MORGAN STANLEY & Co. V. ARCHER DANIELS MIDLAND COMPANY
570 F. Supp. 1529 (1933)


PROCEDURAL POSTURE: Plaintiff corporation filed an action against defendant borrower under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.S. §§ 78j, 17(a) of the Securities Act of 1933, 15 U.S.C.S. §§ 77q, 323(a), and § 316(b) of the Trust Indenture Act of 1939, 15 U.S.C.S. §§ 77www(a), 77ppp(b), and other state and federal laws. Additionally, the corporation sought a preliminary injunction, and both parties filed motions summary judgment.


FACTS: Morgan Stanley (P) purchased bought $15.518.000 principal amount of Debentures from Archer (D) for $1,252 50 per $1000 face amount on May 5. 1983. $500,000 principal amount at $1,200 per $1,000 on May 31, 1983 The next day, D announced that it was calling for the redemption of the 16% Sinking Fund Debentures, effective August 1, 1983 The direct source of the funds for this payment was common stock offerings in January and June 1983 Prior to the redemption, they were trading in excess of the $1,139 50 call price D gave no prior warning of any kind that it intended to exercise its redemption rights Nor did it express any opinion over its ability to call the debentures when it was borrowing money at 16 08% P contends that the redemption is barred by the express terms and that consummation of the plan would violate 15 U S C section 77 aaa and common law contract principles P contends that the redemption is being funded indirectly with proceeds of borrowing in violation of the Debentures and Indenture agreement The fact that D raised sufficient funds to redeem the debentures entirely through the issuance of common stock is according to Ps an irrelevant juggling of funds used to circumvent provisions in the debenture D's position is not so strict in that it would only bar redemption when the direct or indirect source of funds is a debt instrument issued at a rate lower than that it is paying on the outstanding debentures P moved for summary judgment on contract claims.

ISSUE: Is an early redemption of dentures lawful if it is funded directly from the proceeds of a common stock offering?

RULE: Using the funding obtained with proceeds of common stock issued by a bond issuer is a lawful means of redeeming outstanding debentures, notwithstanding the fact that the debtor corporation had also obtained funding that was prohibited from being used to effect a redemption.

HOLDING:The District Court, Sand, J., held that purchaser failed to make sufficient showing to warrant preliminary relief. On motion for summary judgment, the District Court, Sand, J., held that: (1) funding of proposed redemption with proceeds of common stock issues would be lawful under terms of debentures and indenture, and (2) disputed issues of fact precluded summary judgment on purchaser's securities and business law claims. Order accordingly.

Analysis: Problems dealing with early redemption appear to be common in the bond market. Corporations use a variety of techniques to get around early redemption when current interest rates make it favorable to escape from high-interest obligation bonds. Several methods corporations have used are described in James E. Spiotto, Early Redemption and Leveraged Buyouts, 304 Prac. L. Inst. 511 (Jan. 11, 1988). When corporations have financial obligations that have turned into financial suicide, companies may even engage in deliberate actions leading to a default. Once default has been established, the issuers are required to redeem under the default provisions, and it is not important where the issuer obtained the funds or how much they paid for them.