be redeemed by a method that complies with the requirements, if any, of any stock exchange on which
the Securities are listed and that the Trustee considers fair and appropriate, which may include selection pro rata or by lot. The Trustee shall make the selection from Securities outstanding not pre-
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viously called for redemption. The Trustee may select for redemption portions of the Principal of
Securities that have denominations larger than $ 1000. Securities and portions thereof selected by
the Trustee shall be in amounts of $ 1000 or whole multiples of $ 1000. Provisions of this Indenture
that apply to Securities called for redemption also apply to portions of Securities called for redemption.
Section 3.03. Notice of Redemption.
At least 30 days but not more than 60 days before a redemption date, the Company shall mail a
notice of redemption to each Holder whose Securities are to be redeemed.
The notice shall state that it is a notice of redemption, identify the Securities to be redeemed and
shall state:
(1) the redemption date;
(2) the redemption price;
(3) the conversion price;
(4) the name and address of the Paying Agent and Conversion Agent;
(5) that convertible Securities called for redemption may be converted at any time
before the close of business on the Business Day immediately preceding the redemption date (unless the redemption date is also a record date for an interest payment, in
which event they may be converted at any time through the redemption date);
(6) that Holders who want to convert Securities must satisfy the requirements for
conversion set forth in the Securities;
(7) that Securities called for redemption must be surrendered to the Paying Agent to
collect the redemption price;
(8) that, unless the Company defaults in making such redemption payment or the
Paying Agent is prohibited from making such payment pursuant to the terms of this Indenture, interest on Securities (or portion thereof) called for redemption ceases to accrue on and after the redemption date; and
(9) list the CUSIP number of the Securities and state that no representation is made
as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or
printed on the Securities.
At the Company's request, the Trustee shall give the notice of redemption in the Company's
name and at its expense.
Section 3.04. Effect of Notice of Redemption.
Once notice of redemption is mailed, Securities called for redemption become due and payable
on the redemption date at the redemption price. Upon surrender to the Paying Agent, such Securities
shall be paid at the redemption price stated in the notice, plus accrued interest to the redemption
date. Failure to give notice or any defect in the notice to any Holder shall not affect the validity of
the notice to any other Holder.
Section 3.05. Deposit of Redemption Price.
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On or before the redemption date, the Company shall deposit with the Paying Agent (or, if the
Company or any Affiliate is the Paying Agent, shall segregate and hold in trust) money sufficient to
pay the redemption price of, and accrued interest on, all Securities to be redeemed on that date other
than Securities or portions of Securities called for redemption which have been delivered by the
Company to the Registrar for cancellation. The Paying Agent shall return to the Company any
money not required for that purpose because of conversion of Securities.
Unless the Company shall default in the payment of Securities (and accrued interest) called for
redemption, interest on such Securities shall cease to accrue after the redemption date. Securities
called for redemption shall cease to be convertible after the close of business on the Business Day
immediately preceding the redemption date (unless the redemption date is also a record date for an
interest payment, in which event they may be converted through the redemption date), unless the
Company shall default in the payment of such Securities on the redemption date, in which event the
Securities shall remain convertible until paid (together with accrued interest).
Section 3.06. Securities Redeemed in Part.
Upon surrender of a Security that is redeemed in part, the Company shall deliver to the Holder
(at the Company's expense) a new Security equal in Principal amount to the unredeemed portion of
the Security surrendered.
ARTICLE 4
COVENANTS
Section 4.01. Payment of Securities.
The Company shall pay the Principal of and interest on the Securities on the dates and in the
manner provided in the Securities and this Indenture. Principal and interest shall be considered paid
on the date due if the Paying Agent holds in accordance with this Indenture on that date money sufficient to pay all Principal and interest then due and the Paying Agent is not prohibited from paying
such money to the Holders on such date pursuant to the terms of this Indenture.
The Company shall pay interest on overdue Principal at the rate borne by the Securities; it shall
pay interest on overdue Defaulted Interest at the same rate to the extent lawful.
Section 4.02. SEC Reports.
The Company shall file with the Trustee within 15 days after it files them with the SEC copies
of the annual reports and of the information, documents and other reports which the Company is
required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. The Company
will cause any quarterly and annual reports which it makes available to its stockholders to be mailed
to the Holders. The Company will also comply with the other provisions of TIA Section 314(a). Delivery of such reports, information and documents to the Trustee is for informational purposes only
and the Trustee's receipt of such shall not constitute notice or constructive notice of any information
contained therein or determinable from information contained therein, including the Company's
compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates).
Section 4.03. Compliance Certificate.
The Company shall deliver to the Trustee, within [105] days after the end of each fiscal year of
the Company, a brief certificate signed by the principal executive officer, principal financial officer
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or principal accounting officer of the Company, as to the signer's knowledge of the Company's
compliance with all conditions and covenants contained in this Indenture (determined without regard to any period of grace or requirement of notice provided herein).
Section 4.04. Notice of Certain Events.
The Company shall give prompt written notice to the Trustee and any Paying Agent of (i) any
Proceeding, (ii) any Default or Event of Default, (iii) any cure or waiver of any Default or Event of
Default, (iv) any Senior Debt Payment Default or Senior Debt Default Notice, and (v) if and when
the Securities are listed on any stock exchange.
ARTICLE 5
SUCCESSORS
Section 5.01. When Company May Merge, etc.
The Company shall not consolidate or merge with or into, or transfer all or substantially all of
its assets to, any Person unless:
(1) either the Company shall be the resulting or surviving entity or such Person is a
corporation organized and existing under the laws of the United States, a State thereof
or the District of Columbia;
(2) if the Company is not the resulting or surviving entity, such Person assumes by
supplemental indenture all the obligations of the Company under the Securities and this
Indenture, except that it need not assume the obligations of the Company as to conversion of Securities if pursuant to Section 10.17 the Company or another Person enters
into a supplemental indenture obligating it to deliver securities, cash or other assets
upon conversion of Securities; and
(3) immediately before and immediately after the transaction no Default exists.
The Company shall deliver to the Trustee prior to the proposed transaction an Officers' Certificate and an Opinion of Counsel, each of which shall state that such consolidation, merger or transfer
and such supplemental indenture comply with this Article 5 and that all conditions precedent herein
provided for relating to such transaction have been complied with.
Section 5.02. Successor Corporation Substituted.
Upon any consolidation or merger, or any transfer of all or substantially all of the assets of the
Company in accordance with Section 5.01, the successor corporation formed by such consolidation
or into which the Company is merged or to which such transfer is made shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under this Indenture and
the Securities with the same effect as if such successor corporation had been named as the Company
herein and in the Securities. Thereafter the obligations of the Company under the Securities and Indenture shall terminate except for (i) obligations the Company may have under a supplemental indenture pursuant to Section 10.17 and (ii) in the case of a transfer, the obligation to pay the Principal of and interest on the Securities.
ARTICLE 6
DEFAULTS AND REMEDIES
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Section 6.01. Events of Default.
An "Event of Default" occurs if:
(1) the Company fails to pay interest on any Security when the same becomes due
and payable and such failure continues for a period of [30] days;
(2) the Company fails to pay the Principal of any Security when the same becomes
due and payable at maturity, upon redemption or otherwise;
(3) the Company fails to comply with any of its other agreements in the Securities
or this Indenture and such failure continues for the period and after the notice specified
below;
(4) the Company pursuant to or within the meaning of any Bankruptcy Law:
(A) commences a voluntary case,
(B) consents to the entry of an order for relief against it in an involuntary case,
(C) consents to the appointment of a Custodian of it or for all or substantially all of its property, or
(D) makes a general assignment for the benefit of its creditors;
or
(5) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that:
(A) is for relief against the Company in an involuntary case,
(B) appoints a Custodian of the Company or for all or substantially all
of its property, or
(C) orders the liquidation of the Company, and the order or decree remains unstayed and in effect for 60 days.
The foregoing will constitute Events of Default whatever the reason for any such Event of Default, whether it is voluntary or involuntary, a consequence of the application of Article 11, or is
effected by operation of law or pursuant to any judgment, decree or order of any court or any order,
rule or regulation of any administrative or governmental body.
The term "Bankruptcy Law" means title 11 of the U.S. Code or any similar Federal or state law
for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator or
similar official under any Bankruptcy Law.
A Default under clause (3) is not an Event of Default until the Trustee or the Holders of at least
[25]% in Principal amount of the Securities notify the Company and the Trustee of the Default and
the Company does not cure the Default, or it is not waived, within [60] days after receipt of the notice. The notice must specify the Default, demand that it be remedied to the extent consistent with
law, and state that the notice is a "Notice of Default."
Section 6.02. Acceleration.
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If an Event of Default occurs and is continuing, the Trustee by notice to the Company, or the
Holders of at least 25% in Principal amount of the Securities by notice to the Company and the
Trustee, may declare the Principal of and accrued and unpaid interest on all the Securities to be due
and payable. Upon such declaration the Principal and interest shall be due and payable immediately.
The Holders of a majority in Principal amount of the Securities by notice to the Company and
the Trustee may rescind an acceleration and its consequences if the rescission would not conflict
with any judgment or decree and if all existing Events of Default have been cured or waived except
nonpayment of Principal or interest that has become due solely because of the acceleration.
Section 6.03. Other Remedies.
If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to
collect the payment of Principal or interest on the Securities or to enforce the performance of any
provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any of the Securities or does
not produce any of them in the proceeding. A delay or omission by the Trustee or any Securityholder in exercising any right or remedy accruing upon an Event of Default shall not impair the
right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are
cumulative to the extent permitted by law.
Section 6.04. Waiver of Past Defaults.
The Holders of a majority in Principal amount of the Securities by notice to the Trustee may
waive an existing Default and its consequences except:
(1) a Default in the payment of the Principal of or interest on any Security;
(2) a Default with respect to a provision that under Section 9.02 cannot be amended
without the consent of each Securityholder affected; or
(3) a Default under Article 10.
Section 6.05. Control by Majority.
The Holders of a majority in Principal amount of the Securities may direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or exercising any trust
or power conferred on the Trustee. However, the Trustee may refuse to follow any direction that
conflicts with law or this Indenture, is unduly prejudicial to the rights of other Securityholders, or
would involve the Trustee in personal liability or expense for which the Trustee has not received a
satisfactory indemnity.
Section 6.06. Limitation on Suits.
A Securityholder may pursue a remedy with respect to this Indenture or the Securities only if:
(1) the Holder gives to the Trustee notice of a continuing Event of Default;
(2) the Holders of at least 25% in Principal amount of the Securities make a request
to the Trustee to pursue the remedy;
(3) the Trustee either (i) gives to such Holders notice it will not comply with the
request, or (ii) does not comply with the request within [15 or 30] days after receipt of
the request; and
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(4) the Holders of a majority in Principal amount of the Securities do not give the
Trustee a direction inconsistent with the request prior to the earlier of the date, if ever,
on which the Trustee delivers a notice under Section 6.06(3)(i) or the expiration of the
period described in Section 6.06(3)(ii).
A Securityholder may not use this Indenture to prejudice the rights of another Securityholder or
to obtain a preference or priority over another Securityholder.
Section 6.07. Rights of Holders To Receive Payment.
Notwithstanding any other provision of this Indenture, the right of any Holder of a Security to
receive payment of Principal and interest on the Security, on or after the respective due dates expressed in the Security, or to bring suit for the enforcement of any such payment on or after such
respective dates, shall not be impaired or affected without the consent of the Holder.
Notwithstanding any other provision of this Indenture, the right of any Holder of a Security to
bring suit for the enforcement of the right to convert the Security shall not be impaired or affected
without the consent of the Holder.
Nothing in this Indenture limits or defers the right or ability of Holders to petition for commencement of a case under applicable Bankruptcy Law to the extent consistent with such Bankruptcy Law.
Section 6.08. Priorities.
After an Event of Default any money or other property distributable in respect of the Company's
obligations under this Indenture shall be paid in the following order:
First: to the Trustee (including any predecessor Trustee) for amounts due under Section 7.07;
Second: to holders of Senior Debt to the extent required by Article 11;
Third: to Securityholders for amounts due and unpaid on the Securities for Principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on
the Securities for Principal and interest, respectively; and
Fourth: to the Company.
The Trustee may fix a record date and payment date for any payment to Securityholders.
Section 6.09. Undertaking for Costs.
In any suit for the enforcement of any right or remedy under this Indenture or in any suit against
the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the
filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in
its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party
litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by
the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder pursuant to
Section 6.07 or a suit by Holders of more than 10% in Principal amount of the Securities.
Section 6.10. Proof of Claim.
In the event of any Proceeding, the Trustee may (and, if applicable, the trustee for or holders of
Senior Debt may) file a claim for the unpaid balance of the Securities in the form required in the
Proceeding and cause the claim to be approved or allowed. Nothing herein contained shall be
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deemed to authorize the Trustee or the holders of Senior Debt to authorize or consent to or accept or
adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment, or
composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee
or the holders of Senior Debt to vote in respect of the claim of any Securityholder in any Proceeding.
Section 6.11. Actions of a Holder.
For the purpose of providing any consent, waiver or instruction to the Company or the Trustee,
a "Holder" or "Securityholder" shall include a Person who provides to the Company or the Trustee,
as the case may be, an affidavit of beneficial ownership of a Security together with a satisfactory
indemnity against any loss, liability or expense to such party to the extent that it acts upon such affidavit of beneficial ownership (including any consent, waiver or instructions given by a Person
providing such affidavit and indemnity).
ARTICLE 7
TRUSTEE
Section 7.01. Duties of Trustee.
(a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the
rights and powers vested in it by this Indenture, and use the same degree of care and skill in their
exercise, as a prudent person would exercise or use under the circumstances in the conduct of its
own affairs.
(b) Except during the continuance of an Event of Default:
(1) The Trustee need perform only those duties that are specifically set forth in this
Indenture and no others.
(2) In the absence of bad faith on its part, the Trustee may conclusively rely, as to
the truth of the statements and the correctness of the opinions expressed therein, upon
certificates or opinions furnished to the Trustee and conforming to the requirements of
this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture.
(c) The Trustee may not be relieved from liability for its own negligent action, its own negligent
failure to act or its own willful misconduct, except that:
(1) This paragraph does not limit the effect of paragraph (b) of this Section.
(2) The Trustee shall not be liable for any error of judgment made in good faith by a
Trust Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts.
(3) The Trustee shall not be liable with respect to any action it takes or omits to take
in good faith in accordance with a direction received by it pursuant to Section 6.05.
(4) The Trustee may refuse to perform any duty or exercise any right or power
which would require it to expend its own funds or risk any liability if it shall reasonably
believe that repayment of such funds or adequate indemnity against such risk is not
reasonably assured to it.
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(d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section.
(e) The Trustee shall not be liable for interest on any money received by it except as the Trustee
may agree with the Company. Money held in trust by the Trustee need not be segregated from other
funds except to the extent required by law.
Section 7.02. Rights of Trustee.
(a) The Trustee may rely on any document believed by it to be genuine and to have been signed
or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the
document.
(b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an
Opinion of Counsel. The Trustee shall not be liable for any action it takes or omits to take in good
faith in reliance on the Officers' Certificate or an Opinion of Counsel. The Trustee may also consult
with counsel on any matter relating to the Indenture or the Securities and the Trustee shall not be
liable for any action it takes or omits to take in good faith in reliance on the advice of counsel.
(c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care.
(d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it
believes to be authorized or within its rights or powers.
(e) Except in connection with compliance with TIA Section 310 or 311, the Trustee shall only
be charged with knowledge of Trust Officers.
Section 7.03. Individual Rights of Trustee; Disqualification.
The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company or an Affiliate with the same rights it would have if
it were not Trustee. Any Agent may do the same with like rights. However, the Trustee is subject to
TIA Sections 310(b) and 311.
Section 7.04. Trustee's Disclaimer.
The Trustee shall have no responsibility for the validity or adequacy of this Indenture or the
Securities, it shall not be accountable for the Company's use of the proceeds from the Securities and
it shall not be responsible for any statement in the Securities other than its authentication.
Section 7.05. Notice of Defaults.
If a continuing Default is known to the Trustee, the Trustee shall mail to Securityholders a notice of the Default within 90 days after it occurs. Except in the case of a Default in payment on any
Security, the Trustee may withhold the notice if and so long as a committee of its Trust Officers in
good faith determines that withholding the notice is in the interests of Securityholders. [The Trustee
shall mail to Securityholders any notice it receives from Securityholder(s) under Section 6.06, and
of any notice the Trustee provides pursuant to Section 6.06(3)(i).]
Section 7.06. Reports by Trustee to Holders.
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If required pursuant to TIA Section 313(a), within 60 days after the reporting date stated in Section 12.09, the Trustee shall mail to Securityholders a brief report dated as of such reporting date
that complies with TIA Section 313(a). The Trustee also shall comply with TIA Section 313(b)(2).
A copy of each report at the time of its mailing to Securityholders shall be filed with the SEC
and each stock exchange on which the Securities are listed.
Section 7.07. Compensation and Indemnity.
The Company shall pay to the Trustee from time to time reasonable compensation for its services, including for any Agent capacity in which it acts. The Trustee's compensation shall not be
limited by any law on compensation of a trustee of an express trust. The Company shall reimburse
the Trustee upon request for all reasonable out-of-pocket expenses incurred by it. Such expenses
shall include the reasonable compensation and out-of-pocket expenses of the Trustee's agents and
counsel.
The Company shall indemnify the Trustee against any loss, liability or expense incurred by it
including in any Agent capacity in which it acts. The Trustee shall notify the Company promptly of
any claim for which it may seek indemnity. The Company shall defend the claim and the Trustee
shall cooperate in the defense. The Trustee may have separate counsel and the Company shall pay
the reasonable fees and expenses of such counsel. The Company need not pay for any settlement
made without its consent, which consent shall not unreasonably be withheld.
The Company need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee through gross negligence, willful misconduct or bad faith.
To secure the Company's payment obligations in this Section, the Trustee shall have a lien prior
to the Securities on all money or property held or collected by the Trustee, except that held in trust
to pay Principal and interest on particular Securities.
Without prejudice to its rights hereunder, when the Trustee incurs expenses or renders services
after an Event of Default specified in Section 6.01(4) or (5) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy
Law.
Section 7.08. Replacement of Trustee.
A resignation or removal of the Trustee and appointment of a successor Trustee shall become
effective only upon the successor Trustee's acceptance of appointment as provided in this Section.
The Trustee may resign by so notifying the Company. The Holders of a majority in Principal
amount of the Securities may remove the Trustee by so notifying the Trustee and the Company. The
Company may remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged a bankrupt or an insolvent;
(3) a receiver or public officer takes charge of the Trustee or its property; or
(4) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason,
the Company shall promptly appoint a successor Trustee.
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If a successor Trustee is not appointed and does not take office within 30 days after the retiring
Trustee resigns, the retiring Trustee may appoint a successor Trustee at any time prior to the date on
which a successor Trustee takes office. If a successor Trustee does not take office within [45] days
after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or, subject to Section 6.09, any Securityholder may petition any court of competent jurisdiction for the appointment
of a successor Trustee.
If the Trustee fails to comply with Section 7.10, any Securityholder may petition any court of
competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee.
Within one year after a successor Trustee appointed by the Company or a court pursuant to this
Section 7.08 takes office, the Holders of a majority in Principal amount of the Securities may appoint a successor Trustee to replace such successor Trustee.
A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee
and to the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under
this Indenture. The successor Trustee shall mail a notice of its succession to Securityholders. The
retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee,
subject to the lien provided for in Section 7.07.
Section 7.09. Successor Trustee by Merger, etc.
If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its
corporate trust business to, another corporation, the successor corporation without any further act
shall be the successor Trustee, if such successor corporation is eligible and qualified under Section
7.10.
Section 7.10. Eligibility.
This Indenture shall always have a Trustee who satisfies the requirements of TIA Sections
310(a)(1) and 310(a)(2). The Trustee shall always have a combined capital and surplus as stated in
Section 12.09.
Section 7.11. Preferential Collection of Claims Against Company.
Upon and so long as the Indenture is qualified under the TIA, the Trustee is subject to TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed is subject to TIA Section 311(a) to the extent indicated.
ARTICLE 8
SATISFACTION AND DISCHARGE
Section 8.01. Satisfaction and Discharge of Indenture.
This Indenture shall cease to be of further effect (except as to any surviving rights of conversion, registration of transfer or exchange of Securities expressly provided for herein), and the Trustee, on demand of and at expense of the Company, shall execute proper instruments acknowledging
satisfaction and discharge of this Indenture, when
(1) either
(A) all Securities theretofore authenticated and delivered (other than (i)
Securities which have been destroyed, lost or stolen and which have been
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replaced or paid as provided in Section 2.07 and (ii) Securities for whose
payment money has theretofore been deposited in trust or segregated and
held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 8.04) have been delivered
to the Trustee for cancellation; or
(B) all such Securities not theretofore delivered to the Trustee for cancellation
(i) have become due and payable, or
(ii) will become due and payable at their stated maturity within one
year, or
(iii) are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Company, and the Company in the case of (i), (ii), and (iii) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount of
money or U.S. Government Obligations sufficient to pay and discharge the
entire indebtedness on such Securities not theretofore delivered to the
Trustee for cancellation, for Principal and interest to the date of such deposit (in the case of Securities which have become due and payable) or to
the stated maturity or redemption date, as the case may be;
(2) the Company has paid or caused to be paid all other sums payable hereunder by
the Company; and
(3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to
the satisfaction and discharge of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company
to the Holders under Section 4.01, to the Trustee under Section 7.07, and, if money or U.S. Government Obligations shall have been deposited with the Trustee pursuant to subclause (B) of Clause
(1) of this Section, the obligations of the Trustee under Section 8.02 shall survive.
Section 8.02. Application of Trust Funds.
The Trustee or Paying Agent shall hold in trust, for the benefit of the Holders, all money and
U.S. Government Obligations deposited with it (or into which such money and U.S. Government
Obligations are reinvested) pursuant to Section 8.01. It shall apply such deposited money and money from U.S. Government Obligations in accordance with this Indenture to the payment of the Principal and interest on the Securities. Money and U.S. Government Obligations so held in trust (i) are
not subject to Article 11 and (ii) are subject to the Trustee's rights under Section 7.07.
Section 8.03. Reinstatement.
If the Trustee or Paying Agent is unable to apply any money or U.S. Obligations in accordance
with Section 8.01 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's obligations under
this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred
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pursuant to this Article 8, until such time as the Trustee or Paying Agent is permitted to apply all
such money or U.S. Government Obligations in accordance with Section 8.01; provided, however,
that if the Company makes any payment of Principal of or interest on any Security following the
reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of
such Securities to receive such payment from the money or U.S. Government Obligations held by
the Trustee or Paying Agent after payment in full to the Holders.
Section 8.04. Repayment to Company.
The Trustee and Paying Agent shall promptly turn over to the Company upon request any excess money or U.S. Government Obligations held by them at any time. All money or U.S. Government Obligations deposited with the Trustee pursuant to Section 8.01 (and held by it or a Paying
Agent) for the payment of Securities subsequently converted shall be returned to the Company upon
request.
The Trustee and the Paying Agent shall pay to the Company upon request any money held by
them for payment of Principal or interest that remains unclaimed for two years after the right to
such money has matured. After payment to the Company, Securityholders entitled to the money
shall look to the Company for payment as unsecured general creditors unless an abandoned property
law designates another Person.
ARTICLE 9
AMENDMENTS
Section 9.01. Without Consent of Holders.
The Company and the Trustee may amend this Indenture or the Securities without the consent of
any Securityholder:
(1) to cure any ambiguity, defect or inconsistency;
(2) to comply with Section 5.01, 10.06 or 10.17; or
(3) to make any change that does not adversely affect the rights of any Securityholder.
Section 9.02. With Consent of Holders.
The Company and the Trustee may amend this Indenture or the Securities with the written consent of the Holders of at least a majority in Principal amount of the Securities. However, without the
consent of each Securityholder affected, an amendment under this Section may not:
(1) reduce the amount of Securities whose Holders must consent to an amendment;
(2) reduce the interest on or change the time for payment of interest on any Security;
(3) reduce the Principal of or change the fixed maturity of any Security;
(4) reduce the premium payable upon the redemption of any Security [or change the
time at which any Security may or shall be redeemed];
(5) make any Security payable in money other than that stated in the Security;
(6) make any change in Section 6.04, 6.07 or 9.02 (second sentence);
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(7) make any change that adversely affects the right to convert any Security; or
(8) make any change in Article 11 that adversely affects the rights of any Securityholder.
It shall not be necessary for the consent of the Holders under this Section to approve the particular
form of any proposed amendment, but it shall be sufficient if such consent approves the substance
thereof.
An amendment under this Section may not make any change that adversely affects the rights
under Article 11 of any Senior Debt unless it consents to the change.
Section 9.03. Compliance with Trust Indenture Act and Section 12.03.
Every amendment to this Indenture or the Securities shall comply with the TIA as then in effect,
so long as the Indenture and Securities are subject to the TIA. The Trustee is entitled to, and the
Company shall provide an Opinion of Counsel and Officers' Certificate that the Trustee's execution
of any amendment or supplemental indenture is permitted under this Article 9.
Section 9.04. Revocation and Effect of Consents and Waivers.
A consent to an amendment or a waiver by a Holder of a Security shall bind the Holder and
every subsequent Holder of that Security or portion of the Security that evidences the same debt as
the consenting Holder's Security, even if notation of the consent or waiver is not made on the Security. However, any such Holder or subsequent Holder may revoke the consent or waiver as to such
Holder's Security or portion of the Security if the Trustee receives the notice of revocation before
the date the amendment or waiver becomes effective. After an amendment or waiver becomes effective, it shall bind every Securityholder.
The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Securityholders entitled to give their consent or take any other action described above or required or permitted to be taken pursuant to this Indenture. If a record date is fixed, then
not-withstanding the immediately preceding paragraph, those Persons who were Securityholders at
such record date (or their duly designated proxies), and only those Persons, shall be entitled to give
such consent or to revoke any consent previously given or take any such action, whether or not such
Persons continue to be Holders after such record date. No such consent shall be valid or effective
for more than 120 days after such record date.
Section 9.05. Notice of Amendment; Notation on or Exchange of Securities.
After any amendment under this Article becomes effective, the Company shall mail to Securityholders a notice briefly describing such amendment. The failure to give such notice to all Securityholders, or any defect therein, shall not impair or affect the validity of an amendment under this
Article.
The Company or the Trustee may place an appropriate notation about an amendment or waiver
on any Security thereafter authenticated. The Company may issue in exchange for affected Securities new Securities that reflect the amendment or waiver.
Section 9.06. Trustee Protected.
The Trustee need not sign any supplemental indenture that adversely affects its rights.
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ARTICLE 10
CONVERSION
Section 10.01. Conversion Right and Conversion Price.
A Holder of a Security may convert it into Common Stock at any time during the period stated
in paragraph 9 of the Securities. The number of shares issuable upon conversion of a Security is determined as follows: Divide the Principal amount to be converted by the conversion price in effect
on the conversion date. Round the result to the nearest 1/100th of a share.
The initial conversion price is stated in paragraph 9 of the Securities. The conversion price is
subject to adjustment in accordance with this Article.
A Holder may convert a portion of a Security if the portion is $ 1000 or a whole multiple of $
1000. Provisions of this Indenture that apply to conversion of all of a Security also apply to conversion of a portion of it.
"Common Stock" means the Common Stock of the Company as such Common Stock exists on
the date of this Indenture.
Section 10.02. Conversion Procedure.
To convert a Security, a Holder must (1) complete and sign the conversion notice on the back of
the Security, (2) surrender the Security to a Conversion Agent, (3) furnish appropriate endorsements
and transfer documents if required by the Trustee or Conversion Agent, (4) pay any transfer or similar tax if required, and (5) provide funds, if applicable, required pursuant to the next paragraph. The
date on which the Holder satisfies all such requirements is the conversion date. As soon as practicable, the Company shall deliver, or shall cause the Conversion Agent to deliver, upon the order of the
Holder, a certificate for the number of full shares of Common Stock issuable upon the conversion
and a check for any fractional share. The Person in whose name the certificate is registered shall be
treated as a stockholder of record on and after the conversion date.
Any Security surrendered for conversion during the period from the close of business on the
record date for any interest payment date to the close of business on the Business Day next preceding the following interest payment date shall be accompanied by payment, in New York Clearing
House funds or other funds acceptable to the Company, of an amount equal to the interest otherwise
payable on such interest payment date on the Principal amount being converted[; provided, however, that no such payment need be made if there shall exist at the conversion date a Default in the
payment of interest on the Securities]. Notwithstanding Section 2.13, if a Holder has paid an
amount equal to the interest otherwise payable in accordance with the preceding sentence and the
Company thereafter defaults in the payment of interest on such interest payment date, such Defaulted Interest, together with interest thereon shall be paid to the Person who made such required
payment no later than the payment date set in accordance with Section 2.13. Except as provided
above in this Section 10.02, no payment or other adjustment shall be made for interest accrued on
any Security converted or for dividends on any securities issued on conversion of the Security.
[Except as provided in the immediately preceding paragraph, the Company's delivery of the
fixed number of shares of Common Stock into which a Security is convertible will be deemed to
satisfy the Company's obligation to pay the Principal amount of the Security and all accrued interest
(and original issue discount) that has not previously been (or is not simultaneously being) paid. The
Common Stock is treated as issued first in payment of accrued interest (and original issue discount)
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and then in payment of Principal. Thus, accrued interest (and original issue discount) are treated as
paid rather than cancelled.]
If a Holder converts more than one Security at the same time, the number of full shares issuable
and payment pursuant to Section 10.03 upon the conversion shall be based on the total Principal
amount of the Securities converted.
Upon surrender of a Security that is converted in part, the Trustee shall authenticate for the
Holder a new Security equal in Principal amount to the unconverted Principal amount of the Security surrendered.
If the last day on which a Security may be converted is a Legal Holiday in a place where the
Conversion Agent is located, the Security may be surrendered to the Company or the Conversion
Agent on the next succeeding Business Day.
Section 10.03. Fractional Shares.
The Company shall not issue a fractional share of Common Stock upon conversion of a Security. Instead, the Company shall deliver a check for an amount equal to the current market value of
the fractional share. The current market value of a fraction of a share shall be determined as follows: Multiply the current market price of a full share by the fraction. Round the result to the nearest cent.
The current market price of a share of Common Stock for purposes of this Section 10.03 shall
be the Quoted Price of the Common Stock on the last trading day prior to the conversion date. In the
absence of such a quotation, the Board shall determine the current market price in good faith on the
basis of such information as it considers reasonably appropriate.
Section 10.04. Taxes on Conversion.
If a Holder of a Security converts it, the Company shall pay any documentary, stamp or similar
issue or transfer tax due on the issue of shares of Common Stock upon the conversion. However, the
Holder shall pay any withholding tax or any such tax that is due because the shares are issued in a
name other than the Holder's name.
Section 10.05. Company to Reserve Common Stock.
The Company shall at all times reserve out of its authorized but unissued Common Stock or its
Common Stock held in treasury enough shares of Common Stock to permit the conversion of the
Securities.
All shares of Common Stock issued upon conversion of the Securities shall be fully paid and
non-assessable and free of any preemptive or other similar rights.
The Company shall endeavor to comply with all securities laws regulating the offer and delivery
of shares of Common Stock upon conversion of Securities and shall endeavor to list such shares on
each national securities exchange on which the Common Stock is listed.
Section 10.06. Adjustment for Change in Capital Stock.
If the Company:
(1) pays a dividend or makes a distribution on its Common Stock in shares of its
Common Stock;
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(2) subdivides its outstanding shares of Common Stock into a greater number of
shares;
(3) combines its outstanding shares of Common Stock into a smaller number of
shares;
(4) makes a distribution on its Common Stock in shares of its capital stock other
than Common Stock; or
(5) issues by reclassification of its Common Stock any shares of its capital stock,
then the conversion privilege and the conversion price in effect immediately prior to
such action shall be proportionately adjusted so that the Holder of a Security thereafter
converted may receive the aggregate number and kind of shares of capital stock of the
Company that the Holder would have owned immediately following such action if the
Security had converted immediately prior to such action.
Each adjustment contemplated by this Section 10.06 shall become effective immediately after
the record date in the case of a dividend or distribution and immediately after the effective date in
the case of a subdivision, combination or reclassification.
If after an adjustment a Holder of a Security upon conversion of it may receive shares of two or
more classes of capital stock of the Company, the Board, acting in good faith, shall determine the
allocation of the adjusted conversion price among the classes of capital stock. After such allocation,
the conversion privilege and the conversion price of each class of capital stock shall thereafter be
subject to adjustment on terms comparable to those applicable to Common Stock in this Article.
The term "Common Stock" shall thereafter apply to each class of capital stock and the Company
shall enter into such supplemental Indenture, if any, as may be necessary to reflect such conversion
privilege and conversion price.
The adjustment contemplated by this Section 10.06 shall be made successively whenever any of
the events listed above shall occur.
Section 10.07. Adjustment for Rights Issue.
If the Company distributes any rights, options or warrants to all holders of its Common Stock
entitling them for a period expiring within 60 days after the record date mentioned below to subscribe for or purchase shares of Common Stock at a price per share less than the current market
price per share on that record date, the conversion price shall be adjusted in accordance with the
following formula:
C' = C x ((O + N x P/M)/(O + N))
where:
C' = the adjusted conversion price.
C = the current conversion price.
O = the number of shares of Common Stock outstanding on the record date.
N = the number of additional shares of Common Stock subject to such rights, options
or warrants.
P = the offering price per share of the additional shares.
M = the current market price per share of Common Stock on the record date.
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The adjustment contemplated by this Section 10.07 shall be made successively whenever any
such rights, options or warrants are issued and shall become effective immediately after the record
date for the determination of stockholders entitled to receive the rights, options or warrants. If at the
end of the period during which such rights, options or warrants are exercisable, not all rights, options or warrants shall have been exercised, the conversion price shall immediately be readjusted to
what it would have been if "N" in the above formula had been the number of shares actually issued.
Section 10.08. Adjustment for Other Distributions.
If the Company distributes to all holders of its Common Stock any of its assets (including, but
not limited to, cash), debt securities or other securities or any rights, options or warrants to purchase
assets, debt securities or other securities of the Company, the conversion price shall be adjusted in
accordance with the following formula:
C' = C x (M - F)/M
where:
C' = the adjusted conversion price.
C = the current conversion price.
M = the current market price per share of Common Stock on the record date mentioned
below.
F = the fair market value on the record date of the assets, securities, rights, options or
warrants applicable to one share of Common Stock. Fair market value shall be determined in good faith by the Board, provided that the Company shall obtain an appraisal
or other valuation opinion in support of the Board's determination from an investment
bank or accounting firm of recognized national standing if the aggregate fair market
value exceeds $ [X] million.
The adjustment contemplated by this Section 10.08 shall be made successively whenever any
such distribution is made and shall become effective immediately after the record date for the determination of stockholders entitled to receive the distribution.
This Section 10.08 does not apply to cash dividends or cash distributions paid in any fiscal year
out of consolidated net income of the Company for the current fiscal year or the prior fiscal year, as
shown on the books of the Company prepared in accordance with generally accepted accounting
principles. Also, this Section does not apply to rights, options or warrants referred to in Section
10.07.
Section 10.09. Adjustment for Common Stock Issue.
If the Company issues shares of Common Stock for a consideration per share less than the current market price per share on the date the Company fixes the offering price of such additional
shares, the conversion price shall be adjusted in accordance with the following formula:
C' = C x (O + P/M)/A
where:
C' = the adjusted conversion price.
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C = the current conversion price.
O = the number of shares of Common Stock outstanding on the record date.
P = the aggregate consideration received for the issuance of such additional shares.
M = the current market price per share of Common Stock on the record date.
A = the number of shares of Common Stock outstanding immediately after the issuance
of such additional shares.
The adjustment contemplated by this Section 10.09 shall be made successively whenever any
such issuance is made and shall become effective immediately after the record date for the determination of stockholders entitled to receive such additional shares of Common Stock.
This Section 10.09 shall not apply to:
(1) any of the transactions described in Sections 10.07 and 10.08;
(2) the conversion of the Securities or the conversion or exchange of other securities convertible into or exchangeable for Common Stock;
(3) the issuance of Common Stock upon the exercise of rights, options or warrants
issued to the holders of Common Stock;
(4) the issuance of Common Stock to the Company's employees under bona fide
employee benefit plans adopted by the Board, and approved by the holders of Common
Stock when required by law, but only to the extent that the aggregate number of shares
excluded by this clause (3) and issued after the date of this Indenture shall not exceed
5% of the Common Stock outstanding as of the date of this Indenture;
(5) the issuance of Common Stock to stockholders of any Person that merges into
the Company in proportion to their stock holdings of such Person immediately prior to
such merger, upon such merger;
(6) the issuance of Common Stock in a bona fide public offering pursuant to a firm
commitment underwriting; or
(7) the issuance of Common Stock in a bona fide private placement through a
placement agent that is a member firm of the National Association of Securities Dealers, Inc. (except to the extent that any discount from the current market price shall exceed 20% of the then current market price).
Section 10.10. Adjustment for Convertible Securities Issue.
If the Company issues any securities, rights, options or warrants convertible into or exchangeable for Common Stock (other than the Securities or securities issued in transactions described in
Sections 10.07, 10.08 and 10.09) for a consideration per share of Common Stock initially deliverable upon conversion or exchange of such securities less than the current market price per share on
the date of issuance of such securities, the conversion price shall be adjusted in accordance with the
following formula:
C' = C x (O + P/M)/(O + D)
where:
C' = the adjusted conversion price.
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C = the current conversion price.
O = the number of shares of Common Stock outstanding on the record date.
P = the aggregate consideration received for the issuance of such securities.
M = the current market price per share of Common Stock on the record date.
D = the maximum number of shares of Common Stock deliverable upon conversion or
exchange of such securities at the initial conversion or exchange rate.
The adjustment contemplated by this Section 10.10 shall be made successively whenever any
such issuance is made and shall become effective immediately after the record date for the determination of stockholders entitled to receive such securities, rights, options or warrants. If at the end of
the period during which such securities, rights, options or warrants are convertible into or exchangeable for Common Stock, not all such securities, rights, options or warrants shall have been so
converted or exchanged, the conversion price shall immediately be readjusted to what it would have
been if "D" in the above formula had been the number of shares actually issued upon conversion or
exchange.
This Section 10.10 shall not apply to:
(1) the issuance of convertible securities to stockholders of any Person that merges
into the Company, or with a subsidiary of the Company, in proportion to their stock
holdings of such Person immediately prior to such merger, upon such merger;
(2) the issuance of convertible securities in a bona fide public offering pursuant to a
firm commitment underwriting; or
(3) the issuance of convertible securities in a bona fide private placement through a
placement agent that is a member firm of the National Association of Securities Dealers, Inc. (except to the extent that any discount from the current market price shall exceed 20% of the then current market price).
Section 10.11. Current Market Price.
In Sections 10.07, 10.08, 10.09 and 10.10, the current market price per share of Common Stock
on any date shall be the average of the Quoted Prices of the Common Stock for the five consecutive
trading days selected by the Company commencing not more than 20 trading days before, and ending not later than, the earlier of (i) the date of such determination and (ii) the day before the "ex"
date with respect to the issuance or distribution requiring such computation. The "Quoted Price" of
a security shall be the last reported sales price of such security as reported by the New York Stock
Exchange or, if the security is listed on another securities exchange, the last reported sales price of
such security on such exchange which shall be for consolidated trading if applicable to such exchange, or as reported by the Nasdaq National Market System, or, if the security is neither so reported nor listed, the last reported bid price of the security. In the absence of one or more such quotations, the current market price shall be determined in good faith by the Board on the basis of such
quotations as it considers reasonably appropriate. For the purposes of this Section 10.11, the term
"ex" date, when used with respect to any issuance or distribution, shall mean the first date on which
the security trades on such exchange or in such market without the right to receive such issuance or
distribution.
Section 10.12. When De Minimis Adjustment May Be Deferred.
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No adjustment in the conversion price need be made unless the adjustment would require an increase or decrease of at least 1% in the conversion price. All calculations under this Article shall be
made to the nearest cent or to the nearest 1/100th of a share, as the case may be. Any adjustments
that are not made shall be carried forward and taken into account in any subsequent adjustment.
Section 10.13. When No Adjustment Required.
No adjustment need be made for a transaction referred to in Sections 10.06, 10.07, 10.08, 10.09
or 10.10 if Securityholders are permitted to participate in the transaction on a basis and with notice
that the Board determines to be fair and appropriate in light of the basis and notice on which holders
of Common Stock are permitted to participate in the transaction.
No adjustments need be made for rights to purchase Common Stock pursuant to a Company
plan for reinvestment of dividends or interest.
No adjustment need be made for a change in the par value or no par value of the Common
Stock.
To the extent the Securities become convertible into cash, no adjustment need be made thereafter as to the cash. Interest will not accrue on the cash.
Section 10.14. Notice of Adjustment.
Whenever the conversion price is adjusted, the Company shall promptly mail to Securityholders
a notice of the adjustment. The Company shall file with the Trustee a certificate from the Company's independent public accountants briefly stating the facts requiring the adjustment and the manner of computing it. The certificate shall be conclusive evidence that the adjustment is correct, absent mathematical error.
Section 10.15. Voluntary Reduction.
The Company may from time to time reduce the conversion price by any amount for any period
of time if the period is at least 20 days and if the reduction is irrevocable during the period; provided, however, that in no event may the conversion price be less than the par value of a share of
Common Stock.
Whenever the conversion price is reduced, the Company shall mail to Securityholders a notice
of the reduction. The Company shall mail the notice at least 15 days before the date the reduced
conversion price takes effect. The notice shall state the reduced conversion price and the period it
will be in effect.
A reduction of the conversion price does not change or adjust the conversion price otherwise in
effect for purposes of Sections 10.06 through 10.10.
Section 10.16. Notice of Certain Transactions.
If:
(1) the Company takes any action that would require an adjustment in the conversion price pursuant to Section 10.06, 10.07, 10.08, 10.09 or 10.10 and if the Company
does not permit Securityholders to participate pursuant to Section 10.13;
(2) the Company takes any action that would require a supplemental indenture pursuant to Section 10.17; or
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(3) there is a liquidation or dissolution of the Company, the Company shall mail to
Securityholders a notice stating the proposed record date for a dividend or distribution
or the proposed effective date of a subdivision, combination, reclassification, consolidation, merger, transfer, lease, liquidation or dissolution. The Company shall mail the
notice at least 20 days before such date. Failure to mail the notice or any defect in it
shall not affect the validity of the transaction.
Section 10.17. Reorganization of the Company.
If the Company is a party to a transaction subject to Section 5.01 or a merger that reclassifies or
changes its outstanding Common Stock, the Person obligated to deliver securities, cash or other assets upon conversion of Securities shall enter into a supplemental indenture. If the issuer of securities deliverable upon conversion of Securities is an Affiliate of the surviving or transferee corporation, such issuer shall join in the supplemental indenture.
The supplemental indenture shall provide that the Holder of a Security may convert it into the
kind and amount of securities, cash or other assets that such holder would have owned immediately
after the consolidation, merger or transfer if the Security had been converted immediately before the
effective date of the transaction. The supplemental indenture shall provide for adjustments that are
as nearly equivalent as practicable to the adjustments provided for in this Article. The successor
Company shall mail to Securityholders a notice briefly describing the supplemental indenture.
[If this Section 10.17 applies, Section 10.06 does not apply.]
Section 10.18. Company Determination Final.
Any determination that the Company or the Board must make pursuant to Section 10.03, 10.06,
10.07, 10.08, 10.09, 10.10, 10.11 or 10.13 is conclusive, absent mathematical error. Not later than
the date of making any such determination pursuant to Section 10.06, 10.07, 10.08, 10.09, 10.10,
10.11 or 10.13, the Company shall deliver to the Trustee an Officers' Certificate stating the basis
upon which such determination was made and, if pursuant to Section 10.06, 10.07, 10.08, 10.09 or
10.10, the calculations by which adjustments under such Sections were made.
Section 10.19. Trustee's Disclaimer.
The Trustee has no duty to determine when an adjustment under this Article should be made,
how it should be made or what it should be. The Trustee has no duty to determine whether any provisions of a supplemental indenture under Section 10.06 or 10.17 are correct. The Trustee makes no
representation as to the validity or value of any securities or assets issued upon conversion of Securities. The Trustee shall not be responsible for the Company's failure to comply with this Article.
Each Conversion Agent other than the Company shall have the same protection under this Section
as the Trustee.
ARTICLE 11
SUBORDINATION
Section 11.01. Securities Subordinated to Senior Debt.
The rights of Holders to payment of the Principal of and interest on the Securities is subordinated to the rights of holders of Senior Debt, to the extent and in the manner provided in this Article
11.
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Section 11.02. Securities Subordinated in Any Proceeding.
Upon any Distribution in any Proceeding,
(1) any Distribution to which the Holders are entitled shall be paid directly to the
holders of Senior Debt to the extent necessary to make payment in full of all Senior
Debt remaining unpaid after giving effect to all other Distributions to or for the benefit
of the holders of Senior Debt; and
(2) in the event that any Distribution is received by the Trustee before all Senior
Debt is paid in full, such Distribution shall be applied by the Trustee in accordance
with this Article 11.
Section 11.03. No Payment on Securities in Certain Circumstances.
The Company shall not, directly or indirectly (other than in capital stock of the Company) pay
any Principal of or interest on, redeem, defease or repurchase any of the Securities (i) after any
Senior Debt becomes due and payable, unless and until all such Senior Debt shall first be paid in
full or (ii) after a Senior Debt Payment Default, unless and until such Senior Debt Payment Default
has been cured, waived, or otherwise has ceased to exist.
During a Payment Blockage Period, no payment of any Principal of or interest on the Securities
may be made, directly or indirectly, by the Company. Unless the Senior Debt in respect of which
the Senior Debt Default Notice has been given has been declared due and payable in its entirety
within the Payment Blockage Period, at the end of the Payment Blockage Period, the Company
shall pay all sums not paid to the Holders during the Payment Blockage Period and resume all other
payments on the Securities as and when due. Defaulted Interest shall be paid in accordance with
Section 2.13. Any number of Senior Debt Default Notices may be given; provided, however, that as
to any issue of Senior Debt (i) not more than one Senior Debt Default Notice shall be given within a
period of any [366] consecutive days, and (ii) no specific act, omission or condition that gave rise to
a default that existed upon the date of such Senior Debt Default Notice (whether or not such default
applies to the same issue of Senior Debt) shall be made the basis for the commencement of any other Payment Blockage Period.
If any Distribution, payment or deposit to redeem, defease or acquire any of the Securities shall
have been received by the Trustee at a time when such Distribution was prohibited by the provisions of this Section 11.03, then, unless such Distribution is no longer prohibited by this Section
11.03, such Distribution shall be received and applied by the Trustee for the benefit of the holders
of Senior Debt, and shall be paid or delivered by the Trustee to the holders of Senior Debt for application to the payment of all Senior Debt.
Section 11.04. Subrogation.
The Holders shall not have any subrogation or other rights of recourse to any security in respect
of any Senior Debt until such time as all Senior Debt shall have been paid in full. Upon the payment
in full of all Senior Debt, the Holders shall be subrogated to the rights of the holders of Senior Debt
to receive Distributions applicable to Senior Debt until all amounts owing in respect of the Securities shall be so paid. No Distributions to the holders of Senior Debt which otherwise would have
been made to the Holders shall, as between the Company and the Holders, be deemed to be payment
by the Company to or on account of Senior Debt.
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If any Distribution to which the Holders would otherwise have been entitled shall have been applied pursuant to the provisions of this Article to the payment of Senior Debt, then the Holders shall
be entitled to receive from the holders of such Senior Debt any Distributions received by such holders of Senior Debt in excess of the amount sufficient to pay all amounts payable on such Senior
Debt to the extent provided herein.
Section 11.05. Obligations of the Company Unconditional.
This Article defines the relative rights of the Holders and holders of Senior Debt. Nothing in this
Indenture is intended to or shall impair, as between the Company and the Holders, the obligation of
the Company, which is absolute and unconditional, to pay to the Holders the Principal of and interest on the Securities as and when the same shall become due and payable in accordance with their
terms, or is intended to or shall affect the relative rights of the Holders and creditors of the Company, other than the holders of Senior Debt, nor shall anything herein or in the Securities prevent the
Trustee or any Holder from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article 11, of the holders of Senior
Debt in respect of any Distribution received upon the exercise of any such remedy. If the Company
fails because of this Article to pay principal of or interest on a Security on the due date, the failure is
still a Default. Upon any Distribution, the Trustee and the Holders shall be entitled to rely upon any
order or decree made by any court of competent jurisdiction in which the Proceeding is pending, or
a certificate of the liquidating trustee or agent or other Person making any Distribution for the purpose of ascertaining the Persons entitled to participate in such Distribution, the holders of Senior
Debt and other Debt of the Company, the amount thereof or payable thereon, the amount or
amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 11.
Section 11.06. Trustee and Paying Agents Entitled to Assume Payments Not Prohibited in
Absence of Notice.
The Trustee shall not at any time be charged with knowledge of the existence of any facts which
would prohibit the making of any payment to or by the Trustee, unless and until a Trust Officer
shall have received, no later than [] Business Day[s] prior to such payment, written notice thereof
from the Company or from one or more holders of Senior Debt and, prior to the receipt of any such
written notice, the Trustee, shall be entitled in all respects conclusively to presume that no such fact
exists. Unless the Trustee shall have received the notice provided for in the preceding sentence, the
Trustee shall have full power and authority to receive such payment and to apply the same to the
purpose for which it was received, and shall not be affected by any notice to the contrary which may
be received by it on or after such date. The foregoing shall not apply to any Affiliate of the Company acting as Paying Agent.
Section 11.07. Satisfaction and Discharge.
Amounts deposited in trust with the Trustee pursuant to and in accordance with Article 8 and
not prohibited to be deposited under Section 11.03 when deposited shall not be subject to this Article 11.
Section 11.08. Subordination Rights Not Impaired by Acts or Omissions of the Company
or Holders of Senior Debt.
No right of any holder of any Senior Debt established in this Article 11 shall at any time or in
any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any
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act or failure to act, in good faith, by any such holder, or by any failure by the Company to comply
with the terms of this Indenture.
Section 11.09. Right to Hold Senior Debt.
The Trustee is entitled to all of the rights set forth in this Article 11 in respect of any Senior
Debt at any time held by it to the same extent as any other holder of Senior Debt.
Section 11.10. No Fiduciary Duty of Trustee or Securityholders to Holders of Senior Debt.
Neither the Trustee nor the Holders owes any fiduciary duty to the holders of Senior Debt. Neither the Trustee nor the Holders shall be liable to any holder of Senior Debt in the event that the
Trustee, acting in good faith, shall pay over or distribute to the Holders, the Company, or any other
Person, any property to which any holders of Senior Debt are entitled by virtue of this Article or
otherwise. Nothing contained in this Section 11.10 shall affect the obligation of any other such Person to hold such payment for the benefit of, and to pay such payment over to, the holders of Senior
Debt.
Section 11.11. Distribution to Holders of Senior Debt.
Any Distribution otherwise payable to the holders of the Securities made to holders of Senior
Debt pursuant to this Article shall be made to such holders of Senior Debt ratably according to the
respective amount of Senior Debt held by each.
Section 11.12. Trustee's Rights to Compensation, Reimbursement of Expenses and Indemnification.
The Trustee's rights to compensation, reimbursement of expenses and indemnification under
Sections 6.08 and 7.07 are not subordinated.
Section 11.13. Exception for Certain Distributions.
The rights of holders of Senior Debt under this Article do not extend (a) to any Distribution to
the extent applied to the Trustee's rights to compensation, reimbursement of expenses or indemnification or (b) to (i) securities which are subordinated to the securities distributed to the holders of
Senior Debt on terms no less favorable to the holders of Senior Debt than the provisions of this Article, or (ii) Distributions under any plan approved by the court in any Proceeding.
Section 11.14. Certain Definitions.
As used in this Article 11,
"Distribution" in any Proceeding means any payment or distribution of assets or securities of the
Company of any kind or character from any source, whether in cash, securities or other property
made by the Company, custodian, liquidating trustee or agent or any other person whether pursuant
to a plan or otherwise.
"Payment Blockage Period" means the period beginning when a Senior Debt Default Notice is
given to the Company and the Trustee and ending (a) when the default identified in the Senior Debt
Default Notice is cured, waived or otherwise ceases to exist or (b) after [179 or fewer] days,
whichever occurs first.
"Senior Debt Default Notice" means any notice of a default (other than a Senior Debt Payment
Default) that permits the holders of any Senior Debt to declare such Senior Debt due and payable.
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"Senior Debt Payment Default" means a default in the payment of any principal of or interest on
any Senior Debt.
"Trustee" for purposes of this Article 11 includes any Paying Agent.
ARTICLE 12
MISCELLANEOUS
Section 12.01. Notices.
Any notice by one party to the other shall be in writing and sent to the other's address stated in
Section 12.09. The notice is duly given if it is delivered in Person or sent by a national courier service which provides next Business Day delivery or by first-class mail.
A party by notice to the other party may designate additional or different addresses for subsequent notices.
Any notice sent to a Securityholder shall be mailed by first-class letter mailed to its address
shown on the register kept by the Registrar. Failure to mail a notice to a Securityholder or any defect in a notice mailed to a Securityholder shall not affect the sufficiency of the notice mailed to
other Securityholders.
If a notice is delivered or mailed in the manner provided above within the time prescribed, it is
duly given, whether or not the addressee receives it.
If the Company mails a notice to Securityholders, it shall deliver or mail a copy to the Trustee
and each Agent at the same time.
A "notice" includes any communication required by this Indenture.
Section 12.02. Communication by Holders with Other Holders.
Securityholders may communicate pursuant to TIA Section 312(b) with other Securityholders
with respect to their rights under this Indenture or the Securities. The Company, the Trustee, and
Registrar and anyone else shall have the protection of TIA Section 312(c).
Section 12.03. Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Company to the Trustee to take any action under this
Indenture, the Company shall furnish to the Trustee:
(1) an Officers' Certificate stating that, in the opinion of the signers, all conditions
precedent, if any, provided for in this Indenture relating to the proposed action have
been complied with; and
(2) an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with.
Section 12.04. Statements Required in Certificate or Opinion.
Each certificate or opinion with respect to compliance with a condition or covenant provided for
in this Indenture shall include:
(1) a statement that each Person making such certificate or opinion has read such
covenant or condition;
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(2) a brief statement as to the nature and scope of the examination or investigation
upon which the statements or opinions contained in such certificate or opinion are
based;
(3) a statement that, in the opinion of such Person, the Person has made such examination or investigation as is necessary to enable such Person to express an informed
opinion as to whether or not such covenant or condition has been complied with; and
(4) a statement as to whether or not, in the opinion of such Person, such condition
or covenant has been complied with.
Section 12.05. Rules by Trustee and Agents.
The Trustee may make reasonable rules for action by or a meeting of Securityholders. Any
Agent may make reasonable rules and set reasonable requirements for its functions.
Section 12.06. Legal Holidays.
A "Legal Holiday" is a Saturday, a Sunday or a day on which banking institutions are not required to be open. If a payment date is a Legal Holiday at a place of payment, payment may be
made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period.
Section 12.07. No Recourse Against Others.
A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Securities or the Indenture or for any claim based
on, in respect of or by reason of such obligations or their creation.
Section 12.08. Duplicate Originals.
The parties may sign any number of copies, and may execute such in counterparts, of this Indenture. One signed copy is enough to prove this Indenture.
Section 12.09. Variable Provisions.
"Officer" means the President, any Vice-President, the Treasurer, the Secretary, any Assistant
Treasurer or any Assistant Secretary of the Company.
The Company initially appoints the Trustee as Registrar, Paying Agent and Conversion Agent.
The first certificate pursuant to Section 4.03 shall be for the fiscal year ending on ___, 20__.
The reporting date for Section 7.06 is ___ of each year. The first reporting date is ___.
The Trustee shall always have a combined capital and surplus of at least $ ___ as set forth in its
most recent published annual report of condition. The Trustee will be deemed to be in compliance
with the capital and surplus requirement set forth in the preceding sentence if its obligations are
guaranteed by a Person which could otherwise act as Trustee hereunder and which meets such capital and surplus requirement and the Trustee has at least the minimum capital and surplus required by
TIA Section 310(a)(2).
In determining whether the Trustee has a conflicting interest as defined in TIA Section
310(b)(1), the following is excluded: Indenture dated as of January 1, 20__, between the Company
and Greater Bank and Trust Company, Trustee for the ___% Subordinated Debentures Due.
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Senior Debt does not include:
(1) the debentures described in the preceding paragraph;
(2) the Company's ___% Convertible Subordinated Notes due ___, 20__; and
(3) the Company's subordinated guarantee of the ___% Convertible Subordinated
Debentures Due ___ of [Universal Overseas Finance Corporation].
The Securities are not senior in right of payment to the foregoing debt securities of the Company.
The Company's address is:
Universal Business Corporation
1 Commerce Plaza
New York, NY 10099
Facsimile No.:
[Attention: ___]
The Trustee's address is:
Greater Bank and Trust Company
Corporate Trust Department
500 Wall Street
New York, NY 10015
Facsimile No.:
[Attention: ___]
Section 12.10. Governing Law.
The laws of the State of ___ shall govern this Indenture and the Securities.
Dated: ___ UNIVERSAL BUSINESS CORPORATION
By: ___ Vice President
Attest:
___ Assistant Secretary
Dated: ___ GREATER BANK AND TRUST COMPANY
By: ___ Trust Officer
Attest:
___ Assistant Secretary
EXHIBIT A
(Face of Security)
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No. ___ $ ___
UNIVERSAL BUSINESS CORPORATION
___% Convertible Subordinated Debenture Due
Interest Payment Dates: ___
Record Dates: ___
Universal Business Corporation promises to pay to ___, or registered assigns, the sum of ___ Dollars on ___.
This Security is convertible and subordinated as specified on the other side of this Security. See
the reverse and the Indenture referenced for additional provisions of this Security.
Dated: ___
Authenticated: ___
GREATER BANK AND TRUST COMPANY as Trustee
By ___ Authorized Officer
UNIVERSAL BUSINESS CORPORATION
By ___
By ___
[SEAL]
(Back of Security)
UNIVERSAL BUSINESS CORPORATION
___% Convertible Subordinated Debenture Due ___
1. Interest. Universal Business Corporation ("Company"), a Delaware corporation, promises to
pay interest on the principal amount of this Security at the rate per annum shown above. The Company will pay interest semiannually on ___ and ___ of each year. Interest on the Securities will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from
___. Interest will be computed on the basis of a 360-day year of twelve 30-day months.
2. Method of Payment. The Company will pay interest on the Securities to the Persons who are
registered holders of Securities at the close of business on the record date for the next interest payment date, except as otherwise provided herein or in the Indenture even though Securities are cancelled after the record date and on or before the interest payment date. Holders must surrender Securities to a Paying Agent to collect principal payments. The Company will pay Principal and interest in money of the United States that at the time of payment is legal tender for payment of public
and private debts. However, the Company may pay Principal and interest by wire transfer or check
payable in such money. It may mail an interest check to a record date holder's registered address.
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3. Agents. Initially, Greater Bank and Trust Company ("Trustee"), 500 Wall Street, New York,
NY 10015, will act as Registrar, Paying Agent and Conversion Agent. The Company may change
any such Agent without notice. The Company or an Affiliate may act in any such capacity. Subject
to certain conditions, the Company may change the Trustee.
4. Indenture. The Company issued the Securities under an Indenture dated as of ___ ("Indenture") between the Company and the Trustee. The terms of the Securities include those stated in the
Indenture and those made part of the Indenture by the Trust Indenture Act of 1939 (15 U.S.C. §§
77aaa-77bbbb) (the "Act"). The Securities are subject to all such terms, and Securityholders are referred to the Indenture and the Act for a statement of such terms. The Securities are unsecured subordinated general obligations of the Company limited to $ ___ in aggregate principal amount.
5. Redemption. [The Securities may not be redeemed at the option of the Company prior to
(date).] The Company may redeem all the Securities at any time or some of them from time to time
after [(date)] [note this date should be at least two Business Days after the last interest payment date
in the period described in the preceding sentence] at the following redemption prices (expressed in
percentages of principal amount), plus accrued interest to the redemption date:
If redeemed during the 12-month period beginning ___,
Year
Percentage
Year
Percentage
The Company's right to redeem securities under this Section 5 may not be exercised if and for so
long as the Company has failed to pay interest on any Security when the same becomes due and
payable.
6. Mandatory Redemption. The Company will redeem $ ___ principal amount of the Securities
on ___ and on each ___ thereafter through ___ at a redemption price of 100% of principal amount,
plus accrued interest to the redemption date.
The Company may reduce the principal amount of Securities to be redeemed pursuant to this
paragraph by subtracting 100% of the principal amount (excluding premium) of any Securities that
have been previously cancelled, that Securityholders have converted (other than Securities converted after being called for mandatory redemption), that the Company has delivered to the Trustee for
cancellation or that the Company has redeemed other than pursuant to this paragraph. The Company
may so subtract the same Security only once.
7. Additional Optional Redemption. In addition to redemptions pursuant to paragraph 6, the
Company may redeem not more than $ ___ principal amount of the Securities on ___ and on each
___ thereafter through ___ at a redemption price of 100% of principal amount, plus accrued interest
to the redemption date.
8. Notice of Redemption. Notice of redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of Securities to be redeemed at his registered address.
9. Conversion. A holder of a Security may convert it into Common Stock of the Company at any
time before the close of business on ___. If a Security is called for redemption, the holder may convert it at any time before the close of business on the Business Day prior to the redemption date
(unless the redemption date is an interest record date in which event it may be converted through the
record date). The initial conversion price is $ ___ per share, subject to adjustment in certain events.
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In certain circumstances the right to convert a Security into Common Stock may be changed into a
right to convert it into securities, cash or other assets of the Company or another.
To determine the number of shares issuable upon conversion of a Security, divide the principal
amount to be converted by the conversion price in effect on the conversion date. On conversion no
payment or adjustment for interest will be made. The Company will deliver a check for cash in lieu
of any fractional share.
To convert a Security a Holder must comply with Section 10.02 of the Indenture, which requires
the Holder to (1) complete and sign the conversion notice on the back of the Security, (2) surrender
the Security to a Conversion Agent, (3) furnish appropriate endorsements and transfer documents if
required by the Paying Agent or Conversion Agent, (4) pay any transfer or similar tax if required,
and (5) provide funds, if applicable, required pursuant to Section 10.02 of the Indenture. A holder
may convert a portion of a Security if the portion is $ 1000 or a whole multiple of $ 1000.
10. Subordination. The Securities are subordinated to Senior Debt as defined in the Indenture.
To the extent provided in the Indenture, Senior Debt must be paid before the Securities may be paid.
The Company agrees, and each Securityholder by accepting a Security agrees, to the subordination
and authorizes the Trustee to give it effect.
11. Denominations, Transfer, Exchange. The Securities are in registered form without coupons
in denominations of $ 1000 and whole multiples of $ 1000. The transfer of Securities may be registered and Securities may be exchanged as provided in the Indenture. The Registrar may require a
holder, among other things, to furnish appropriate endorsements and transfer documents and to pay
any taxes required by law. The Registrar need not exchange or register the transfer of any Security
or portion of a Security selected for redemption. Also, it need not exchange or register the transfer
of any Securities for a period of 15 days before a selection of Securities to be redeemed.
12. Persons Deemed Owners. Subject to Section 6.11, the registered holder of a Security may be
treated as its owner for all purposes.
13. Amendments and Waivers. Subject to certain exceptions, the Indenture or the Securities may
be amended, and any Default may be waived, with the consent of the holders of a majority in Principal amount of the Securities. Without the consent of any Securityholder, the Indenture or the Securities may be amended to cure any ambiguity, defect or inconsistency, to provide for assumption
of Company obligations to Securityholders or to make any change that does not adversely affect the
rights of any Securityholder.
14. Successors. When successors assume all the obligations of the Company under the Securities and the Indenture, the Company will be released from those obligations, except as provided in
the Indenture.
15. Satisfaction and Discharge Prior to Redemption or Maturity. Subject to certain conditions,
the Company at any time may terminate some or all of its obligations under the Securities and the
Indenture if the Company deposits with the Trustee money or U.S. Government Obligations for the
payment of Principal and interest on the Securities to redemption or maturity.
16. Defaults and Remedies. Subject to the Indenture, if an Event of Default, as defined in the
Indenture, occurs and is continuing, the Trustee or the holders of at least 25% in Principal amount
of the Securities may declare all the Securities to be due and payable immediately. Securityholders
may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee
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may require indemnity satisfactory to it before it enforces the Indenture or the Securities. Subject to
certain limitations, holders of a majority in Principal amount of the Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Securityholders notice of
any continuing Default (except a Default in payment of Principal or interest) if it determines that
withholding notice is in their interests. The Company must furnish an annual compliance certificate
to the Trustee.
17. Trustee Dealings with Company. Greater Bank and Trust Company, the Trustee under the
Indenture, in its individual or any other capacity, may make loans to, accept deposits from, and
perform services for the Company or its Affiliates, and may otherwise deal with the Company or its
Affiliates, as if it were not Trustee, subject to the Indenture and the Act.
18. No Recourse Against Others. A director, officer, employee or stockholder, as such, of the
Company shall not have any liability for any obligations of the Company under the Securities or the
Indenture or for any claim based on, in respect of or by reason of such obligations or their creation.
Each Securityholder by accepting a Security waives and releases all such liability. The waiver and
release are part of the consideration for the issue of the Securities.
19. Authentication. This Security shall not be valid until authenticated by a manual signature of
the Trustee.
20. Abbreviations. Customary abbreviations may be used in the name of a Securityholder or an
assignee, such as: TEN COM (= tenants in common), TEN ENT ( = tenants by the entireties), JT
TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G A (= Uniform Gifts to Minors Act).
The Company will furnish to any Securityholder upon written request and without charge
a copy of the Indenture. Requests may be made to: Secretary, Universal Business Corporation, 1 Commerce Plaza, New York, NY 10099.
NOTES ON THE REVISED MODEL SIMPLIFIED INDENTURE
General
1. General Principles of Construction of Indentures. The rules of construction of indentures are
well established. The courts emphasize the need for uniformity in the interpretation of agreements
which control securities traded anonymously in the markets. Construction of indentures is uniquely
a matter of law for the court. See Chemical Bank v. First Trust of N.Y. (In re Southeast Banking
Corp.), 156 F.3d 1114, 1125 (11th Cir. 1998); Leverso v. Southtrust Bank, 18 F.3d 1527, 1534
(11th Cir. 1994); Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d 1039, 1048 (2d Cir.
1982); Broad v. Rockwell Int'l Corp., 642 F.2d 929, 943 (5th Cir. 1981); Chemical Bank v. First
Trust of N.Y., 93 N.Y.2d 178 (1999).
2. Time Periods and Percentages. The various time periods and percentages appearing in the
Revised Model Simplified Indenture [RMSI or simply Model Simplified Indenture], n4 to the extent
not prescribed by the Trust Indenture Act, 15 U.S.C. §§ 77aaa-77bbbb [hereinafter TIA], should be
reviewed by prospective users of the Model Simplified Indenture in light of the conflicting interests
of the particular parties. Certain of these periods and proportions are the subject of specific explanation in these notes (e.g., Note 5 to Section 6.01). Users may alter any of these figures, but it should
be noted that there do exist interrelationships among some periods or percentages (appearing in different Sections of the Model Simplified Indenture) which are deliberate and should be considered in
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the alteration. For users' convenience, there is set forth below a list of the Sections containing time
periods and percentages not prescribed by the TIA:
Sec.
2.212
3.01 (last P)
3.02
3.03 (1st P)
4.02
4.03
6.01(1)
6.01(2)
6.01(5)
6.01 (last P)
6.02
6.04
6.06
7.06
8.01(1)
Sec.
8.01(2)
8.04 (2nd P)
9.02 (1st P)
10.07 (1st P)
10.09
10.10 (1st P)
10.10 (2nd P)
10.13 (1st P)
10.13 (2nd P)
10.14
11.03
11.05
11.06
11.14
12.10
Security PP1, 5, 6, 7, 8, 9, 11, 13, 14
n4 All citations to the "Model Simplified Indenture" in this text refer to the Revised Model Simplified Indenture, unless otherwise noted. The 1983 version of this text is referred to as
the "1983 MSI."
3. Uniform Commercial Code. The references to Article 8 of the Uniform Commercial Code
("U.C.C.") are to the 1994 Revision to that Article, which, although not yet adopted in every state,
is contemplated to be so adopted.
4. Guarantors. The Model Simplified Indenture does not contain provisions which would be
required if another entity were a guarantor of the Indenture.
Introductory Paragraphs
1. Definitions. The terms "Company," "Trustee" and "Securities" are defined in these paragraphs
and further defined in Section 1.01. The definitions of those terms in Section 1.01 build on the definitions in the introductory paragraphs so that users need not repeat the Company's and Trustee's
names and the title of the issue a second time in Section 1.01.
2. Other Definitions. Obviously, users will add additional defined terms as required for their
particular transaction. Even common words may usefully be defined for a specific transaction. A
defined term such as "Interest," for example, is frequently added to include items that may by virtue
of the parties' negotiations be included in "Interest" (e.g., default interest). Cf. the definition of
"Principal."
Section 1.01
1. Affiliate. This is the 1983 MSI definition; note although the Model Simplified Indenture does
not automatically incorporate defined terms from the TIA (as did the 1983 MSI), this definition is
set forth in TIA Rule 0-2, 17 C.F.R. § 260.0-2 (1999). TIA Rule 0-2 defines as well the words "control," "controlling" and "controlled" which are repeated here. Because the definition of "affiliate"
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and therefore "control" may be key to covenants, both definitions may be subject to exceptions or
clarifications for special fact situations.
2. Agent. The terms "Registrar," "Paying Agent" and "Conversion Agent" are defined in Section
2.03. See U.C.C. § 8-407; id. §§ 8-401 to 8-406 (for the duties of Registrars). There is no comparable definition in the Model Indentures found in American Bar Foundation, Commentaries on Indentures (1971) [hereinafter ABF Indenture Commentaries; or, if referring specifically to the Model
Indentures found therein, cited as ABF Model Indentures].
3. Board of Directors. This definition is essentially the same as the one in the 1983 MSI, which
itself was derived from the ABF Model Indentures. The reference to an "authorized" board committee maintains the ABF Indenture Commentaries' requirement (at 36) of compliance with applicable
state law.
4. Company. Succession to the "Company," and successive successions, is provided for in Article 5 and Section 10.17. Each successive "Company" under Article 5 becomes an obligor on the
Securities for payment and an obligor on the Indenture for other performance (although another
"Company" may become obligor under Article 10--Conversion). In addition, while "Company" is
deliberately broad enough to encompass non-corporate issuers, non-corporate users will find the
Model Simplified Indenture adaptable, but not yet adapted, to their needs.
5. Debt. The definition of Debt was contained in Article 11 of the 1983 MSI and read "any indebtedness for borrowed money or any guarantee of such indebtedness." The definition contained in
this Section 1.01 is used in the definition of Senior Debt, and reflects Senior Debtholders' desire to
have a broad definition which specifically includes, for example, common obligations to a lender
under bank agreements (e.g. indemnification amounts, fees and expenses, letters of credit and capitalized leases). Conversely, in this definition or in the definition of Senior Debt there are frequently
specific obligations carved out of the definition. See Note 11 below.
Note that as drafted, the parenthetical phrase in this definition of Debt, combined with the definition of Senior Debt and the provisions of the subordination article (Article 11), has the effect of
authorizing the holders of Senior Debt to recover interest accruing on their claims after the filing of
a bankruptcy petition by or against the Company from the distributions to the Securityholders unless specifically provided otherwise in Article 11. Holders of Senior Debt do not have as to their
debt an allowable claim in the bankruptcy case for post-petition interest unless the creditor is oversecured or the estate is solvent (in which events the Senior Debt would have no need for recourse to
the Securityholders' distributions). Applying the "Rule of Explicitness" in the construction of subordination contracts, most of the decided cases have held that the holders of Senior Debt are not entitled to recover post-petition interest from the distributions to subordinated creditors since it should
be assumed that the claims of the holders of Senior Debt as to which they may seek subordination
are limited to their allowable bankruptcy claims. See In re Time Sales Fin. Corp., 491 F.2d 841, 844
(3d Cir. 1974); First Fidelity Bank, N.A. v. Midlantic Nat'l Bank (In re Ionosphere Clubs, Inc.), 134
B.R. 528, 535 (Bankr. S.D.N.Y. 1991) (citation omitted); In re King Resources Co., 385 F. Supp.
1269, 1281 (D. Colo. 1974), aff'd, 528 F.2d 789, 791 (10th Cir. 1976); In re Kingsboro Mortgage
Corp., 379 F. Supp. 227, 231 (S.D.N.Y. 1974), aff'd, 514 F.2d 400 (2d Cir. 1975). However, in In re
Southeast Banking Corp., 156 F.3d 1114, 1125-26 (11th Cir. 1998), the circuit court held that the
Rule of Explicitness has been superseded by Bankruptcy Code Section 510(a) and certified the
question of the construction of the subordination provisions in the indentures to the New York State
Court of Appeals. The New York State Court of Appeals, however, held that New York law recog-
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nized the Rule of Explicitness and found it applicable to the indentures in question. Chemical Bank
v. First Trust, 93 N.Y.2d 178, 186 (1999).
Note as well that to the extent this definition of Debt is used in any financial covenants, it may
be over-or-under-inclusive, depending on the intent of the financial covenant. For every covenant
using the defined term Debt, the drafter must therefore carefully ascertain whether the definition
must be adjusted in any respect.
6. Default. This definition is not contained in the ABF Model Indentures. It refers to an Event of
Default as defined in Section 6.01, and also includes an event which would become an Event of
Default after notice or passage of time.
7. Officers' Certificate. See Section 12.09 for the definition of "Officer." By reference to Section
12.09, it is intended that flexibility be afforded to users to expand the list of persons who qualify as
officers. (Section 12.09 is used as a repository for other variations in the text, in order to avoid
changes, fill-ins and re-numberings to the greatest extent possible). There is no provision in the
Model Simplified Indenture for an engineer, accountant or other expert to give a certificate, as there
is in the ABF Model Indentures, since such a provision accompanies negotiated covenants (which
are not included in the Model Simplified Indenture).
8. Principal. The use of the term "principal" in the Model Simplified Indenture to include the
"premium, if any" is intended to avoid the repetition of that phrase in many separate provisions of
the Indenture. "Principal," standing alone, is proper in almost all contexts (e.g., there is an immediate Event of Default under clause (2) of Section 6.01 if the Company fails to pay "principal" when
due), and the premium is specifically excluded in those provisions (e.g., paragraph 6 of the form of
Security) when required. While resort may always be had to the reference to "context" in the introductory clause of Section 1.03, it is hoped that each use of the term "principal" has been tested
against the foregoing.
9. SEC. The ABF Model Indenture defines "Commission" to mean the SEC and any successor
agency "performing the duties now assigned to [the SEC] under the Trust Indenture Act," i.e., under
"the Trust Indenture Act of 1939, as in force at the date as of which this [indenture] was executed."
While the SEC could by statute be consolidated or changed into some new or different agency, just
as the TIA could be eliminated, combined into, or replaced by legislation, the Model Simplified Indenture does not deal with those possibilities.
10. Securities. The generic term "Securities" is used so that the Model Simplified Indenture can
be utilized with respect to unsecured debt instruments of whatever formal appellation (notes, debentures, certificates, etc.). However, the Model Simplified Indenture is a closed-end indenture and
contemplates a single series of debt instruments, in a specific aggregate maximum principal
amount; it does not provide for multiple series of issues.
11. Senior Debt. The definition of Senior Debt is largely dependent on the definition of Debt.
The Senior Debt definition is frequently highly negotiated. Among other issues to be considered is
whether there are multiple tiers of "Senior Debt" with varying rights (e.g., "Designated Senior
Debt" may have the sole right to invoke certain of the subordination provisions); and whether
post-petition interest on such debt is to be included in such a definition. In addition, definitions of
Senior Debt frequently provide that certain obligations shall in no event constitute Senior Debt, e.g.,
obligations to employees of the issuer (note this definition already incorporates an exclusion for
Debt held by the Company and any of its affiliates); trade debt; preferred stock; obligations for tax-
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es; capitalized lease obligations; and certain specified Debt, which varies with the issuer. The MSI
calls for the last to be listed in Section 12.09, and Clause (iii) of this definition incorporates that exclusion by cross-reference. A definition of "Designated Senior Debt," if added, typically defines a
class of institutional lenders to the Company as of the time that the Indenture is executed and is
used where provisions of Article 11 provide different rights to that class (such as rights to invoke
payment blockage provisions or to recover post-petition interest from the distributions to Securityholders). Note that this definition does not provide clarity as to how the Securities rank vis-a-vis
Debt which is not "Senior Debt." If, for example, the issuer of the Security merges with another issuer which has several subordinated Debt issues outstanding, those issues are not likely to meet the
definition of "Senior Debt." Unless this definition also excludes from "Senior Debt" any Debt which
is subordinated to any other Debt (which usually accompanies an "anti-layering" covenant precluding the issuance of Debt subordinate to any other Debt and senior to the Securities), the relative priorities of the Securities over other Debt will be left to a determination in the particular circumstances.
12. Subsidiary. Since the term "subsidiary" may be used in different contexts with different definitions, and since those contexts frequently involve negotiated provisions, definition of the term
has been omitted from this Section.
13. TIA. By virtue of this definition, the Trust Indenture Act of 1939 as in effect on the date of
the Indenture is incorporated into the Indenture if the Indenture is qualified under and subject to the
TIA. See Note 9 above; Notes 1 and 2 to Section 1.04; Note 2 to Sections 7.01 and 7.02.
14. Trust Officer. The MSI revises this definition to eliminate the listing of the Chairman and
President as well as of any other officer or assistant officer assigned to administer corporate trust
matters. The revision recognizes that the trust function is generally separate from other areas of
most banks and responsibilities under the Indenture should be limited to those bank officers who are
specifically authorized to administer Indentures. This is also consistent with the ethical walls now in
place at most banks between the trading and trust administration departments, and the fact that information in one division of a large commercial bank may not--and often should not--filter to the
trust area. See Note 9 to Section 7.02.
15. U.S. Government Obligations. This definition was previously contained in Section 8.01 of
the 1983 MSI, and has been expanded to specify that qualifying obligations may not be subject to
redemption or call, but may include funds consisting of government obligations (including funds for
which the Trustee or one of its Affiliates receives fees).
Section 1.03
1. GAAP. Clause (2) contemplates generally accepted accounting principles as they exist at the
time an accounting term is being construed. If an issuer is concerned that negotiated financial covenants (which must be added to the Model Simplified Indenture, if desired) have been structured on
the basis of currently accepted accounting principles and that a future change in accounting principles may make those covenants too restrictive, clause (2) can be changed to lock onto accounting
principles generally accepted at the date of the indenture. See James H. Fogelson, The Impact of
Changes in Accounting Principles on Restrictive Covenants in Credit Agreements and Indentures,
33 BUS. LAW. 769, 777 (1978). Of course, that would impose upon the issuer the increasingly onerous obligation to restate subsequent years' financial statements, solely for indenture covenant
purposes, on the basis of accounting principles otherwise no longer applied.
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2. And/Or. Clause (3) eliminates the need for such awkward locutions as "and/or" and "A or B
or both." See Bankruptcy Code, 11 U.S.C. § 102(5).
3. Successive Successors, Occurrences, etc. Clause (5) is intended to underscore the intended
application and re-application of definitional provisions like "Company" and "Trustee" in Section
1.01, and operating provisions like Sections 5.01 and 10.06, to successive obligors, fiduciaries,
mergers, conversion adjustments, etc.
4. Internal Reference. The only addition to this Section from the comparable Section of the 1983
MSI is clause (6).
Section 1.04
1. Automatic Incorporation. This Section restates TIA Section 318(c), which provides that the
provisions of TIA Section 310 to and including Section 317 that impose duties on any person (including provisions automatically deemed included unless the indenture provides that they are excluded) are automatically deemed included in every qualified indenture, upon and for so long as it is
qualified under the TIA. Notwithstanding the automatic incorporation, the Model Simplified Indenture sets forth most of the incorporated provisions as a matter of convenience. Note that to the extent TIA provisions are set forth in full in the Indenture they are not subject to amendment or repeal
solely by virtue of the amendment or repeal of the comparable TIA provision. See Note 2 below.
The last sentence, contained in brackets, should be used if it is the intent of the parties to continue
TIA provisions (identified as such) only for so long as the Indenture is qualified under the TIA.
2. Incorporated Law and Rules. The TIA definition in Section 1.01 fixes the incorporated TIA
to the statutory text in effect on the date borne by the Indenture. The effect is intended to be the
same as long-form repetition, in conventional indentures, of provisions permitted or required by
TIA Sections 310 to 317. The last sentence of this Section, however, provides for automatic conforming changes on the amendment of a portion of the TIA which is a required or permitted provision in the Indenture. Note this Section would continue the TIA in force, as then amended (to the
extent described in the preceding sentence) if the TIA were repealed. See Note 2 to Sections 7.01
and 7.02. As to the possibility of change in the definition of certain indenture terms via rule-making
under the TIA, see TIA Section 309(c): no such rule may affect the interpretation of an indenture
previously qualified. See Note 2 to Sections 7.01 and 7.02.
Section 2.01
1. The Form of Security. This provision is slightly changed from the 1983 MSI to permit notations, etc. as required by the use of global securities, automated quotation systems or agreements to
which the Company is subject. The approach of the Model Simplified Indenture is to utilize the
form of Security (attached as Exhibit A) as the place, and the only place, where several of the substantive provisions of the Indenture appear. The first sentence of this Section is intended to effectuate that approach and to make clear that those provisions, although appearing only in the form of
Security, are part of the Indenture.
2. Format of the Security. The phrase "substantially in the form of Exhibit A," appearing in the
first sentence of this Section, is intended to allow for changes in format in the physical Securities,
whether printed or lithographed or typed and whether or not framed in steel-engraved borders. The
phrase is also intended to allow for corrections in the definitive Securities of errors in or omissions
from Exhibit A.
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Section 2.02
1. Execution of Securities. The signatures of two Company Officers are required in order to
comply with certain stock exchange requirements for listing. See NEW YORK STOCK EXCHANGE LISTED COMPANY MANUAL P501.06 (1998) [hereinafter NYSE Listed Co. Manual]. It is understood that the signature of an Officer attesting to the Company's seal is one of the two
acceptable for this purpose. Manual or (for the Company) facsimile signatures are both recognized
as satisfactory.
2. Continuing Validity. The second paragraph of this Section embodies a requirement, and uses
the language, of the NYSE Listed Co. Manual P501.06. It is recognized that individual Securities
bearing proper signatures may be invalid for reasons wholly unrelated to the signature requirement.
3. Certificate of Authentication. What was formerly a certificate by the Trustee is, as can be seen
on Exhibit A, to be a signature (like that of a stock transfer agent) evidencing authentication.
4. Purpose and Effect of Authentication. The ABF Indenture Commentaries (at 141) express the
principal purposes of authentication as the following: identification of the Security with the Indenture; prevention of an overissue; and safeguarding against counterfeiting. As to the effect of authentication, see U.C.C. Section 8-208 (such a signature constitutes a warranty to a purchaser for value
if the purchaser is without notice of a particular defect, that: the certificate is genuine, the person's
participation in the issue of the security is within that person's capacity and the scope of its authority, and the person has reasonable grounds to believe the certificated security is in the form and
within the amount the issuer is authorized to issue).
5. Authenticating Agent. While authentication is a principal responsibility of the Trustee, the
capacity to appoint authenticating agents is preserved in the last paragraph of this Section if the
Trustee chooses to use it, and authentication by an agent is treated as equivalent to authentication by
the Trustee.
Section 2.03
1. Registrar. The 1983 MSI made a distinction between one registrar and one or more
co-registrars, because only one definitive register of the names and addresses of Securityholders can
be maintained, and that is done by the registrar. This distinction is eliminated in the Model Simplified Indenture.
2. Exchange Requirements. For Securities to be listed on the New York Stock Exchange, the
Exchange still maintains the requirement for location of an office of the paying agent in Manhattan.
See NYSE Listed Co. Manual P601.01(B).
Section 2.04
1. Paying Agent to Comply with Article 11. Note the addition, in the second sentence, of the requirement that the Paying Agent comply with Article 11. In Article 11, under Section 11.14, "Trustee" includes a Paying Agent.
Section 2.05
1. Persons Deemed Owners. The customary provision permitting the Company and the Trustee
to recognize the registered holder of a Security as the owner for all purposes is found in paragraph
12 of the form of Security. The portion of the customary provision which disregards notice to the
contrary is omitted from paragraph 12. As noted in the ABF Indenture Commentaries (at 191), the
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customary provision "may" exceed the boundaries of U.C.C. Sections 8-403 and 8-404. Some
draftsmen may choose to leave out paragraph 12 on the theory that U.C.C. Section 8-207(a) already
covers the point. See new Section 6.11 and Note 1 to Section 6.11 (discussing the ability of beneficial holders to act for the owner of a Security in certain circumstances).
Section 2.06
1. Rules for Transfer and Exchange. Section 12.06 contemplates that the Registrar may make
reasonable rules and set reasonable requirements for its functions. Compliance with such reasonable
requirements is prescribed in this Section as a condition to registration of transfer or exchange.
2. Transfer Fees. The last sentence of the first paragraph of this Section is not intended to encourage the practice of charging fees to Securityholders but rather to protect issuers in the event that
agency charges do become substantial. For Securities listed on the New York Stock Exchange, the
Exchange forbids any such fee to be charged to Securityholders. See NYSE Listed Co. Manual
P703.06(E).
3. Same Debt. The second paragraph of Section 2.06 is new. It makes express what had been
implicit, that a Security issued on an exchange or transfer has the same characteristics as the Security surrendered.
Section 2.07
1. Mutilated Securities. The language "lost, destroyed, or wrongfully taken" is the language of
U.C.C. Section 8-405, and a sufficient mutilation is treated as a destruction for U.C.C. purposes.
2. Matured or Maturing Securities. The language of the ABF Model Indentures, permitting
payment of a matured or maturing Security (rather than issuance of a new Security which is then
presented for payment), has been omitted on the assumption that such one-step payment would follow in any event.
3. Protected Purchaser. The 1983 MSI reference to a bona fide purchaser has been changed to
"protected purchaser" in conformity with the term used in U.C.C. Section 8-303. See also Section
2.08, where the same change is made.
4. Replacement Securities. The ABF Indenture Commentaries (at 184-85) point out that the Indenture cannot discharge the obligation represented by a lost or stolen Security that comes into the
hands of a bona fide (protected) purchaser. Therefore the last sentence of this Section provides that
the total obligations of the Company are increased by the issuance of replacement Securities. As a
practical matter, such increase is offset either by the destruction or unenforceability of the lost or
stolen Security or by the indemnity furnished for the issuance of the substituted Security.
Sections 2.08/2.09
1. Replaced Securities. The intent of the second paragraph of this Section is to allow a determination, at any time, of the Securities then deemed to be outstanding. See Note 4 to Section 2.07.
Note again the use of the term protected purchaser. See Note 3 to Section 2.07.
2. Converted Securities. There is no specification in these Sections that converted Securities are
no longer outstanding, both because that does appear to be self-evident and because (i) paragraph 9
of the form of Security requires surrender of each Security to a Conversion Agent in order to effect
conversion; (ii) Section 2.12 requires the Conversion Agent to forward such Securities to the Trus-
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tee and further requires the Trustee to cancel such Securities; and (iii) this Section specifies that
cancelled Securities are not outstanding.
3. Securities Called for Redemption. The only Securities which will cease to be outstanding on a
redemption date if the Paying Agent has received funds sufficient to pay them are those Securities
which are "payable on that date," i.e., those Securities as to which notice of redemption has been
properly given. See Section 3.04.
4. Securities Considered Paid. Note 2 to Section 4.01 applies to this Section.
5. Securities Held by the Company or an Affiliate. According to the ABF Indenture Commentaries (at 42), the more usual practice is to include as outstanding those Securities which are owned
by the Company and its Affiliates except for purposes of giving consents, waivers, etc.; but it is
possible to exclude such Securities from the category of those outstanding. ABF Indenture Commentaries (at 42). The second sentence of Section 2.09 is new and reflects a common exception to
the preceding sentence (prohibiting consents by the Company and its Affiliates), to the extent such
Securities are held by a pledgee.
6. Exit Consents. Many bondholders object to issuers obtaining a consent to an amendment or a
waiver where the Securities providing such consents or waiver are substantially simultaneously retired by the Company (an "exit consent"). If such an exit consent were to be prohibited, this would
be a rational place to do so.
Section 2.11
1. Global Securities. Many securities, including securities sold in reliance on Rule 144A (17
C.F.R. § 230.144A) under the Securities Act of 1933, 15 U.S.C. §§ 77a-77aa (the "1933 Act" or
"Securities Act"), are generally issued in the form of global securities, i.e., securities are issued in
the name of a depository (such as Depository Trust Company ("DTC")) and transfers among the
beneficial owners of such securities are made by bookentry on the depository's books. If global securities are to be used, changes would also be made to the form of security to add appropriate legends and otherwise reflect that the security is a global security, and to add transfer provisions. See
Note 1 to Section 2.01.
Section 2.12
1. Destruction of Securities. This Section is largely unchanged from the 1983 MSI, other than
the change to permit the Trustee to dispose of canceled securities in accordance with its standard
procedures. The Model Simplified Indenture, like the ABF Model Indentures, does not direct the
Trustee to destroy securities surrendered to it. Destruction or other disposition of cancelled securities should be made the subject of a standing instruction from the Company to the Trustee, taking
into account applicable document retention requirements and the Trustee's standard procedures.
Section 2.13
1. Payees of Defaulted Interest. On the date an interest payment is due, if not made, that interest
becomes "Defaulted Interest." This Section 2.13 thereafter requires that defaulted interest be paid to
Securityholders as of a special record date, as provided in this Section. The rights of persons who
were registered holders of the Securities on the regular record date are therefore specifically overridden.
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2. Payment Methods. This Section is a more detailed version of Section 2.12 of the 1983 MSI,
placing more emphasis on the need to provide notice to Securityholders prior to the subsequent
payment. Securityholders need prompt notice of record dates so that information can accurately be
reflected in trading and valuations of securities.
3. Interest on Defaulted Interest. Assuming Section 4.01 requires the payment of interest on
Defaulted Interest (as does the MSI), this Section needs to provide that such additional interest on
Defaulted Interest is payable to the holders receiving the Defaulted Interest.
Article 3 Generally
1. Scope of Redemption Right. The parameters of the Company's redemption right are set forth
in the form of security, rather than in Article 3.
2. Issues Under Article 3. Redemption provisions, like subordination provisions, are now more
likely to be negotiated in light of specific facts relevant to an issuer than was true in 1983. Redemption provisions may include limitations on redemption where the funds used were obtained from
less expensive financing, although there have been a series of cases growing out of such provisions
where the issuer involved allegedly evaded the limitation illegally. See, e.g., Shenandoah Life Ins.
Co. v. Valero Energy Corp., No. 9032, 1988 Del. Ch. LEXIS 84, *25-*27 (Del. Ch. June 21, 1988);
Morgan Stanley & Co. Inc. v. Archer Daniels Midland Co., 570 F. Supp. 1529, 1542-43 (S.D.N.Y.
1983). See also Texas-New Mexico Power Co. v. Jackson Nat'l Life Ins. Co., No. 4:95-CV-758-Y,
1997 U.S. Dist. LEXIS 5640 (N.D. Tex. Mar. 31, 1997) (discussing whether non-callable bonds
could be redeemed because the proceeds to be used were received from "condemnation or eminent
domain proceedings"). The Model Simplified Indenture does not provide language for such limitations.
Section 3.01
1. Specification to the Trustee. Since redemption may be effected under the mandatory, optional,
or "additional optional" provisions of the form of Security, specification to the Trustee (in the required notice) appears appropriate. The ABF Model Indentures have no such requirement. See also
Note 1 to Section 3.03.
2. Securities To Be Credited. Note this Section 3.01 (and Paragraph 6 of the Securities) permit
converted Securities to be credited against the mandatory redemption amounts, if any. This is a term
which may be negotiated out of the provision, in which event both this Section and Paragraph 6
should be modified.
3. Notice Period. The Model Simplified Indenture continues the provision specifying that notice
of redemption shall be at least 50 days unless a shorter period is satisfactory to the Trustee. Note
this provision may permit the manipulation of a redemption date to force bondholders to convert
just prior to an interest payment date, thus losing all accrued interest. See, e.g., Elliott Assocs. v. J.
Henry Schroder Bank & Trust Co., 655 F. Supp. 1281, 1287 (S.D.N.Y. 1987), aff'd, 838 F.2d 66 (2d
Cir. 1998). Recommended changes to the conversion provisions (see Section 10.02 and Notes 1 and
2 to Section 10.02) can prevent that result.
Section 3.02
1. Method of Selection. The first sentence of this Section was changed from the 1983 MSI
(which specified selection on a pro rata basis or by lot) to a formulation which gives the Trustee
both clearly permissible methods and discretion if needed.
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2. Time of Selection. The ABF Model Indentures provide for selection of Securities to be redeemed not more than 60 days prior to the redemption date. The Model Simplified Indenture, in
specifying the methods of selection, adopts the approach of the ABF Model Indentures but prescribes a period of not more than 75 days since the notice of redemption may be given as early as 60
days before the redemption date.
3. Notice to the Company. The ABF Model Indentures also provide for a notice by the Trustee
to the Company with respect to the Securities selected for redemption. The Model Simplified Indenture omits such a requirement since the Company can always make inquiry of the Trustee if it
cares to do so.
Section 3.03
1. Specification to the Securityholder. While certain holders, particularly institutions, have expressed an interest in knowing whether redemption is being made pursuant to the mandatory, optional or "additional optional" provisions of the form of Security (among other reasons, to ensure
that the redemption is permitted under the Indenture), the Model Simplified Indenture (like the ABF
Model Indentures) does not require that such information be included among the statements in the
redemption notice to Securityholders.
2. Notice by Mail. This Section is the first of several which prescribe notice by mail directly by
Securityholders, without a parallel requirement of publication. Where notice by the Trustee is required under this and other Sections of the Indenture, the Trustee is required only to mail to Securityholders as they appear on the register of Securityholders. To the extent that the registered Securityholders are depositories or other nominees, it is their responsibility to transmit notices to their participants or beneficial owners.
3. Timing of Conversion. Note the timing of the conversion right (clause (5)) is to ensure a
well-timed call for redemption does not require a holder to relinquish a full interest payment in order to convert. See Section 10.02 and Notes 1 and 2 to Section 10.02.
Section 3.05
1. Funds Deposited for Redemption. The requirement of deposit of moneys "sufficient" to pay
the redemption price plus accrued interest is intended to import a requirement that on the redemption date the Paying Agent be in possession of funds then available (i.e., funds cleared for its use) to
pay for redemption and accrued interest.
2. Interest After the Redemption Date; Conversion. The form of Security previously was the
only place which specified that interest on a Security called for redemption ceases to accrue on the
redemption date; that language has been moved into Section 3.05. In addition, the effect on the
conversion right is specified here, as well as the effect of a Default in paying a Security called for
redemption on the redemption date.
Section 4.01
1. Promise to Pay. The Model Simplified Indenture defers to tradition in including in this Section a promise to pay that duplicates the promise to each Securityholder appearing in the form of
Security. Inclusion of this separate promise running to the Trustee arose out of the need, prior to
enactment of the TIA, to confer standing on the Trustee to enforce payment on behalf of the Securityholders. See Note 1 to Section 6.08.
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2. Payments Deemed to be Made. By depositing with the Paying Agent a sum sufficient for the
purpose (see Note 1 to Section 3.05), the Company is considered to have honored its obligation to
pay principal and interest on the Securities, and those Securities cease to be outstanding. This Section makes clear that the Company must deposit an amount sufficient to pay all principal and interest due on the particular date, not (for example) just enough to pay principal and interest on Securities called for redemption if other amounts are due on the same date. As set forth in Section 2.04,
each Paying Agent agrees to hold in trust all amounts so deposited.
3. Interest on Overdue Payments. While indentures generally provide that interest on overdue
principal (and overdue interest, if lawful) will be computed at the pre-default rate, some users may
consider this subject to be a matter for negotiation. If used, a penalty rate may better be placed in
the Indenture than in the form of Security.
Section 4.02
1. "Filing." Assuming that TIA Section 314(a)(1), if applicable, were deemed satisfied, and the
Trustee agreed, a "filing" might in the future include electronic transmissions to the Trustee.
2. Reports by Company to Trustee and Securityholder. TIA Section 314(a)(1) requires the
Company to file its Exchange Act reports with the Trustee, but neither the SEC nor the stock exchanges require the Company to send Exchange Act reports or periodic shareholder reports to
debtholders. The new sentence at the end of Section 4.02 requires the Company to mail quarterly
and annual reports to Holders if made available to stockholders (whether by mail or otherwise),
which is now a standard provision in most indentures. Cf. TIA § 314(a)(3).
3. Issuer No Longer A Reporting Company. If the Company is not publiclytraded or ceases to be
subject to the reporting requirements of the Exchange Act, many indentures add a provision which
requires the filing, with the Trustee, of the information, documents, and reports comparable to those
required pursuant to Section 13 of the Securities Exchange Act of 1934 ("Exchange Act"), 15
U.S.C. § 78m, in respect of a Security listed and registered on a national security exchange. See
Note 2 to Sections 7.01/7.02. Such a provision might read:
[In the event the Company is at any time no longer] (or) [If and so long as the Company is not] subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company will prepare, in accordance with generally accepted accounting principles, (i) for the first three quarters of each fiscal year, quarterly financial statements
substantially equivalent to the financial statements required to be included in a report
on Form 10-Q under the Exchange Act, and (ii) on an annual basis, complete audited
consolidated financial statements. The Company will provide such quarterly statements
to the Trustee and Holders not later than [45] days after the end of each of the first
three quarters of the fiscal year and annual reports not later than [90] days after the end
of each fiscal year.
4. Rule 144A Information. Securities offered in a Rule 144A offering will have a paragraph requiring that the Company make information required under Rule 144A(d)(4) available during any
period the Company is not subject to Section 13 or 15(d) of the Exchange Act. Such a provision
might read:
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For so long as the Securities are Transfer Restricted Securities, the Company will continue to provide to Holders and to prospective purchasers of the Securities, the information required by Rule 144A(d)(4) under the Securities Act of 1933, as amended, and
the Trustee shall make any such reports available to Securityholders upon request. In
such event, such reports shall be provided at the times the Company would have been
required to provide reports and had it continued to have been subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act.
Section 4.03
1. Reason for Compliance Certificate. An annual certificate to this effect is required under TIA
Section 314(a)(4).
2. Contents of Compliance Certificate. If the annual certification includes reference to a Default
that occurred during the last fiscal year, it must also describe the status of the Default (i.e., continuing, cured or waived) at the time of certification. The Model Simplified Indenture, however, unlike
the ABF Model Indentures, requires the inclusion in such certificate of the four recitals that derive
from TIA Section 314(e) and are listed in Section 12.04.
3. Timing of Compliance Certificate. The suggested 105 day period is 15 days after the date an
issuer required to file reports under the Exchange Act would be required to file its annual report on
Form 10-K. This would therefore be at the end of the fifteen day period permitted under Section
4.02 for an issuer to provide copies of its reports to the Trustee.
Section 4.04
1. New Covenant. This covenant, which has no counterpart in the 1983 MSI, is designed to give
prompt notice to the Trustee of events which are likely to affect the Securities. Note the Trustee's
obligation to mail a notice to Securityholders of certain Defaults under Section 7.05.
Article 4 Further Covenants
1. Techniques for Addition. Where it is not practical to add covenants in full after Section 4.04,
users might consider a single Section 4.05, to the general effect that "the Company shall perform
each of the further covenants appearing in Appendix 1, which is part of this Article 4," with the text
and related definitions of the several additional covenants set forth at length in an appendix attached
to, and integrally a part of, the Indenture in the same manner as Exhibit A--the form of Security. In
any event, users adding covenants should consider whether summary disclosure concerning any of
such covenants should be set forth in the form of Security.
Section 5.01
1. Scope. It should be noted that this Section only applies to a transaction in which the Company
consolidates or merges with or into another corporation or transfers or leases assets to another corporation.
2. Non-Corporate Successors. The ABF Model Indentures preclude the possibility of a
non-corporate substituted obligor on the Securities by the combination of the traditional covenants
(i) to preserve the obligor's corporate existence (which is omitted from the Model Simplified Indenture) and (ii) to limit consolidation, merger, or asset transfer only to "another corporation." The
Model Simplified Indenture seeks to achieve the same effect by requiring a corporate successor in
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clause (1) of this Section. Given the rate of evolution in capital formation devices and the increased
use of vehicles (such as joint ventures) for projects involving the possibility of a public borrowing,
the likelihood, over the life of a long-term Security issue, of substituting a non-corporate obligor by
asset transfer should not be discarded without thought. It should be remembered, nevertheless, that
certain institutional investors (particularly life insurance companies) may be substantially disadvantaged if debt instruments in their portfolios become the obligations of non-corporate obligors.
3. Foreign Successor Obligors. The ABF Model Indentures also preclude consolidation, merger
and asset transfer except to domestic corporations. The 1983 MSI stopped short of that prohibition;
the Model Simplified Indenture returns to the ABF Model Indenture concept, which is more consistent with current practices. Note that because there is no clear practice on whether corporations
formed under the laws of a territory of the United States should be included in clause (1) of Section
5.01, they are excluded unless the language of clause (1) is expressly modified. The note set forth
immediately above applies as well to the possibility of foreign successor obligors.
4. Triangular Transactions. The Model Simplified Indenture takes the position that the basic
obligations under the Securities should follow the initial obligor's assets (but see Notes 5 and 6 below). However, the exception to clause (2) of this Section recognizes the frequent pattern of merger
into a subsidiary or vice versa, with the parent assuming subsequent obligations under Article
10--Conversions. The exception to clause (2) is also directed to the cash merger problems that were
the subject of controversy in Broad v. Rockwell Int'l Corp., 642 F.2d 929 (5th Cir. 1981).
5. Any Series of Related Transactions. In the context of asset disposition by transfer or lease, serious consideration must be given to the possibility of accomplishing piecemeal, in a series of
transactions, what is specifically precluded if attempted as a single transaction. Privately placed
debt instruments frequently prohibit disposition of substantial assets (with a mathematical prescription of "substantial") in one or a series of related transactions. See Sharon Steel Corp. v. Chase
Manhattan Bank, N.A., 691 F.2d 1039 (2d Cir. 1982).
6. No Default. Many indentures add, at the end of clause (3), a phrase similar to "and treating
any Debt which becomes an obligation of the Company or of the resulting or surviving entity (if not
the Company) as having been incurred at the time of such transaction."
7. Opinion of Counsel. At the end of the last paragraph of Section 5.01, many indentures carve
out from the Opinion of Counsel any opinion regarding compliance with Section 5.01(3), or allow
counsel to rely on representations of compliance under Section 5.01(3) contained in an Officers'
Certificate. See Note 2 to Section 9.03.
Section 5.02
1. Termination of the Obligations of the Prior Obligor. Under the ABF Model Indentures, the
prior obligor remains liable on the Securities. The 1983 MSI was similarly structured so that,
whether or not the successor obligor properly assumes the obligations, the prior obligor (except in
case of a merger or consolidation) is not released from its obligations to pay principal and interest
on the Securities. Thus, if company A sold all of its assets to company B, which assumes all of A's
liabilities, company A remained obligated to pay the Securities if B fails to do so. See Alleco Inc. v.
IBJ Schroder Bank & Trust Co., 745 F.Supp. 1467 (D. Minn. 1989). The Model Simplified Indenture expressly releases the issuer, except for the specified obligations noted. See also form of Securities, Note 8.
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Section 6.01
1. Involuntary Defaults. The ABF Model Indentures include, in the introductory clause to the
default list, a lengthy parenthetical phrase which makes clear that Default is occasioned whether the
occurrence "shall be voluntary or involuntary or be effected by operation of law." The ABF Indenture Commentaries (at 205) explain that this introductory material is intended to refute any argument that events resulting from force majeure are not to be treated as Defaults. The ABF Indenture
Commentaries go on to say that some draftsmen feel this phraseology to be unnecessary, and the
1983 MSI took that view. The inclusion of language in the second paragraph of Section 6.01 to address this issue reflects the more common practice, not a change in view. See Chase Manhattan
Bank v. Traffic Stream (BVI) Infrastructure Ltd., 86 F. Supp. 2d 244 (S.D.N.Y. 2000) (disscussion
of involuntary defaults).
2. Cross Defaults and Subsidiaries' Defaults. The inclusion of cross-default provisions, and the
drafting of such provisions, are matters for negotiation and are not addressed in the Model Simplified Indenture. Similarly, the extent to which subsidiaries of an issuing Company represent a major
part of the credit upon which the Securityholders are relying, and should therefore be included
(along with the Company) in clauses (4) and (5) of this Section 6.01, is left to negotiation.
3. Custodian. The particular language of clauses (4)(C) and (5)(B) of this Section is derived
from 11 U.S.C. § 303(h)(2).
4. General Inability or Failure to Pay Debts as They Become Due. Some current instruments include, among the specified defaults, the general inability or failure on the part of the Company to
pay its debts as they become due. The Model Simplified Indenture omits this provision on the
ground that it may be a disguised cross-default and bestows no obvious practical advantage on the
Securityholders but, particularly in times of tight or expensive funds, it may inhibit the Company's
ability to stretch its payables.
5. Grace Periods. Grace periods are by their nature arbitrarily selected. The Model Simplified
Indenture retains 30 days as the grace period for Default in payment of interest but prescribes 60
days as the period of non-compliance with an indenture covenant after receipt of proper notice of
the Default. The ABF Model Indentures use 30 days for both. Note that if there is a dispute as to
whether a Default exists or not, the short period makes adjudication of the issue prior to the expiration of the cure period practically impossible, which is disadvantageous to the issuer. See Metropolitan Life Ins. Co. v. RJR Nabisco Inc., 906 F.2d 884, 892 (2d Cir. 1990) (court declined to toll cure
period pending determination of whether default had occurred).
6. Disclosure; Accounting Consequences. An issuer that is subject to the reporting requirements
of Section 13(a) or 15(d) of the Exchange Act must disclose material Defaults under an indenture to
the SEC on Form 10-Q, Item 3--Defaults upon Senior Securities, and in its financial statements
pursuant to Rule 4-08(c) under Regulation S-X, 17 C.F.R. § 210.4-08(c) (1999). Certain events
which are (e.g., bankruptcy) or may (e.g., acquisitions or dispositions which violate financial covenants) be Defaults under the Indenture may also be reported on Form 8-K. Further, if the maturity of
a long-term debt issue may be accelerated because of a Default, the issuer may have to reclassify
the issue as short-term debt until the Default is cured or waived. See Financial Accounting Standards Board [FASB], Statement of Financial Accounting Standards No. 78, Classification of Obligations that Are Callable by the Creditor (1983). Finally, if the consequences of Default may be material to investors, the issuer may have an obligation to provide "timely public disclosure" under
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Rule 10b-5 and other anti-fraud provisions and under applicable stock exchange policies. See, e.g.,
NYSE Listed Co. Manual P202.05.
Section 6.02
1. Percentage of Holders Required for Acceleration. The ABF Model Indentures use a 25% figure in the analog to this Section but use only a 10% figure in the analog to the final paragraph of
Section 6.01 (the percentage of Holders whose notice to the Company and the Trustee is requisite to
the ripening of the specified Default). The Model Simplified Indenture uses 25% for both purposes.
2. Accrued Interest. The ABF Model Indentures do not specify that, upon acceleration, accrued
interest as well as principal of the Securities shall become due and payable immediately. In part this
may be because the ABF Model Indentures, or at least the ABF Indenture Commentaries, were
written with coupon debentures in mind; the ABF Indenture Commentaries refer (at 218), in this
connection, to the requirement that coupons be presented on the specified interest payment dates.
The Model Simplified Indenture, on the other hand, does specify acceleration of interest, presumably interest accrued to the date of declaration.
3. Rescission of Acceleration. The ABF Model Indentures, along with many current instruments,
include a lengthy paragraph providing that after acceleration the holders of a majority in principal
amount of the outstanding Securities may rescind the declaration and its consequences, subject to
compliance by the Company with a set of conditions. The Model Simplified Indenture subsumes all
such conditions within the phrase "cured or waived" in the final sentence of this Section. (The
Model Simplified Indenture deliberately uses the same majority requirement for rescission of acceleration in this Section and for waiver in Section 6.04; the ABF Indenture Commentaries point out
alternative possibilities (at 472-73).) See also Note 2 to Section 6.04.
4. Relationship to Sections 6.04 and 6.05. Although the holders of only 25% in principal amount
of the Securities may accelerate upon an Event of Default, the Model Simplified Indenture does not
attempt to create an impasse between a 25% minority and the majority. It is intended that the power
of the majority, bestowed by Sections 6.04 and 6.05, shall in any event govern.
5. Relationship to Article 11. While a declaration of acceleration may make Principal and interest on the Securities immediately payable, no payment on the Securities may be made during the
continuance of the circumstances provided for in Sections 11.02 and 11.03.
Section 6.03
1. Available Remedies. In authorizing the Trustee to "pursue any available remedy" for collection on the Securities or enforcement of the Indenture, the Model Simplified Indenture subsumes all
of the customary phraseology: "actions, suits or proceedings," "at law or in equity," "under this Indenture or otherwise by law," etc. Cf. ABF Indenture Commentaries at 225-26. The provision that
the Trustee may bring suit without having the Securities in its possession has been retained in the
Model Simplified Indenture, although some may consider it unnecessary.
2. Fraud claims. The Indenture does not empower the Trustee to pursue claims which may be
available to purchasers or sellers of Securities under state or federal securities laws or the common
law for misrepresentations inducing them to purchase or hold the securities. See Central Bank of
Denver, N.A. v. Deloitte & Touche, 928 P.2d 754, 758 (Colo. Ct. App. 1996); cf. Continental Bank,
N.A. v. Caton, 1990 Fed. Sec. L. Rep (CCH) P95,623, at 97,922 (D. Kan. Aug. 6, 1990); In re
Washington Pub. Power Supply Sys. Sec. Litig., 623 F. Supp. 1466, 1483-84 (W.D. Wash. 1985),
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aff'd, 823 F.2d 1349 (9th Cir. 1987). The Trustee's role is to enforce the rights arising under the Indenture and the Securities against the Company for the equal benefit of all Securityholders. For
various reasons pursuing fraud claims may create a conflict for the Trustee in fulfilling that role.
Fraud claims may be held by persons no longer holders of Securities who sold their Securities after
the fraud was discovered as well as by persons who continue to hold Securities. Securityholders
may have different rights depending on when they purchased their Securities and the extent to
which they can prove reliance on the fraud. Recoveries by holders of fraud claims may prejudice
collections by current holders. Lastly, securities fraud claims may be subordinated to the claims
upon the Securities of current holders under Section 510(b) of the Bankruptcy Code, thereby potentially raising adverse interests between fraud claimants and current Holders as to the desirability of
or distributions in Proceedings. If a Trustee has the right to assert these claims against the Company
and others such as the Company's accountants and investment bankers, it would also have to consider the extent to which it has an obligation to investigate whether such claims may exist. Existing
procedures where such claims are pursued by individual or class actions by the injured parties do
not appear to require changes to Indentures to change the party responsibility for pursuing such
claims. See also Note 1 to Section 6.06.
Section 6.04
1. Sequence of Events. As is implicit in Note 3 to Section 6.02, the sequence of events is: first,
Default under Section 6.01; second, acceleration under the first sentence of Section 6.02; third,
waiver under this Section 6.04 or cure by the Company; and fourth, rescission under the last sentence of Section 6.02. Conceptually, waiver or cure is a precondition to rescission of acceleration.
2. Effect of Waiver. Unlike the ABF Model Indentures, the Model Simplified Indenture omits
the traditional language to the effect that no waiver shall have an effect upon any unwaived occurrence or upon a repetition of the waived occurrence. As a practical matter, any waiver given under
this Section should state the date as of which it speaks and specify that it has no effect on any occurrence not specifically waived. (An action rescinding acceleration, under the last sentence of Section 6.02, should be equally specific.)
3. Waiver of Past Default vs. Approval of Supplemental Indentures. The Model Simplified Indenture uses a majority provision for waiver of past Defaults but a two-thirds provision for consent
to supplemental indentures. The ABF Indenture Commentaries point out alternative possibilities (at
472-73), and it is noted that some indentures covering debt securities to be offered under Securities
Act Rule 415 have used a majority provision in both contexts. If the same percentage is used in both
contexts, then those waiving a past Default will have the capacity, by consenting to a supplemental
indenture, to effect what amounts to a permanent waiver.
Section 6.05
1. Refusal by the Trustee. The Model Simplified Indenture specifies three grounds for the Trustee's refusal to follow the directions of the holders of a majority of the Securities. Cf. ABF Indenture
Commentaries at 237. In this connection, attention is drawn to Section 7.01(c), which relates to indemnities satisfactory to the Trustee. Upon receiving such indemnities, the Trustee may not refuse
to follow a direction, otherwise unexceptionable, that might create liability for it in its capacity as
Trustee, but the Model Simplified Indenture (unlike the ABF Model Indentures) specifies that the
Trustee may refuse to follow a direction that would involve it in personal liability.
Section 6.06
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1. "No Action" Clauses. No action clauses are strictly construed against the issuer and have been
enforced in a variety of contexts in both federal and state courts. See, e.g., Watts v. Missouri-Kansas-Texas R.R. Co., 383 F.2d 571, 575 (5th Cir. 1967); UPIC & Co. v. Kinder-Care
Learning Ctrs., Inc., 793 F. Supp. 448, 454 (S.D.N.Y. 1992); Lichter v. Land Title Guarantee &
Trust Co., 150 N.E.2d 70, 75 (Ohio Ct. App. 1957); cf. Cruden v. Bank, 957 F.2d 961, 968 (2d Cir.
1992) (clause strictly construed against bondholders). The clause applies, however, only to suits
brought to enforce contract rights under the Indenture or the Securities, not to suits asserting rights
arising under other laws. See, e.g., McMahan & Co. v. Wherehouse Entertainment, Inc., 65 F.3d
1044, 1051 (2d Cir. 1995) (actions based on federal securities laws may not be precluded by the
no-action clause); accord Kusner v. First Pa. Corp., 531 F.2d 1234, 1239 (3d Cir. 1976); Envirodyne Indus. Inc. v. Connecticut Mut. Life Co. (In re Envirodyne Indus., Inc.), 174 B.R. 986, 992-93
(Bankr. N.D. Ill. 1994); Acacia Nat'l Life Ins. Co. v. Kay Jewelers, Inc., 610 N.Y.S.2d 209, 212
(App. Div. 1994). Actions to enforce the Indenture or Securities which are exceptions to the "no
action" provisions are contained in Section 6.07. See also Notes 1 and 2 to Section 6.07.
Note that the introductory language requiring compliance prior to pursuing a remedy "with respect to this Indenture or the Securities" indicates merely that claims to enforce the contractual
terms of the Securities (which may include rights incorporated from the Indenture) are likewise
subject to the no-action clause (subject to the exclusion noted in the preceding paragraph). See
UPIC Co. v. Kinder-Care Learning Ctrs., Inc., 793 F. Supp. 448, 455 n.8 (S.D.N.Y. 1992).
To aid the enforceability of this Section, paragraph 14 of the form of Security discloses the limitation on Securityholders' right to sue. See ABF Indenture Commentaries at 232-35. See generally
Conflict of Interests Between Indenture Trustee and Bondholders: Avoidance of "No Action"
Clauses Prohibiting Bondholder Suits Against the Obligor, 62 YALE L.J. 1097 (1953).
2. Trustee's Indemnity. Old "no-action" provisions, including the 1983 MSI, require, in addition
to the notices and other requirements of this Section 6.06, that the Securityholders provide the
Trustee with a satisfactory indemnity before the Trustee is required to bring action. The deletion of
such a requirement here recognizes that the Trustee still may insist on indemnity as a condition of
bringing action (see Sections 6.05 and 7.01(c)), but the Securityholders' failure to provide one does
not block their ability to bring a suit or other action (provided the other provisions of Section 6.06
are met). In a circumstance where the Securities are unsecured, Securityholders may be hesitant to
post an indemnity, because there is no easy means to recover from other holders any amounts expended under the indemnity.
3. Securityholders' Derivative Suits. The courts have traditionally denied standing to debtholders
to bring derivative suits on behalf of a solvent corporation. Standing to bring such suits might nullify the effect of this Section. See John Coffee & Donald Schwartz, The Survival of the Derivative
Suit: An Evaluation and a Proposal for Legislative Reform, 81 COLUM. L. REV. 261, 313 & n.277
(1981). But see Note, Creditors' Derivative Suits on Behalf of Solvent Corporations, 88 YALE L.J.
1299, 1300 & n.11 (1979).
4. Shortening of Time Periods. The 1983 MSI and ABF Model Indentures fixed the period of 60
days for a Trustee to respond to a request for action. Such a lengthy period is inconsistent with the
exigencies of the modern world. A "pre-packaged" bankruptcy case can be taken from filing to confirmation of a plan in less than 60 days. The Model Simplified Indenture suggests that the 60 days
be shortened to 15 or at most 30 days. It also provides a mechanism for the Trustee to further
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shorten the period by delivering a notice by which the Trustee declares that it will not comply with
the request for action, clearing the way for the Holders to proceed.
5. Notice to Securityholders. An optional provision added to Section 7.05 requires the Trustee to
notify other Securityholders of Securityholder notices it receives pursuant to Section 6.06 (which
would include a notice under Section 6.06(4), and of a notice the Trustee provides under Section
6.06(3)(i)).
Section 6.07
1. Exceptions to "No Action" Prohibition. Section 6.07 contains the provision required by TIA
Section 316(b) that a Securityholder have the right to sue directly to collect interest and Principal
when due. Such suits, as well as actions to enforce conversion rights, are expressly exempted from
the obligation to comply with Section 6.06.
2. Securityholder's Right to Act as a Petitioning Creditor. Consistent with Ninth Circuit opinion
in Grey v. Federated Group, Inc. (In re Federated Group, Inc.), 107 F.3d 730 (9th Cir. 1997), the
Model Simplified Indenture explicitly rejects, as wrongly decided, the cases holding that the
"no-action" clause prevents a securityholder from acting as a petitioning creditor in a bankruptcy
case. See In re Marcade Group, Inc., Case No. 92-B-43920, 1992 Bankr. LEXIS 2484 (Bankr.
S.D.N.Y. Aug. 2, 1992); In re Iroquois Brands, Inc., No. 91-01018-H3-11, 1991 Bankr. LEXIS
1915, *6-*9 (Bankr. S.D. Tex. Mar. 7, 1991); In re Electro Audio Dynamics, Inc., Case No. 888
81406-20, 1989 Bankr. LEXIS 2755 (Bankr. E.D.N.Y. Sept. 25, 1989); cf. Envirodyne Indus., Inc.
v. Connecticut Mut. Life Co. (In re Envirodyne Indus., Inc.), 174 B.R. 986, 997 (Bankr. N.D. Ill.
1994) (holding that securityholders could act as petitioning creditors). Restating TIA Section
316(b), the first paragraph of Section 6.07 preserves the Securityholder's independent right to seek
payment of the principal of and interest on his Security. A bankruptcy petition is simply another
form of remedy to recover on the Securityholder's claim, if the other conditions for filing a petition
exist. That right, like the right to file suit for the amounts due under the holder's Security, is not
subject to the "no action" limitation on pursuit of remedies arising under the Indenture which necessarily affect all Securityholders. Section 6.07 does not empower a Securityholder to accelerate the
principal of a Security, except by the means set forth in Section 6.02.
3. Changes Affecting Mandatory Redemption Before Maturity. As under TIA Section 316(b) the
Model Simplified Indenture provides that a Securityholder's right to receive Principal and interest
when due may not be impaired or affected without that holder's consent. It is recognized that this
provision, like TIA Section 316(b), tends to frustrate consensual recapitalizations outside bankruptcy proceedings since Securityholders which do not consent to changes to payment or maturity terms
are perceived by consenting Securityholders as benefitting (and even improving their positions) because of the consenting Securityholders' concessions. Moreover, if there are enough non-consenting
holders, or if the disparity in terms offered to consenting and non-consenting holders is too great,
the recapitalization outside bankruptcy is likely to fail. See UPIC & Co. v. Kinder-Care Learning
Ctrs., Inc., 793 F. Supp. 448, 453 (S.D.N.Y. 1992). See generally Mark J. Roe, The Voting Prohibition in Bond Workouts, 97 YALE L.J. 232 (1987). The percentage of Securityholders prescribed in
Section 9.02 may, however, consent to an amendment of the Indenture to change or suspend the
mandatory redemption provisions of the Securities, unless Section 9.02(4) provides otherwise. See
ABF Indenture Commentaries at 309 (with respect to "sinking funds"); SECURITIES AND EXCHANGE COMMISSION, MANUAL OF THE TRUST INDENTURE ACT OF 1939, at 148
(1958) [hereinafter SEC TIA Manual].
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Section 6.08
1. Money or Property Held or Collected. The introductory language of Section 6.08 is intended
to clarify that the "waterfall" provisions apply: (i) regardless of who holds or collects the money or
other property to be distributed (although in every instance, it must be either paid over to the Trustee or Paying Agent or otherwise segregated and clearly identified as property to be distributed in
satisfaction of obligations under the Indenture (e.g., a payment pursuant to a confirmed plan in
bankruptcy)); (ii) that it applies to money or other property; and (iii) that it applies after the occurrence of an Event of Default, regardless of when the money or other property has been collected or
set aside for the distribution.
2. Recovery on Proof of Claim. In re Firstmark Corp., Case Nos. IP 89-1356-e, IP 92-176-C
(S.D. Ind. June 22, 1992), enforced the trustee's rights to recover its fees and expenses from the securityholders' distributions through the operation of this Section of the indenture while refusing to
enforce the "lien" granted to the trustee under Section 7.07. See also Bluebird Partners v. First Fidelity Bank, 671 N.Y.S.2d 7, 11-12 (App. Div. 1998).
3. Payment over to the Company. Clause four of this Section is characterized by the ABF Indenture Commentaries (at 231) as "improper conformance to secured bond indenture precedents,"
on the ground that the Trustee for unsecured debentures cannot collect or hold any monies beyond
the indebtedness and related expenses. The Model Simplified Indenture respectfully disagrees.
4. Escheat. The payment of any unused funds back to the Company is also related to the provisions of Section 8.04, pursuant to which unclaimed moneys held by the Trustee or any paying agent,
in the administration of the Indenture, are paid back to the Company upon its request after two
years. See Note 2 to Section 8.04. The intention of both provisions is to return funds to the Company, unless and until otherwise claimed. Obviously such provisions cannot change applicable state
law, which generally prevents retention of such amounts by the issuer and requires payment over to
the relevant state. See, e.g., N.Y. ABAND. PROP. LAW §§ 300-306 (Consol. 1997); CAL. CIV.
PROC. CODE § 1516 (West 1997).
Section 6.09
1. Undertaking for Costs. Variance of the permissive provisions of TIA Section 315(e) in favor
of the Trustee would run counter to an administrative position which may be summarized as follows: when the TIA permits the inclusion of indenture provisions, all other provisions not consistent
with those provisions are excluded. See ABF Indenture Commentaries at 472; ALI, Federal Securities Code § 1305 cmt. 2(b) (1980).
Section 6.10
1. Revision Note. This provision is a modified form of Section 6.09 of the 1983 MSI. Note that
11 U.S.C. § 501(a) expressly authorizes the Trustee to file proofs of claim on behalf of the Securityholders, and TIA Section 317(a)(2), incorporated by reference into every qualified indenture,
confers this power as well. Non-qualified indentures may wish to include a specific provision conferring such powers. See Sections 6.08 and 6.09 of the 1983 MSI.
Section 6.11
1. Ability of Beneficial Owners to Act. This provision is new and, together with the changes to
Section 6.06, is intended to address the difficulties experienced in connection with directions to the
Trustee in situations requiring immediate action. Two difficulties which beneficial holders of Secu-
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rities and Trustees commonly face in situations with rapidly evolving events are that the time periods in Section 6.06 may be too long and it is difficult to obtain direction from the registered holder
where there are several tiers of indirect ownership between the beneficial holder and the registered
holder. For instance, an institutional holder may have its securities held by a custodian. That custodian may, in turn, be the customer of an institution which is a direct participant in a depository. The
Trustee's records reflect that the depository is the registered holder. While wishing to respond to the
direction of a beneficial holder, the Trustee will be concerned that it lacks Indenture protections if it
follows direction from one or more entities which assert that they are beneficial holders but which
are not registered Holders under the Indenture. Section 7.01(c)(3) provides exculpation to the Trustee only where it follows a direction "in accordance with a direction received by it in accordance
with Section 6.05." New Section 6.11 makes a beneficial holder who complies with its provisions a
Holder for the purposes of giving directions under Section 6.05 and otherwise exercising rights under Article 6. This Section does not otherwise vary the rule that the Holder is the "Person in whose
name a Security is registered." (Section 1.01, definition of Holder). The registered Holder remains
the party entitled to payment and notices. See Sections 2.13 and 3.03.
Sections 7.01/7.02
1. Duties and Rights. The Model Simplified Indenture proposes Section 7.01 to cover the Trustee's duties, while Section 7.02 governs the Trustee's rights. An argument can be made that some
"duties" are "rights" (see, e.g., Section 7.01 (b)) and many indentures essentially combine these
provisions.
2. The TIA. Several provisions of the Model Simplified Indenture are taken, more or less verbatim, from the TIA (see, e.g., tie sheet). Of course, Sections 310-317 of the TIA are deemed incorporated into every indenture required to be qualified under the TIA and need not, therefore, be set
forth. See also Notes 1 and 2 to Section 1.03. Nonetheless, there are reasons to add (or not to add)
such provisions.
First, there has been some discussion as to whether the TIA is necessary or even desirable. In
July 1995, the Capital Markets Deregulation and Liberalization Act, H.R. 2131, 104th Cong. (1995)
was introduced. Title IV of that proposed legislation contained a repeal of the TIA, and testimony
before Congress included arguments by some parties that the increasing sophistication of the market
for debt instruments, the ability and willingness of institutional debtholders to negotiate with issuers, and tensions between a Trustee's desire to protect itself and the debtholders' desire to make decisions and to pursue action raised issues about the TIA, including the role of the Trustee. H.R.
2131 did not pass, but a report of the SEC's Task Force on Disclosure Simplification (Mar. 5, 1996)
<http://www.sec.gov/news/studies/smpl.txt> recommends that the SEC evaluate the continued effectiveness of the TIA. To the extent that mandatory TIA provisions were deemed desirable by a
debtholder, it would be important to include them in the Indenture in the event of a repeal (or simplification or amendment) of the TIA. In addition, this would ensure that the provisions would be
readily ascertainable and accessible. Cf. Century Bonds Prove Effective Financing Tool for Three
Big Independents, PETROLEUM FIN. WK., Nov. 25, 1996 (Apache Corp., Anadarko Petroleum
Corp., and Union Pacific Resources Group Inc. followed Walt Disney's lead and issued "century
bonds" or 100-year notes in 1996); Craig Karmin & Charlene Lee, First-Ever 1,000-Year Corporate
Bond is Readied As Issuer Counts on Demand for Higher Yields, WALL ST. J., Oct. 7, 1997, at C27
(1997 offering of bonds due the year 2997); see also Note 1 to Section 1.03.
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Second, many of the mandatory provisions can be supplemented. In addition, there are certain
provisions of the TIA which are explicitly optional and therefore should be included (in full text or
by reference) if desired. See, e.g., TIA §§ 311(b), 315(a), 315(b), 315(d), 315(e), 316(a)(1).
3. Standard of Care. Section 7.01(c) provides that the Trustee remains liable for its own negligent action or its own negligent failure to act, which is the standard set forth in TIA Section 315(d).
To the extent the Indenture is not TIA qualified, the Trustee may insist on a change to "grossly negligent."
4. Interest on Trust Funds. The ABF Indenture Commentaries point out (at 260-61) that trust
funds are not expected to be held by the Trustee for any significant period of time, and that it is
therefore rare to find an agreement by the Trustee to pay interest. Unless otherwise negotiated and
provided, trustees are therefore presumed to be entitled to hold funds in non-interest bearing accounts and to retain the benefit, e.g., of any float on the funds.
5. Segregation of Indenture Funds. The ABF Indenture Commentaries explain (at 260) that express permission for the Trustee to commingle funds held under the Indenture is customary and reflects case and statutory law on the subject. It is normal in trust law that beneficiary assets may not
be commingled except in a common trust fund or where specifically permitted by the trust instrument. Such express permission is necessarily subject (as the ABF Indenture Commentaries note) to
applicable state or federal banking law and regulations.
6. Pre-Default Duties of Trustee. The Model Simplified Indenture does not alter the very limited
duties imposed under the TIA upon the Trustee prior to a Default, and in that connection includes
(in clause (b)(1) of Section 7.01) the protective provision permitted by TIA Section 315(a)(1). The
law is well established that prior to an event of default, the trustee's duties are limited to those explicitly set forth in the indenture (the "Four Corners Rule"). The trustee assumes broader duties only
after an event of default. See TIA § 315(a)(1); see also Lorenz v. CSX Corp., 1 F.3d 1406, 1415 (3d
Cir. 1993); Meckel v. Continental Resources Co., 758 F.2d 811, 816 (2d Cir. 1985). As noted in the
1983 MSI, a contrary position was considered by the Reporter for the Federal Securities Code, who
concluded:
"It has been persuasively urged that extension of the 'prudent man' test for purposes
of ascertaining the occurrence of a default . . . would be impracticable and prohibitively expensive in terms of increased trustees' fees."
ALI, Federal Securities Code, intro. at xl (1980). See generally Richard B. Schreiber & Thomas
G. Wood, Caveat Indenture Trustee: Avoiding the Expanding Scope of Sutton's Law, 121 TRUSTS
& ESTATES 48 (Jan. 1982). [When asked why he robbed banks, notorious 1930s felon Willie Sutton replied, "Because that's where the money is." Thus Sutton's Law of Litigation for plaintiffs:
"When in doubt, sue the bank."]
7. Additional Immunity for Trustee. The ABF Model Indentures deliberately omit the provision,
contained in paragraph (d) of Section 7.02, exempting the Trustee from liability for any action taken
in good faith which it believes to be authorized or within its rights or powers. The Model Simplified
Indenture respectfully disagrees with one of the premises in the ABF Indenture Commentaries (at
258), to the effect that this provision will encourage the Trustee to act in questionable circumstances. The provision is, of course, subject to the overriding provisions of the TIA.
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8. Trustee's Right to Obtain Indemnity. The Model Simplified Indenture adds clause (4) to Section 7.01(c) and deletes clause 7.01(e) in the 1983 MSI. These changes have two purposes. First,
placing the provision that the Trustee does not have to risk its own funds in (c) will limit the introduction to Section 7.01(c) and in fact every other provision of the Indenture by reason of Section
7.01(d). Although this is not explicitly provided for in the TIA, it has been this way in the ABF
Model and sanctioned by the SEC in its TIA Manual (at 109-110). Secondly, the existing language
in the 1983 MSI which implies that the Trustee has the right to receive a specific indemnity each
time does not express the underlying concept here as well as does the ABF Model from which
clause (4) was adopted.
9. Extent of Trustee's Knowledge. One of the current legal questions relating to corporate trust
work is to what extent there may, should, or must be an ethical wall between the corporate trust department and other departments of the bank. The addition of clause (e) to Section 7.02 is a first attempt to permit such a wall and to provide some protection to a trustee which adopts appropriate
measures. It also acknowledges that corporate trust officers need not (and often it would be inappropriate for them to) solicit information about the Company and its debt from other departments of
the Bank. One may question whether the adoption of a wall and the resultant protection is consistent
with the TIA; but with the growing judicial and regulatory acceptance of (and in some cases requirements for) such walls, the provision may be effective in at least some circumstance.
Section 7.03
1. Ownership of "Securities" by the Trustee and Its Other Dealings with the Company. At the
time of the 1983 MSI, the note to this section noted the longstanding debate as to whether a Trustee
should be prohibited from having other relationships with the Company. This issue was resolved in
the Trust Indenture Reform Act of 1990, Pub. L. No. 101-550, 104 Stat. 2721, which amended TIA
Section 310(b) to provide that a Trustee need not eliminate or avoid conflicts until a default arises
under the Indenture.
Section 7.05
1. Timing of Notice of Default. The obligation to mail notice of Default arises only when the
Default is known to the Trustee. If that knowledge comes too long after the Default occurs (whether
during or after the prescribed 90-day period) to allow mailing of notice as a practical matter within
the period prescribed, the Trustee needs, and can, only mail the notice with such promptness as
meets the overriding standard of Section 7.01. As to the optional sentence in brackets, see Note 5 to
Section 6.06.
Section 7.06
1. Annual Report. Although May 15 is the date as of which the Trustee reports on certain possible conflicting interests under TIA Section 310(b)(9), neither May 15 nor any other date is prescribed for the annual report required under TIA Section 313(a). The Model Simplified Indenture,
therefore, like the ABF Model Indentures, allows selection of any date desired for the latter purpose.
2. Notification of Listing. So many new requirements outside the Indenture (see, e.g., Note 4 to
Section 9.04) become applicable upon listing on a stock exchange that the Model Simplified Indenture requires the Company to notify the Trustee of the occurrence of that event.
Section 7.07
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1. Trustee's Compensation. The Model Simplified Indenture, like the ABF Model Indentures,
specifies that the Trustee's compensation is not limited by other laws governing compensation of
trustees of express trusts.
2. Indemnity. Trustee counsel have consistently been unhappy with the indemnity provisions of
the 1983 MSI. They are fair enough for a claim when the Company is solvent, not in Default, and
there is no conflict between the Company and the Trustee, but there are few claims in that situation.
Claims against the Trustee are much more likely to arise in a Default or insolvency situation or
where the Trustee and the Company are in conflict. In these situations the 1983 MSI provisions do
not seem appropriate. One way to address this issue is to confine the indemnity provision in the
Model Simplified Indenture to a single sentence. For example, "The Company shall indemnify the
Trustee against any loss, liability or expense incurred by it, unless incurred by the Trustee through
its own negligence or bad faith." Another is to try to craft more comprehensive provisions, but since
various trustees tend to develop their unique proprietary versions of this provision, the Model Simplified Indenture offers no detailed provision. Note that the exclusion of any indemnity obligation
where the loss or liability is incurred by the Trustee as a result of gross negligence is a change from
the 1983 MSI, which negated indemnity on negligence; gross negligence is the more common current standard in non-TIA indentures. Many believe that such an indemnity obligation is not inconsistent with or prohibited in TIA indentures by TIA Section 315 because exculpation from liability
(the subject of TIA Section 315) is different from indemnity.
3. Experts Retained by the Trustee. The term "agents," whose expenses are reimbursable to the
Trustee, is not used restrictively in this Section, nor are the expenses of agents the only expenses so
reimbursable. Expenses of and for experts and other professionals such as appraisers, accountants
and investment bankers are comprehended in the first paragraph of this Section.
4. Cooperation in Defense of Claims. The Model Simplified Indenture specifies that the Trustee
may have separate counsel (for which the Company will pay) in the defense of any claim directed
against the Trustee in its capacity as such. The requirement of cooperation by the Trustee with the
Company in such defense is not inappropriate.
5. Recovery from Collections. The fourth paragraph of Section 7.07 should not be construed as
permitting the Trustee's right to recovery of its fees and expenses to be defeated by designating collection as intended only to pay the Securityholders. See, e.g., Bluebird Partners v. First Fidelity
Bank, 671 N.Y.S.2d 7 (App. Div. 1998). It is intended to address the circumstances where, for example, a partial redemption of particular Securities has been called and the Trustee holds money
intended for redemption of those identifiable securities, or where a check in payment of interest has
yet to be deposited.
6. Expenses of Administration in Bankruptcy. The final paragraph of this Section has been added
in the Model Simplified Indenture. While the Indenture provisions cannot predetermine the decision
of a Bankruptcy Judge on the question, it is desirable to state the intention of the Company and the
Trustee, at the time of entry into the Indenture, that compensation due to the Trustee for services
rendered and expenses incurred after commencement of a proceeding in bankruptcy shall constitute
expenses of administration, with their attendant priority in payment. Nothing in this Section, however, requires the Trustee to file an administrative claim.
Section 7.08
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1. Appointment of Successor Trustee. Since the Company will have an ongoing relationship with
any substituted Trustee, the Model Simplified Indenture (like the ABF Model Indentures) provides
for the Company's appointment of a successor, in the first instance, when a vacancy or prospective
vacancy arises. While some indentures only permit Securityholders to name a successor Trustee
with the Company's consent, the Model Simplified Indenture (again like the ABF Model Indentures) recognizes the legitimacy of the Securityholders' choice in the matter. See the second sentence of the third paragraph of this Section.
2. For Want of a Trustee, etc. In those rare circumstances where no successor Trustee has accepted appointment properly and in timely fashion, the Model Simplified Indenture permits the retiring Trustee, the Company or Securityholders to petition for the appointment of a successor Trustee. Note if a holder of less than 10% in principal amount of the Securities so petitions, it may be
required to post an undertaking pursuant to Section 6.09.
Section 8.01
1. Pre-Maturity Discharge. Under the Model Simplified Indenture, pursuant to the terms of the
Indenture itself, the Company may by proper deposit terminate all its obligations under the Indenture, with only specified exceptions. However, this falls short of full defeasance (along the municipal debt model) because the Company's obligations under Section 4.01--Payment of Securities is
one of the exceptions. The intended consequence is that (assuming no obligations under covenants
added to Article 4 are also added to the list of exceptions specified in this Section) all substantive
obligations undertaken by the Company for the benefit of Securityholders will be terminated by a
proper deposit except that, no matter how or with whom it makes its deposit in trust, under the
Model Simplified Indenture the Company will retain the ultimate responsibility vis-a-vis the Securityholders to assure that they are paid. The difference in result between the second sentence of this
Section and the second sentence of Section 4.01 appeared to the drafting committee to be justified
in view of the difference in the time periods over which funds due to the Securityholders are likely
to be held by a third party (albeit a fiduciary in both cases). See also Note 3 to this Section.
2. Distinction from "Economic Defeasance." In mid-1982 some corporate debt issuers made
pre-maturity deposits to a separate grantor trust to ensure interest and Principal payments on certain
outstanding debt although the governing indentures contained no provisions therefor. Christened
"economic defeasance," this technique achieved instant popularity, but the resulting accounting
treatment was promptly made the subject of a proposed moratorium by the FASB, in its Action
Alert dated August 11, 1982, and the subject of a temporary bar (prospectively applied) by the SEC,
in Financial Reporting Release No. 3, 25 SEC DOCKET. 1220 (Aug. 24, 1982), rescinded in Financial Reporting Release No. 15, 29 SEC DOCKET 544 (Dec. 22, 1983) in light of the FASB
standards adopted. See FASB Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (June 1996).
3. Applicable Period. The Model Simplified Indenture, like the ABF Model Indentures, limits
the possibility of termination by the Company of certain of its obligations under the Indenture (see
Note 1 to this Section) to the last year prior to redemption or maturity. Users intending to list Securities and concerned about the 10-day limit imposed in the New York Stock Exchange listing requirements (see NYSE Listed Co. Manual P703.06(D)) should note that the obligation to pay is not
discharged under the Model Simplified Indenture prior to the date payment is due.
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4. Governmental Securities. The class of securities with which the deposit contemplated by this
Section may be made is deliberately limited to direct obligations of the United States (including
mutual funds comprised of such obligations), in order to remain as close as possible to a cash deposit. If such a deposit is in fact made, Securityholders should be notified at the time discharge
takes place (since the rating of the Securities may be expected to improve to reflect their government securities backing). In any event, the class of eligible U.S. government securities should not be
broader than the definition of "government security" in Section 2(a)(16) of the Investment Company
Act of 1940, 15 U.S.C. §§ 80a-1 to-64, in order to avoid any problem that might otherwise arise
under Section 3(a)(3) of that Act. Note, under Section 8.02, that the Trustee is entitled to reinvest
money or U.S. Government Obligations, but only in money and U.S. Government Obligations.
5. Reasons for Early Deposit. The Company may wish to discharge the Indenture prior to maturity in order to be relieved of covenants that have become too restrictive, to remove debt from its
balance sheet, or to effect a voluntary liquidation. It may be motivated to utilize the opportunity for
discharge under this Section because (i) the Securities are non-callable or are not callable at the
time, (ii) the Securities are callable but the call premium is too expensive (as in the case of deep
discount or zero coupon securities), or (iii) the government securities necessary for deposit can be
purchased at a substantial discount. Occasionally, as well, circumstances arise in which the Company might prefer to "buy in" the Securities but some Securityholders refuse to sell except at a prohibitive price, or in which the market for Securities is illiquid and the Company faces the necessity
of paying a substantial premium to obtain Securities to be credited at par against required sinking
fund payments; discharge by early deposit may then become a very important alternative.
6. Mechanics of Deposit. The Model Simplified Indenture contemplates that book entry (by
which ownership of government securities is most frequently maintained) to the Trustee's account
will be sufficient to effect the deposit with the Trustee.
7. Amount of Deposit. The money and government securities to be deposited must, by their
terms, provide for sufficient sums to pay the Principal and interest on the Securities at redemption
or maturity and at all intervening interest payment dates. In that connection, non-callable securities
are required so that there will be no reinvestment risk. To match the cash inflow more exactly with
cash requirements, the Company may be able to purchase, from a government bond dealer, certificates or receipts evidencing interests in stripped government bonds (bonds whose unmatured coupons have been removed in whole or in part and sold separately) or in the coupons stripped from
such bonds. Many indentures include a provision requiring a certificate of an independent accounting firm that the amount of the deposit is sufficient.
8. Alternative of Full Defeasance. The SEC Release cited in Note 2 to this Section applies,
pending issuance of a final FASB standard, unless the Company is discharged from all obligations
with respect to the Securities. (A proposed SFAS, circulated by the FASB under date of October 13,
1982, would treat debt as extinguished "when the debtor's obligation is satisfied and there is no continuing or contingent recourse to the debtor," and would include as an example: "the debtor satisfies
the debt pursuant to a defeasance provision, thereby eliminating the debtor's obligation to the creditor.") Users of the Model Simplified Indenture desiring the ability to achieve full defeasance must,
therefore, add a reference (in the introductory clause of the first sentence of this Section) to termination of the Company's obligations under the Securities and must also delete the reference to Section 4.01 from the list of Sections specified (in the first paragraph of this Section) as surviving despite the deposit. In connection therewith, such users should consider the prospective consequences
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of such procedure, both at the time of drafting the Indenture and again at the time of making the
deposit. In particular, consideration might be given to (i) indemnifying the Trustee or arranging for
payment of any taxes that may be imposed on the deposited government securities or on the Principal and interest payments on such securities received by the Trustee and (ii) making disclosure to
Securityholders of the occurrence of the deposit and the tax and other consequences thereof. Summary disclosure in the form of Security should also be considered.
9. Effect of Other Debt Instruments. In some cases negative pledge clauses in other instruments
governing the Company's outstanding debt may prohibit an early deposit, which in certain respects
resembles a pledge of cash collateral as security for an antecedent debt.
10. Relationship to Article 11. The deposit contemplated by this Section is effectively payment
in full of the Securityholders. Therefore, it may only be made when permitted by the subordination
provisions (see the second sentence of clause (2) of this Section), but once properly made is free of
the rights of holders of Senior Debt bestowed under Article 11 (see the third sentence of Section
8.02).
Section 8.02
1. Reinvestment. New language has been added to make explicit the Trustee's right to reinvest
funds deposited with it in trust for the Holders.
Section 8.04
1. Unclaimed Money. Money returned to the Company (after being held for unclaimed Principal
or interest by a Paying Agent for two years) ceases to be money held in trust under Section 2.04.
See Note 4 to Section 6.08.
2. Application of TIA Sections 317(b), 316(b). Some have asserted that TIA Sections 317(b) and
316(b) impose a mandatory trust on all monies paid over to a paying agent and that money designated for payment to a holder (as opposed to excess funds) is never properly returned to an issuer,
even in a situation where the money would become subject to abandoned property laws. If this argument is correct (about which this draft expresses no view) this Section should be revised to provide that money should instead be paid by the paying agent to the appropriate governmental entity
in accordance with applicable abandoned property law.
Section 9.01
1. Uncertificated Securities. Clause (3) of this Section was included in the 1983 MSI to assure
adaptability to the then proposed amendments to U.C.C. Article 8 (adopted in New York in 1982, as
N.Y. U.C.C. LAW §§ 8-101 to--602 (Consol. 1984 & Supp. 1998)), and permit amendment of the
Indenture to provide for delivery of uncertificated Securities but not to mandate the replacement of
certificated Securities. Clause (3) could now be used to make changes required to issue global securities. See Section 2.11.
2. Ambiguities, Inconsistencies and Non-Adverse Changes. The ABF Model Indentures allow
amendment to cure ambiguities or correct inconsistencies or defects provided there is no adverse
effect on the interest of Securityholders. The Model Simplified Indenture separates the two portions
of that provision in recognition of the fact that it is frequently impossible to cure ambiguities or
correct inconsistencies or defects without some minimal impact, which may be characterized as
"adverse," upon the Securityholders. As to non-adverse changes which are unrelated to ambiguities
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or inconsistencies, the Model Simplified Indenture avoids the qualitative "materially adverse" which
is found in some indentures and tends to engender thorny judgmental distinctions.
Section 9.02
1. The Majority Requirement. See Note 3 to Section 6.04.
2. Additional Limitations. The Model Simplified Indenture specifies that the limitations of this
Section (and all of Sections 6.04 and 6.07) are non-amendable without the consent of all Securityholders, as is the case in the ABF Model Indenture. Note, however, TIA Section 3.16(b) permits
holders of not less than 75% of the Securities to postpone interest payments for up to three years,
and such a provision could be added here.
3. Amendments Affecting Subordination. In this Section the Model Simplified Indenture states
the requirements for amendments of Article 11, whether they affect the Securityholders (see clause
(8) of this Section) or the holders of Senior Debt (see the second paragraph of this Section). With
respect to the holders of Senior Debt, consent must be given by the holders of that percentage of the
Senior Debt issue which is prescribed by the terms of the issue. With respect to the Securityholders,
no counterpart to clause (8) of this Section is mentioned in the ABF Indenture Commentaries, and
users concerned that Securityholders withholding consent could some day impede negotiations for
restructuring of debt might consider returning to the general 66-2/3% requirement.
4. Amendments Affecting Redemption. See bracketed language in Section 9.02(4) and Note 3 to
Section 6.04.
5. Non-Identical Securities. The Model Simplified Indenture, like the ABF Model Indentures,
does not preclude the Company from offering to increase the interest rate or reduce the conversion
price or otherwise to provide a benefit only for Securityholders who consent to an amendment. See
In re Magic Marker Corp., SEC No-Action Letter (July 30, 1971), available in 1971 SEC No-Act.
LEXIS 1341. However, note that the SEC has taken the position that certain modifications to existing indentures may constitute the "offer" or "sale" of a new security and therefore must be registered under the 1933 Act unless exempt. See, e.g., Bryant B. Edwards & Jon J. Bancone, Modifying
Debt Securities: The Search for the Elusive "New Security" Doctrine, 47 BUS. LAW. 571, 572
(1992); Felicia Smith, Applicability of the Securities Act of 1933 and the Trust Indenture Act of
1939 to Consent Solicitations to Amend Trust Indentures, 35 HOW. L.J. 343, 349-51, 367-68
(1992). There may also be an issue of whether such consent solicitations violate state laws requiring
the equal treatment of securityholders or prohibiting "vote buying."
Section 9.03
1. Compliance of Supplemental Indentures with the TIA. By virtue of TIA Section 309(e) the
SEC's authority over an indenture ceases after that indenture has been qualified. For that reason the
SEC insists that every indenture have a provision to the same effect as this Section. See SEC TIA
Manual at 157; see also IV LOUIS LOSS, SECURITIES REGULATION 1611 n.29 (3rd ed. 1990).
2. Officers' Certificate and Opinion of Counsel. The second sentence clarified that the Trustee is
entitled to an Opinion of Counsel and Officers' Certificate as to any amendment or supplemental
indenture, which states, inter alia, that the amendment or supplemental indenture may be executed
by the Trustee pursuant to Article 9.
Section 9.04
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1. Effectiveness of Consents. A consent given under the Model Simplified Indenture may and
should prescribe the terms on which it will be "continuing," i.e., on which it may be used (e.g., until
a given date or when joined in by the holders of a given percentage of Securities).
2. Revocation of Consents. While the Model Simplified Indenture provides that a subsequent
Securityholder may revoke the consent given by his predecessor in interest, as a practical matter it
may be extremely difficult to trace succession. The converse of this problem (see Note 3 to this
Section) is that it may be extremely difficult to establish that revocation has not occurred.
3. Effect of Accumulation of Securities by Depositories. In recent years it has become the increasingly prevalent practice for Securities to be delivered to securities depositories and to be registered and held, as a block, in the names of the depositories' nominees. An adverse consequence of
this practice is, as a practical matter, to preclude utilization of consents by Securityholders to effect
amendment of indentures governing publicly-held debt issues. The reason for this may be summarized as follows: (i) it is the registered holders whose consent is required by the Company and the
Trustee, since those holders are recognized as the owners of the Securities under paragraph 12 of
the form of Security; (ii) the actual registered holders are the nominees for the depositories, who for
these purposes may be treated as identical with the depositories; (iii) each depository holds Securities for the accounts of its participant broker-dealers (among others), who in turn hold the Securities
for their own accounts, for the accounts of their customers, for the accounts of other broker-dealers
for whom they perform clearing services, and for the accounts of customers of those other broker-dealers; (iv) transfers can take place at each level among these accounts, some with and some
without the depository's knowledge; and (v) the depository, therefore, will not accept consent instructions from beneficial holders of Securities, or from those holders' broker-dealers, since the depository can at no time determine which among the Securities it holds are the subject of such instructions or whether a newly-received instruction adds to, duplicates or revokes any portion of an
instruction previously received. Users of the Model Simplified Indenture might consider adding,
either in this Section or at the end of Article 9, provisions authorizing the Company to fix a record
date for purposes of determining Securityholders whose consents will be sought and also authorizing the Trustee to accept such consents if received within a specified period after the record date.
This technique, which has been used under some indentures, allows the depositories to function in
the consent process in the same manner as they have long functioned in the shareholder proxy solicitation process. Selection of the exact period after the record date during which consents will be
honored must balance the difficulties of reaching the large mass of Securityholders against the increasing likelihood that holders as of record date in the past will no longer own the Securities.
4. Solicitation of Consents. The SEC's Exchange Act Regulations 14A and 14C apply to the solicitation of consents or the taking action by consent, without a solicitation, in respect of a class of
securities registered under Section 12 of that Act. Debt securities listed on a stock exchange, and
convertible debt securities held of record by more than 500 persons at the end of any fiscal year of
the issuer, must be registered under Section 12. If proposed amendments to an indenture would result in a sufficient change to create a "new security," the solicitation of consents to such amendments may also be deemed subject to registration under the Securities Act, in the absence of an
exemption form registration under Section 3(a)(9) or otherwise. See Note 4 to Section 9.02.
Section 9.05
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1. Notice to Securityholder. Once an amendment requiring Securityholders' consent becomes
effective, the Model Simplified Indenture requires that the Company notify Securityholders. The
ABF Model Indentures have no such requirement.
Section 10.01
1. Conversion Privilege. The conversion privilege in the Model Simplified Indenture is similar
to that in other indentures: the Principal amount of the Securities is divided by the conversion price
in effect on the conversion date, and the conversion price is subject to adjustment. A Security may
be converted only in whole multiples of $ 1000 and into whole shares of Common Stock.
2. Common Stock. The term "Common Stock" is used throughout Article 10. The definition of
Common Stock, as the form of such stock existing on the date of the Indenture, is deliberately used
by the Model Simplified Indenture without the customary phrase "as it may be constituted from
time to time." In the circumstances addressed by Section 10.17 and the last paragraph of Section
10.06, the "Common Stock" will necessarily be affected as a result of the transactions (and subsequent instruments) contemplated by such Sections. Further, this approach avoids the problem arising in certain reverse triangular cash mergers where (i) a new class of common stock is created and
inherits the role of (but is not substituted for) the "Common Stock" into which conversions have
been and must continue to be made, and (ii) the holders of the "Common Stock" receive cash or
other property. See also Note 2 to Section 10.06 and Section 10.17.
3. Section 16(b). Note recent authority indicating that the beneficial owner of a convertible instrument which as a result has the right to acquire 10% or more of an issuer's registered equity securities may be subject to Section 16(b) of the Securities Exchange Act of 1934, as amended. See Editek, Inc. v. Morgan Capital, L.L.C., 150 F.3d 830, 831-34 (8th Cir. 1998).
4. Conversion After Default/Proceedings. Some Trustees believe that conversion should not be
permitted after a Default, or after the commencement of a Proceeding. As Securities are converted,
the recovery generated on the Securities in the aggregate is reduced which can leave the Trustee
with lower amounts against which it can recoup fees, and prejudice Senior Debt to the extent the
subordination provisions of Article 11 do not apply to the securities into which the Securities are
converted.
Section 10.02
1. Adjustment for Interest on Conversion. The Model Simplified Indenture requires a Securityholder converting between an interest record date and an interest payment date to return the accrued interest to the Company (but see Note 2 below). The ABF Indenture Commentaries take no
position on this subject, and the 1983 MSI took the position that interest need not be returned. See
Notes 3 and 6 to the form of Security; see also Jamie Secs. Co. v. The Ltd., Inc., 880 F.2d 1572,
1573-77 (2d Cir. 1989); Elliott Assocs. v. J. Henry Schroder Bank & Trust Co., 655 F. Supp. 1281,
1284-87 (S.D.N.Y. 1987), aff'd, 838 F.2d 66 (2d Cir. 1988).
2. Loss of Interest on Conversion. Under paragraph 9 of the form of Security, Securityholders
converting Securities, voluntarily or because of a well-timed call for redemption, lost all interest for
the current interest period. That provision has come to be known by investors in convertible securities as the "screw clause." Such clauses are standard language in many indentures and can be invoked by issuers of convertible securities (via a timed call for redemption) to deny investors in such
securities an entire interest payment. Generally, the market compromise is to ensure that the screw
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clause cannot operate for an interest period ending in the period during which the Security cannot
be called (see form of Security, paragraph 5). See Notes 5 and 6 to Form of Security. For a discussion of the invocation of a "screw clause," see Gary Weiss, Beware the Turn of the Screw, BUS.
WK., June 1, 1992, at 108. In addition, for cases where determinations were made regarding the effect of the "screw clause," see generally Elliott Associates v. J. Henry Schroder Bank & Trust Co.,
655 F. Supp. 1281 (S.D.N.Y. 1987), aff'd, 838 F.2d 66 (2d Cir. 1998); Kardolac Industries Corp. v.
Wang Labs Inc., 482 N.E.2d 386 (Ill. App. Ct. 1985).
3. Deemed Payment of Interest. Although the shares of Common Stock deliverable on conversion are generally determined by dividing the Principal amount of the Security by the conversion
price (see Section 10.01), issuers may wish to claim that the delivery of shares of Common Stock
satisfy not only the Principal but the accrued interest and original issue discount associated with the
Security converted. The bracketed language would be inserted if the issuers wished to take this position. Note in that event the need to clarify that interest paid by a holder pursuant to the preceding
paragraph of Section 10.02 is not satisfied, and the issuer must still, therefore, pay such amount.
Section 10.03
1. Registration of Conversion. The conversion of debt into equity is exempt from registration
under Section 3(a)(9) of the Securities Act, provided the conversion of the debt is exchanged exclusively for another security (such as Common Stock). It is well-established that the Section 3(a)(9)
exemption still is available where cash is paid in lieu of fractional shares. See, e.g., Rule 152a
promulgated under the Securities Act of 1933; see also Federated Communications Corp., SEC
No-Action Letter (Dec. 8, 1975), available in 1975 SEC No-Act. LEXIS 2418; C.I.T. Fin. Corp.,
SEC No-Action Letter (Sept. 22, 1975), available in 1975 SEC No-Act. LEXIS 1947; Equimark
Corp., SEC No-Action Letter (Mar. 28, 1973), available in 1973 SEC No-Act. LEXIS 1777. Note,
however, that the further disposition of the equity by the Securityholder receiving such equity on
conversion may well have to be registered. That obligation to register the disposition of equity securities, if applicable, is generally set forth in a separate agreement or is covered by the same registration statement in which the issuance of the Securities is registered. See Note 1 to Section 10.05.
2. "Quoted Price." Note the definition of "Quoted Price" in Section 10.11.
Section 10.05
1. Compliance with Applicable Law and Listing Requirements. Some indentures allow the
Company to prohibit conversions, or at least to postpone delivery of the securities issuable on conversion, if registration or listing requirements are not met. The Model Simplified Indenture, like the
ABF Indenture Commentaries (at 556), omits any such specific prohibition, and the implication is
to the contrary. The parties may negotiate this provision to require either "best efforts" or another
standard rather than "endeavor."
Section 10.06
1. Allocation of Adjustments Among Separate Classes of Securities Issuable Upon Conversion.
The Model Simplified Indenture specifies that, if more than one class of capital stock is issuable
upon conversion, adjustment of each class must be effected separately.
2. Effect of Recapitalization. The definition of "Common Stock", set forth in Section 10.01, is
the Common Stock of the issuer on the date of the Indenture. Nonetheless, Section 10.06 makes
clear that after an adjustment which changes the "Common Stock" to another class of capital stock,
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further adjustments to that class of capital stock, falls under, and are to result in the same adjustments contained in Article 10, as if that capital stock were "Common Stock." See Kaiser Aluminum
Corp. v. Matheson, 681 A.2d 392, 396-97 (Del. 1996) (conversion provision used with respect to
convertible preferred); see also Section 10.17.
Sections 10.07/10.08/10.09/10.10
1. Algebraic Equations. Indentures for convertible debt frequently state anti-dilution formulas in
words. Consequently, a user must decipher the text to discern the underlying formulas. The Model
Simplified Indenture eliminates that step by stating the formulas as algebraic equations.
2. Anti-Dilution Formulas Generally. The Model Simplified Indenture deliberately uses the
market price adjustment formula prevalent in recent years in public offerings. Selection of any formula is arbitrary, and often a question of bargaining between the parties to the indenture. The formulas appearing in these Sections reflect the following principle: Securityholders receive stated interest and stockholders receive normal dividends; when stockholders are to receive something more,
such as an unusual distribution in kind or in cash, the Securityholders' conversion price should be
adjusted. Parties to a proposed indenture may, of course, differ on what constitutes an "unusual"
distribution. (It should be noted that these formulas do not make provision for adjustment upon the
issuance of other convertible securities, cash dividends paid out of consolidated net income from the
prior fiscal year, self-tender offers, or the exercise of other conversion rights.) For a justification of
market price adjustment formulas, see generally David L. Ratner, Dilution and Anti-Dilution: A Reply to Professor Kaplan, 33 U. CHI. L. REV. 494 (1965-66). Note that many venture capital investors and other purchasers of private securities prefer a "conversion price" based formula (i.e., protection against issuance of Common Stock for less than the conversion price, even if at above the
market price) on the theory that in the absence of a bona fide public market, the "market price" is
not a meaningful concept and/or take the position that the securityholders should also be treated like
Common Stockholders and therefore either "share" in dividends paid or receive a conversion price
adjustment. See Note 4 below.
3. Applicability and Effect of Conversion Formulas. Section 10.07 sets out the formula for adjustment of the conversion price in the case of a conventional rights offering, where stockholders
are issued rights entitling them for a limited period to subscribe for or purchase, pro rata, additional
shares at a discount from the then current market price. Section 10.07 also provides for readjustment
in the event that not all such rights, options, or warrants shall have been exercised.
Section 10.08 sets out the formula for adjustment in the case of other rights offerings and other
distributions. If Section 10.08 rather than Section 10.07 applies to a rights offering, a greater
downward adjustment of the conversion price, favorable to the Securityholders and adverse to the
Company, may result because the two formulas do not operate in the same way. In a situation in
which the Company has distributed substantial assets to its stockholders (for example, the spin-off
of a major subsidiary), the application of Section 10.08 may thereafter materially increase the proportion of equity in the remaining company reserved for the Securityholders. For cases arising out
of spin-offs, see Prescott, Ball & Turben v. LTV Corp., 531 F. Supp. 213, 220 (S.D.N.Y. 1981)
(spin-off of shares of a subsidiary is a dividend and not a capital reorganization requiring shares to
be held apart for debtholders); Pittsburgh Terminal Corp. v. Baltimore & Ohio Railroad Co., 680
F.2d 933, 936 (3d Cir. 1982); HB Korenvaes Investments, L.P. v. Marriott Corp., 1993 Fed. Sec. L.
Rep. (CCH) P97,773 at 97,740 (Del. Ch. July 1, 1993) (in providing conversion adjustment mechanism, issuer impliedly undertook to refrain from declaring a dividend so large that what is left in
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corporation is itself worth less than the pre-distribution value of the convertible security). It is intended that these conversion formulas, their applicability, and some of their possible variations be
studied before use.
4. Optional Adjustments to Conversion Price. Sections 10.09 and 10.10 were not contained in
the 1983 MSI. Section 10.09 sets out the formula for adjustment of the conversion price in the case
of a below market price issuance of additional shares of Common Stock and Section 10.10 sets out
the formula for adjustment of the conversion price in the case of an issuance of securities, rights,
options or warrants convertible into or exchangeable for Common Stock. Both Sections except certain below market issuances in an effort to define a list of standard exceptions. Negotiation of these
exceptions is appropriate. In many cases, below market issuances should only be treated as an adjustment event if the issuance was to an officer, director or affiliate.
5. Optional Catch-All Provisions. This form does not purport to include all conversion or adjustment mechanisms that are alive and well in the market. Indentures often contain other adjustment provisions. Set forth below is an example of an optional catch-all adjustment provision that
may be appropriate in certain transactions and may properly be the subject of negotiation.
No Dilution or Impairment. (a) If any event shall occur as to which the provisions of
this Article 10 are not strictly applicable but the failure to make any adjustment would
adversely affect the rights represented by this Indenture and the Securities in accordance with the essential intent and principles of this Article 10, then, in each such case,
the Company shall appoint an investment banking firm of recognized national standing,
or any other financial expert that does not (or whose directors, officers, employees, affiliates or stockholders do not) have a material direct or indirect financial interest in the
Company or any of its subsidiaries, that has not been, and, at the time it is called upon
to give independent financial advice to the Company, is not (and none of the directors,
officers, employees, affiliates or stockholders of which are not) a promoter, director or
officer of the Company or any of its subsidiaries, which investment banking firm shall
give its opinion upon the adjustment, if any, that should be implemented in order to
preserve, without dilution, the purchase rights represented by this Indenture and the
Securities. Upon receipt of such opinion, the Company shall promptly mail a copy
thereof to the holders of the Securities and shall make the adjustments described therein
and in this Indenture.
(b) The Company shall not, by amendment of its certificate of incorporation or
through any consolidation, merger, reorganization, transfer of assets, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of this Indenture, but will at all times in good faith
assist in the carrying out of all such terms and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the holders of the Securities
against dilution or other impairment. Without limiting the generality of the foregoing,
the Company (1) will take all such action as may be necessary or appropriate in order
that the Company may validly and legally issue fully paid and nonassessable shares of
Common Stock that are free of preemptive and other similar rights upon the conversion
of the Securities from time to time outstanding and (2) will not take any action that
would result in an adjustment of the conversion price if the total number of shares of
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Common Stock issuable after the conversion of all of the Securities would exceed the
total number of shares of Common Stock then authorized by the Company's certificate
of incorporation and available for the purpose of issue upon such conversion.
6. Tax Consequences. The tax consequences of non-cash distributions and conversion price adjustments are discussed in BORIS I. BITTKER & JAMES S. EUSTICE, FEDERAL INCOME
TAXATION OF CORPORATIONS AND SHAREHOLDERS PP7.20-7.23 (6th ed. 1998).
Section 10.11
1. Determination of Current Market Price. Section 10.11 sets forth the method and manner of
determining the current market price per share of Common Stock for purposes of Sections 10.07,
10.08, 10.09 and 10.10. Section 10.11 provides for an averaging period of the minimum length reasonably required to prevent aberrations and manipulation of the market price, and permits the averaging period to terminate on the record date or, if earlier, the day prior to the "ex" date. This gives
the Company the flexibility to determine a starting date that will produce an acceptable current
market price that accurately reflects the value of the issuance or the distribution. Section 10.11
(formerly Section 10.09 in the 1983 MSI) has been revised to prevent a circumstance where the
current market price is less than the fair market value of the issuance or distribution, thus resulting
in a negative adjusted conversion price, as discussed in Harcourt Brace Jovanovich, Inc. v. Sun
Bank National Ass'n, No. 87-3985 (Fla. Cir. Ct. June 5, 1987), available in part in Mutual Shares
Corp. et al., Amendment No. 1 to Schedule 13D Concerning Harcourt Brace Jovanovich, Inc. (July
8, 1987). For a further discussion of Harcourt Brace Jovanovich and a review of convertible indenture provisions providing for limitations on downward adjustment of the conversion price below a
"reference market price," see generally Martin Riger, A Conversion Paradox: Negative Anti-Dilution, 44 BUS. LAW. 1243 (1989).
2. Determination Where No Public Market. In a situation where there is no active public market,
the Board of Directors is to determine a current market price in good faith. Additional requirements
applicable to such a determination may be appropriate. For example, the Board of Directors may be
required to obtain a quotation from specified investment banks or accounting firms (see, e.g., Section 10.08) or to obtain at least a specified number of quotations.
Section 10.13
1. Participation in Transactions Otherwise Requiring Adjustment. This Section provides for no
adjustment of the conversion price if Securityholders are given notice of and allowed to participate
in the transaction that would otherwise result in the adjustment. It is an approach that is different
from those discussed in the ABF Indenture Commentaries, and was adapted by the 1983 MSI from
institutional instruments and some convertible preferred stock provisions. In any circumstances, the
tax implications of such participation will require careful exploration.
2. Dividend Reinvestment Plans. A dividend reinvestment plan where new shares are sold by the
Company at a discount might be viewed as a continuous rights offering. However, this Section
specifies that no adjustment is required for such a plan since, unlike a conventional rights offering,
the right to participate in the plan is not transferable and has little or no independent or realizable
value.
Section 10.14
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1. Computation of Adjustment. Like the ABF Indenture Commentaries and the 1983 MSI, the
Model Simplified Indenture requires an accountant's computation. Some indentures permit the
Company itself to calculate any adjustment in the conversion price. In addition, under the Model
Simplified Indenture, when there is an adjustment under Section 10.08 and the aggregate fair market value on the record date of the assets, securities, rights, or warrants being distributed exceeds $
[X] million, the Company must obtain an appraisal or other valuation opinion in support of the
Board of Directors' determination of fair market value from an investment bank or accounting firm
of national standing.
2. Publication of Notice. In line with current practice (arising, presumably, from the Boeing case
cited in Note 1 to Section 10.16), the Model Simplified Indenture requires notice of conversion
price adjustments to be mailed to all Securityholders of record rather than simply to be published.
See Note 2 to Section 3.03.
Section 10.15
1. Voluntary Reduction. In this Section, the Model Simplified Indenture formalizes, and places
limits on, a privilege occasionally utilized by issuers. Notice of the reduction in the conversion
price, and of the period of its effectiveness, must be given to Securityholders.
2. Applicability; Limitations. A voluntary, if temporary, reduction in conversion price may be
considered by the Company when it desires to stimulate conversions but is unwilling or unable to
undergo the optional redemption procedure. It may also be considered in connection with a call for
redemption, but in that case the requirement in this Section for a period of at least 20 days could
inhibit a multi-step, gradual reduction intended to reduce the conversion price only as far as necessary to induce the desired amount of conversions. For that reason, users may wish to consider deleting the 20-day limitation and reserving the right to make further reductions at any time during a
period when a reduced conversion price is in effect.
3. Relationship to Sections 10.06, 10.07, 10.08, 10.09 and 10.10. Any reduced conversion price
resulting under this Section is not subject to further adjustment, except voluntarily by the Company.
The third paragraph of this Section is intended to cause the Company to continue to calculate adjustments from the pre-reduction price, and always to keep in effect the lower of (i) the reduced
price, while it is in effect, or (ii) the adjusted prereduction price.
Section 10.16
1. Notices. The underlying purpose of the notice requirements of Section 10.16 is to afford Securityholders the opportunity to convert and participate in the distribution, combination or liquidation as stockholders rather than to continue to hold their Securities and receive a conversion price
adjustment. No notice is required under this Section (i) if the Company elects under Section 10.13
to let Securityholders participate in the transaction, or (ii) if the transaction is so minor that any adjustment may be deferred under Section 10.12; notice is, however, required in the case of a stock
dividend or a stock split. The Company may also be subject to notice requirements arising under
SEC rules (such as Rules 10b-5 and 10b-17), under stock exchange and NASD policies (see NYSE
Listed Co. Manual P204.12 and NAT'L ASS'N SEC. DEALERS' MANUAL (CCH) 1143-43.2) and
under legal and equitable principles of general applicability. See Pittsburgh Terminal Corp. v. Baltimore & Ohio R.R. Co., 680 F.2d 933 (3d Cir. 1982) (failure to notify holders of convertible debentures of a proposed spin-off of shares of subsidiary); Van Gemert v. Boeing Co., 520 F.2d 1373
(2d Cir. 1975) (failure to give adequate notice to holders of convertible debentures in bearer form of
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call for redemption). See generally Andrew McDonald, Theories of Liability Under Convertible
Debenture Redemption Notice Requirements, 44 FORDHAM L. REV. 817 (1976). If the Company
has prepared a proxy or information statement for stockholders describing the forthcoming transaction, it should consider sending that statement to Securityholders along with the notice required by
this Section.
Section 10.17
1. Triangular Transactions. The "person obligated to deliver" upon conversion may be the parent of the new obligor upon the remainder of the Company's obligations under the Indenture. See
Note 4 to Section 5.01. If the parent is not that "person" but is the issuer of the securities deliverable
upon further conversions, the parent is required by the second sentence of this Section to join in the
supplemental indenture for the protection of Securityholders.
2. Cash Mergers. Conversion into cash is specifically contemplated by this Section. The fourth
paragraph of Section 10.13 provides that interest will not be accrued nor will subsequent adjustments be made after the cash merger date. See also Note 2 to Section 10.01. Note that in a cash
merger, the holders of convertible securities lose their potential option premium. In light of the expectation of stock price appreciation, this provision can work an injustice, particularly for securities
with a long remaining life.
Section 10.19
1. Trustee's Non-Responsibility. The Trustee's duties under the TIA, and therefore under the
Model Simplified Indenture, relate only to the debt features of the Securities. The Trustee has no
duty to monitor the Company's compliance with the terms of the conversion privilege. See Browning Debenture Holders' Comm. v. DASA Corp., 560 F.2d 1078, 1083-85 (2d Cir. 1977) (trustee had
no duty to communicate to debentureholders an opinion regarding the fairness of a reduction in the
conversion price proposed by management to induce debentureholders to consent to an amendment
of the indenture). Section 6.07 prescribes that each Securityholder's right to sue to enforce the conversion privilege may not be impaired or affected without such holder's consent. See also Notes to
Section 7.01.
Article 11 Generally
1. Approach. This article represents an attempt to simplify the complex form of subordination
article such as that appearing in the ABF Model. It was comprehensively revised but with a view to
retaining simple, short and clear language. The brevity of the provisions was accomplished in large
part through the use of additional defined terms which are contained in new Section 11.14. The revision is intended to reduce the possibility of litigation related to the construction of subordination
articles in indentures which has been generated by their turgid language. This Article 11 represents
a fairly simple set of subordination provisions, such as might be found in an indenture for an issuer
presenting no significant credit risk and a straightforward capital structure. The subordination provisions contained in indentures for issuers which do not have such a profile are generally more
complex and are highly negotiated.
2. Basis for Enforcing Subordination Provisions. Due in part to the explicit recognition of the
enforceability of subordination agreements added to the Bankruptcy Code in 1978 (11 U.S.C. §
510(a)), the enforceability of subordination agreements is universally accepted in the United States.
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The Article does not attempt to bolster its language by reference to the various theories of subordination discussed in the 1983 MSI, earlier case law and academic writing.
3. Effect on Subordination of Changes in Senior Debt. The ABF Indenture Commentaries recommend (at 572-73) a provision to the effect that holders of Senior Debt may extend, renew or
change the Senior Debt without notice to or consent of Securityholders and without affecting the
subordination of the Securities. The Model Simplified Indenture omits that provision because the
Securities are subordinated to Debt of the Company "outstanding at any time" (unless expressly
made not Senior--see "Senior Debt" definition in Section 1.01) regardless of when such Debt was
incurred or how it may have changed since it was first incurred. To the extent that the Securityholders may be considered to have suretyship status (see RESTATEMENT (THIRD) OF SURETYSHIP
AND GUARANTY § 1 (1995)), a waiver of any suretyship defenses which may be available to the
Securityholders by reasons of modifications to Senior Debt appears in Section 11.08.
4. Cross-References. See Note 5 to Section 6.02, Note 7 Section 8.01, and Note 3 to Section
9.02.
Section 11.01
1. Agreement to Subordinate. Express agreements to subordinate, such as the agreement set
forth in this Section, furnish the basis for the contractual subordination provided for in Article 11,
have uniformly been enforced by the courts, and, by facilitating correct analysis of the contractual
rights involved, help assure continuance of such enforcement.
2. Revision Note. The changes to this Section from the 1983 MSI are intended to eliminate the
implication that this Section operates independently of the remainder of Article 11 and gives the
holder of Senior Debt rights to Distributions not expressly provided therein.
Section 11.02
1. Effect of Subordination Provisions. The subordinated debt evidenced by the Securities and the
unsecured Senior Debt of the Company would each constitute a type of unsecured debt of the
Company and would be proved on a parity in bankruptcy, without any priority of the Senior Debt
over the subordinated Securities. However, express agreements such as those set forth in Sections
11.01, 11.02 and 11.03 "reallocate from the subordinated class to the senior class as much as is required to obtain for the latter the full equivalent in value of its claims." For an explanation of the
mechanics of reallocation, see In re Imperial '400' National Inc., 2 SEC DOCKET 377, 381 (D.N.J.
1973). Note the comparable 1983 MSI provision stated that "holders of Senior Debt shall be entitled
to receive payment in full in cash of the principal of and interest . . . before the Securityholders shall
be entitled to receive any payment." This language led to suggestions that subordination operated as
a "pour down" rather than a "pass up." "Pour down" erroneously suggests that Distributions should
be made first to the holders of Senior Debt until they are paid in full, then to Holders of subordinated debt. Subordination properly operates by distributions being made equally to the holders of Senior Debt and subordinated debt with the Holders of subordinated debt then being required to turn
over their distributions to holders of Senior Debt to the extent necessary to pay Senior Debt in full.
The effect of the difference is apparent in situations where there is other debt which is neither senior
nor subordinated and in the right of the trustee for the subordinated debt to recover its fees and expenses from the distributions to the subordinated Securityholders prior to passing the distributions
up to the holders of Senior Debt.
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2. Liquidations. This Section applies to any liquidation, whether total or partial, voluntary or
involuntary, and under whatever name (e.g., a "winding up"), in which a distribution is made to
creditors.
3. Post-Bankruptcy Interest. The 1983 MSI specified that priority in right of payment would extend to interest accruing on Senior Debt even after the commencement of a bankruptcy proceeding;
most indentures now include such post-petition interest expressly (if at all) in the definition of Debt
or Senior Debt. See Notes 5 and 11 to Section 1.01.
4. Cash, Securities, or Other Property. This Section 11.02 replaces Section 11.03 of the 1983
MSI. One of the differences is the scope of the distributions which are expressly made subject to the
claims of Senior Debt-holders. The 1983 MSI provided holders of Senior Debt were entitled to receive payment in full, in cash; such holders now expressly want the right to receive as well securities or other property otherwise distributable to subordinated holders. See Note 1 to Section 11.13.
5. Exclusion of Article 5 Events. The definition of Proceeding (see Section 11.14) clarifies that if
Article 5 applies to the transaction, and the issuer complies with the provisions of Article 5, distributions made in connection with that transaction are not subject to Section 11.02.
Section 11.03
1. Changes. This Section 11.03 replaces Section 11.04 of the 1983 MSI. The prohibition on
payment, defeasance, redemption or repurchase is automatic and absolute on maturity of Senior
Debt or on a payment default, unless the Senior Debt is paid in full in the first instance or the payment default is cured in the second instance. The revisions clarify that the prohibition applies to direct or indirect payments (which would include payments by controlled affiliates). Senior
Debtholders in clause (i) of the first paragraph of this Section may want to specify that Senior Debt
must have been paid in cash or cash equivalents. Subordinated holders in clause (ii) of the first paragraph may want to specify that the block applies only if the Payment Default continues beyond any
applicable grace period in the instrument governing the terms of the Senior Debt.
2. Prohibition of Payment During Default on Senior Debt; Applicable Conditions. Prior Section
11.04 prohibited payments on the Securities or purchase of them while there was a Default on Senior Debt that permits the holders of Senior Debt to accelerate its maturity, but only if the Default
was the subject of judicial proceedings or if the Trustee received notice of the Default from a specified person. The second paragraph of current Section 11.03 now prohibits payments or purchases on
a non-Payment Default and express written notice to the Company and Trustee. The "fish or cut
bait" provision applies only to such Defaults, not to the Defaults noted in the first paragraph, which
is the more standard structure in current indentures. (Note debtholders will frequently negotiate with
one another to have the trigger for the payment block be an Event of Default, rather than a Default.)
In essence, the "fish or cut bait" provision of Section 11.03 represents an accommodation between
the position of the holders of Senior Debt, who do not want payments to be made on the subordinated debt evidenced by the Securities while there is a continuing Default on Senior Debt and the
position of the subordinated Securityholders, who do not want to be forced to accept a blockage of
payments on the Securities, especially in a deteriorating situation, until the senior creditors decide,
possibly after an extended period of time, that it is to the advantage of the senior creditors to accelerate the Senior Debt, initiate judicial proceedings, or take other actions to resolve the situation.
This provision is included in Section 11.03 in view of the objectives stated in Note 1 to Article 11
generally. A blocking period approaching 180 days is typical for instruments requiring semi-annual
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interest payments. In the absence of appropriate limitations, the prohibition could prevent payment
on the Securities for a long period of time even in a deteriorating situation. In fact, if the Default
were a technical Default or a financial Default (such as failure to maintain a minimum net worth) on
the Senior Debt rather than a Default in the payment of interest or Principal, the Company could, in
the absence of appropriate limitations, continue to amortize the Senior Debt for an extended period
during which payment on the Securities was prohibited but no action was being taken by the holders
of the Senior Debt to resolve the situation. To avoid notices that, by accident or design, string together consecutive payment block periods, the last sentence of the second paragraph provides there
shall be only one payment block in any year, and that the same Default cannot be used for more
than one block.
3. Conversion of Securities. Section 11.03 excepts from its prohibition the acquisition of Securities in exchange for capital stock of the Company. Thus, Securities may be converted into Common
Stock during a period when Section 11.03 would prohibit payments on the Securities or acquisition
of Securities in exchange for other types of property.
4. Payment Over. The payment over provision formerly contained in Section 11.06 of the 1983
MSI, which required Holders erroneously receiving distributions to hold them for the benefit of
holders of Senior Debt, has been moved to this Section 11.03 and revised to apply only to distributions made to the Trustee. The reference to recovering from Holders has been deleted because such
a right would not operate uniformly on all Holders and is inconsistent with the principles of finality
of transactions in securities. Assuming that a distribution has been made erroneously to the Holders,
as a practical matter recovery will only be sought from the larger Holders since the expense of pursuing the smaller Holders is likely to be disproportionate to the amount to be recovered. In other
contexts, the law has recognized the need for finality in securities transactions. 11 U.S.C. § 546(e);
Kaiser Steel Corp. v. Pearl Brewing Co. (In re Kaiser Steel), 952 F.2d 1230, 1240-41 (10th Cir.
1991).
Section 11.05
1. Revision Note. This provision is analogous to Section 11.09 of the 1983 MSI.
Section 11.06
1. Specific Notice Required. This Section replaces Section 11.12 of the 1983 MSI. That provision of the 1983 MSI provided that a Trustee or Paying Agent could continue to make payments on
the Securities "until it receives notice of facts" that would cause a payment to violate Article 11.
Trustees and Paying Agents now expressly want to eliminate any possibility that they will be
deemed to have had notice and therefore generally require an express written notice to trigger the
payment prohibition. A senior debtholder may also wish to add to this Section a provision requiring
the Trustee to rely on a notice delivered by a Person representing itself as a holder of or representative for senior debt, e.g.:
The Trustee shall be entitled to rely on the delivery to it of a written notice by a Person
representing itself to be a holder of any Senior Debt (or a Trustee on behalf of, or other
representative of, such holder) to establish that such notice has been given by a holder
of such Senior Debt or a Trustee or representative on behalf of any such holder. In the
event that the Trustee determines in good faith that any evidence is required with re-
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spect to the right of any Person as a holder of Senior Debt to participate in any payment
or distribution pursuant to this Article, the Trustee may require such Person to furnish
evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Debt
held by such Person, the extent to which such Person is entitled to participate in such
payment or distribution and any other facts pertinent to the rights of such Person set
forth in this Article and, if such evidence is not furnished to the Trustee, the Trustee
may defer any payment to such Person pending judicial determination as to the right of
such Person to receive such payment.
Section 11.08
1. No Impairment. This provision replaces Section 11.10 of the 1983 MSI. It adds the concept
(previously implicit) that the actions or failures to act by a senior debtholder cannot impair a Senior
Debtholder's right to enforce the subordination provisions. Many indentures give examples of actions (and failures to act) which will not affect the subordination provisions or liabilities or obligations under the Indenture.
Section 11.09
1. Trustee's Right to Hold Senior Debt. This provision restates the second paragraph of Section
11.12 of the 1983 MSI. Note, however, the Trustee's obligation to resign pursuant to TIA Section
310(b)(10) if the Trustee is a creditor of the issuer of the Securities and the Securities are in Default,
the Trustee's duty to avoid conflicts of interest, and TIA Section 311.
Section 11.10
1. No Fiduciary Duty. This Section explicitly disclaims any fiduciary duties running from the
Trustee to the Senior Debt holders by reason of any obligations which the Trustee undertakes to the
Senior Debt holders through this Article. The Trustee's duties to the Senior Debt holders are only
contractual. This avoids any possible conflict of interest in the Trustee assuming fiduciary duties to
two groups with adverse interests.
Section 11.12
1. Clarification of Trustee's Rights. This provision is contained in a separate Section since it applies to all of the provisions of the Article.
Section 11.13
1. The "X Clause." One exception to the payover provision (now contained in Section 11.02) is
commonly found, namely the "X clause." The "X clause" (so named in the ABF Indenture Commentaries at 570-571) is generally written as an exception to the subordination provisions. In the
1983 MSI, Section 11.03, the X clause read:
Until the Senior Debt is paid in full in cash, any distribution to which Securityholders
would be entitled but for this Article shall be to holders of Senior Debt as their interests
may appear, except that Securityholders may receive securities that are subordinated to
Senior Debt to at least the same extent as the Securities.
The Model Simplified Indenture moves this concept to this Section 11.13.
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The X clause has been the subject of litigation in which judges have come to opposite results on
their construction while each stating that the meaning of the clause is plain on its face and requires
no resort to extrinsic evidence. In In re Envirodyne Industries, Inc., 29 F.3d 301, 305 (7th Cir.
1994), the Seventh Circuit found that the X clause in that case did not permit the subordinated creditors to retain any distributions until the senior creditors were paid in full. As drafted, this X Clause
means that the holders of the Securities and the Trustee need not turn over to the holders of Senior
Debt Distributions to the Securityholders (1) to the extent that the Distributions are applied to the
Trustee's compensation, expenses or indemnification, (2) if the distribution to both holders of Senior
Debt and Securityholders are securities and securities distributed to the Securityholders are subordinated to the securities distributed to the holders of Senior Debt or (3) the distributions are made
under an approved plan in the Proceeding. All of these exceptions are subject to modification
through negotiations among the parties involved in drafting the Indenture.
The first exception is important to assure that the Trustee's rights are preserved and is consistent
with the general proposition that the Trustee's rights to payment are not subordinated (Section
11.12). The second exception (clause (b)(1)) recognizes that the rights of the holders of Senior Debt
have been preserved if the securities received by the Holders are subordinated to securities to be
distributed to Senior Debtholders to the same extent as was the subordinate debt to the Senior Debt.
If Senior Debt were to receive preferred stock and the subordinated debt were to receive common
stock, for example, where the preferred stock precluded distributions to common stockholders until
the preferred stock was redeemed, the X clause would permit that distribution. Where all debt holders were to receive the same class of common stock, however, the common stock otherwise distributable to the subordinated holders would be distributed to Senior Debtholders until they were paid
in full. See, e.g., In re Envirodyne Indus., Inc., 29 F.3d 301, 305 (7th Cir. 1994). (But see below.)
The scope of the necessary subordination in exception (2) is a matter of negotiation and may require
that there be no principal amortization on the securities distributed to the Securityholders until after
the maturity of the securities distributed to the holders of Senior Debt.
The third exception (clause (b)(ii)) implements the accepted notion that, in bankruptcy, holders
of Senior Debt will enforce their rights through the structuring of the distributions under the plan
and Securityholders will be entitled to retain their distributions under the approved plan. In large
part such provisions are the result of the perceived need in many bankruptcies to make some distribution to subordinated debt holders in order quickly to confirm a plan. Exception (3) may be, and
not uncommonly is, expanded to permit the Securityholders to retain any common stock of the reorganized company received under a plan, even if the holders of Senior Debt also receive common
stock (which does not have superior rights). The clause might also provide that the Securityholders
may retain any Distribution they receive after the holders of Senior Debt receive property of a value
equal to their claim, even if the property is a note rather than cash. Cf. 11 U.S.C. § 1129(a)(10).
2. "Junior Securities." Many indentures define what will make a security one which is "subordinate to the same extent" as are the Securities. Such a definition could be added to Section 11.14
and might include language similar to the following: "(i) has a maturity, mandatory redemption obligation or put right, if any, longer than, or occurring after the final maturity date of, the Securities
on the date of issuance of such capital stock or Debt, (ii) is unsecured, and (iii) by its terms or by
law is subordinated in right of payment to Senior Debt outstanding on the date of issuance of such
capital stock or Debt at least to the same extent as the Securities."
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3. "Senior Debt Payment Default." Some definitions of Senior Debt Payment Default read "a
default in the payment of any amount payable on any Senior Debt." This would obviously broaden
the scope of the default to pick up other payment obligations to Senior Debt holders.
Section 12.01
1. Notices. The Model Simplified Indenture provides that all notices to Securityholders are to be
given by overnight service or first class mail, and that a copy of each such notice is to be mailed to
the Trustee and each Agent. Some users may wish to leave the choice of class of mail for such notices to the discretion of the Trustee and the Company. For example, the Trustee's annual mailing to
Securityholders required in certain circumstances by TIA Section 313(a) may not warrant first class
postage. Issuers and Trustees may also wish to consider the addition of permitting notices to be delivered by facsimile, e-mail and/or through the DTC LENS system. This Section has been revised
from the 1983 MSI to make express an implicit concept, namely that all communications required
under the Indenture are "notices" and are to be delivered in the manner set forth.
Section 12.02
1. Communication with Holders. This Section is unchanged from the 1983 MSI. See Notes 1
and 2 to Section 1.04, however; if the TIA is not applicable to the Indenture, these provisions (or
alternative provisions) should be set forth in full. See also Note 2 to Sections 7.01 and 7.02.
Section 12.03
1. Certificates and Opinions. This Section is unchanged from the 1983 MSI. Many indentures
now combine Sections 12.03 and 12.04.
Section 12.04
1. "No Default" Certification. The text of this Section derives from TIA Section 314(e). Although each Officers' Certificate must cover satisfaction of all relevant conditions precedent to the
particular proposed action, the Model Simplified Indenture does not require that such Certificate
also cover the absence of any Default under the Indenture.
Section 12.05
1. Use of Defined Terms. The second sentence of this Section has been slightly modified in
form, but not substance, by use of the defined term "Agent."
Section 12.06, 12.07, 12.08
1. No Changes. These Sections are unchanged from the 1983 MSI.
2. "No Recourse" Clause. The ABF Indenture Commentaries indicate (at 138, 244) that the
no-recourse clause is unnecessary or inappropriate, at least where the issuer is a corporation. While
each of the federal securities laws specifically provides against waiver of claims arising thereunder,
the extent to which Securityholders may waive claims arising under state law will depend on state
law. See Note, The "No-Recourse" Clause in Corporate Bonds and Indentures, 34 COLUM. L.
REV. 107 (1934). The Model Simplified Indenture defers on this point to widespread practice. See
Simons v. Cogan, 549 A.2d 300, 304-05 (Del. Ch. 1988) (claim against individuals sued for breach
of indenture dismissed on basis of "no recourse" provision).
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3. Duplicate or Counterpart Indentures. Regardless of how many copies of the Indenture are
executed, it is intended that the production of any one of such copies will be sufficient to satisfy a
best evidence rule.
Section 12.09
1. Function. It would be the best of all worlds for a draftsman if the final text of the Model Simplified Indenture could be used with only changes in names and addresses of the Company and
Trustee, deletion of an unwanted clause or two in the Sections constructed with that in mind (for
example, clause (1) of Section 5.01), and additions only in one place. While that aim is unattainable,
it explains the potpourri found in this Section.
2. Trustee's Capital and Surplus. The second sentence of the fourth paragraph is new, and is
meant to address the problem that arises when a corporate trust business is sold. The business may
be conducted in an Affiliate of the purchaser which may not meet the capital requirements itself but
has a qualifying parent or Affiliate willing to guarantee its obligations.
3. Exclusions from Senior Debt. After listing the indebtedness excluded from Senior Debt, the
Model Simplified Indenture suggests a specification of the other indebtedness (all or part of that
listing) to which "the Securities are not senior in right of payment," in order to meet the requirements of any provisions in such other indebtedness similar to the first sentence of paragraph 10 of
the form of Security. The objective is to avoid circular priorities. See Note 11 to Section 1.01. The
parties should consider adding, as to each issue of excluded Debt, an indication of whether such
Debt is subordinate to, or pari passu with, the Securities.
Section 12.10
1. Governing Law. If there is any concern that the renvoi doctrine may apply, a drafter may wish
to add the phrase "without regard to principles of conflicts of law" at the end of this sentence. While
there have been suggestions that a federal law of trusts might apply (in regard to certain obligations
of federal agencies) in an indenture stated as being governed by New York law, and while it is undoubtedly true that both the TIA and the statute or regulation authorizing the performance of corporate trust powers by the Trustee cut across the application of this Section, the Model Simplified Indenture retains the traditional approach to choice of governing law. The interpretation of TIA provisions in an indenture is, of course, a matter of federal law, and some federal courts have recognized
an implied right of action to enforce those provisions. See Zeffiro v. First Pa. Banking and Trust
Co., 473 F. Supp. 201 (E.D. Pa.. 1979), aff'd, 623 F.2d 290 (3d Cir. 1980); Morris v. Cantor, 390 F.
Supp. 817 (S.D.N.Y. 1975).
Signature Page
1. Formalities. The Model Simplified Indenture omits both a testimonium clause ("In witness
whereof . . . .") and acknowledgments of signatures. If required, acknowledgments appropriate for
filing in any jurisdiction can be added. An indenture governing unsecured debt is rarely required to
be so filed. In deference to tradition, the Model Simplified Indenture does contemplate a seal and its
attestation. Many instruments governing debt dispense with the formality of the seal.
Form of Security
1. Seal. The Company's seal is reproduced on the face of the Securities, pursuant to Section
2.02.
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2. Formalities. The Model Simplified Indenture does not include the common express statements that (i) the provisions on the reverse form of Security are incorporated into the face of the
Security and (ii) all terms defined in the Indenture have the same meaning in the form of Security.
Both statements, however, are true regardless of the inclusion of such language. In addition, the
Model Simplified Indenture varies from the 1983 MSI by including a sentence directing the holder
to the reverse and to the Indenture for a complete understanding of the provisions of the Securities.
Note that the form of listed bonds must meet the formal requirements of the relevant stock exchange. See, e.g., NYSE Listed Co. Manual PP501.06, 501.12, 501.13, 502.00, 502.04.
3. Interest on Debentures Cancelled After the Interest Record Date. Paragraph 2 provides for
payment of interest even though Securities are cancelled after the interest record date and on or before the interest payment date. This situation arises (i) if Securities are called before an interest record date for redemption after the record date but before or on the interest payment date, or (ii) if
Securities are converted after the record date but before or on the payment date. See Note 2 to Section 10.02.
4. Strict Enforcement of Redemption Provisions. Securityholders generally insist on a period
during which the Securities cannot be called, and then a call price on a premium to par (declining
over time) to protect their yield. Exceptions to such provisions are generally strenuously negotiated
and narrowly construed. See, e.g., Texas-New Mexico Power Co. v. Jackson Nat'l Life Ins. Co., No.
4:95-CV-7584, 1997 U.S. Dist. LEXIS 5640 (N.D. Tex. Mar. 31, 1997).
5. No Optional Redemption During Interest Default. To avoid a situation where the Company
fails to pay all interest due and payable then makes a call for redemption to force a conversion (at
which point the Securityholder may lose all accrued interest), the Company's right to call an optional redemption is tolled for any period it has failed to pay all interest due.
6. Timing of Optional Redemption Call. It is critical, to avoid loss of interest through the period
investors expect a convertible security to be non-callable, that the first redemption date be specified
as the second Business Day after the interest payment date for the non-call period. Provided securities are convertible through the close of the Business Day prior to the redemption date (see form of
Security, paragraph 9), this ensures a Securityholder will receive its interest payment and have one
Business Day in which to convert prior to the redemption date. Note that even if the dates are
properly aligned for the non-call period the issuer can force a conversion and loss of an interest
payment after the non-call period under the Model Simplified Indenture (see Note 1 above), which
is the current market practice. A securityholder converting after an interest record date but before an
interest payment date will also be subject to the "wash" payment contemplated by Section 10.02
(see Note 1 to Section 10.02).
7. Securities Credited Against Mandatory Redemption Requirement. Pursuant to paragraph 6 of
the form of Security, the Principal amount of Securities required to be redeemed in any year may be
reduced by the principal amount of Securities cancelled or optionally redeemed and by the Principal
amount of Securities converted unless those Securities were converted after having been called for a
mandatory redemption.
8. Disclosure of Principal Terms. The form of Security included in the Model Simplified Indenture has been drafted to set forth in brief certain important terms in a place where they are readily accessible. See Van Gemert v. Boeing Co., 520 F.2d 1373, 1383 (2d Cir. 1975) (unreasonable
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for issuer to expect investors to send for, and then read and comprehend, a 113-page indenture); see
also Note 1 to Article 4--Further Covenants, Note 6 to Section 5.01 and Note 8 to Sections 8.01.
9. Conversion Price Adjustments. Paragraph 9 summarizes the events which will result in conversion price adjustments. Any substantive changes in or additions to the relevant Sections in Article 10 should also be reviewed against this paragraph to be sure that its text reflects such changes or
additions.
10. Successors. Paragraph 14 reflects the revisions to Sections 5.01 and 5.02. See Note 1 to Section 5.02.
11. Abbreviations. Paragraph 20 is derived from the NYSE Listed Co. Manual P501.04.
12. Availability of Indenture. The boldface legend informs Securityholders how to obtain the
Indenture, which includes the form of Security in larger size type.