The Bristol Myers Decision: One Court’s View of Registered Holder vs Beneficial Owner Actions
The United States District Court for the Southern District of New York (the “District Court”) recently issued a decision that rejected a common industry practice for trustees to be removed, appointed or to take actions based upon the consent, direction or authorization of owners of beneficial interests in debt instruments held through the facilities of The Depository Trust Company (“DTC”).
In UMB Bank, N.A. v. Bristol-Myers Squibb Company, No. 21 Civ. 4897 (S.D.N.Y. Sept. 30, 2024), the District Court held that owners of beneficial interests (the “Beneficial Interest Owners”) in contingent value rights (the “CVRs”) issued by Bristol-Myers Squibb Company (“BMS”) did not have the authority under the related contingent value rights agreements (the “CVR Agreement”) to remove the existing trustee and appoint a successor trustee, because they did not act through, or via an omnibus proxy from, Cede & Co. (“Cede & Co.”), the nominee of DTC and the entity in whose name the CVRs were registered. As a result, the District Court found that the purported successor trustee lacked standing to bring suit against BMS on behalf of the holders of the CVRs.
Background
In November 2019, in connection with BMS’s acquisition of Celgene Corporation (“Celgene”), BMS issued CVRs to the Beneficial Interest Owners through the facilities of DTC, which were registered in the name of Cede & Co as nominee of DTC. BMS would make payments with respect to the CVRs only if the Food and Drug Administration’s approval of certain Celgene products was received by a specified date. Ultimately, the approval was received thirty-six days after such specified date. Certain Beneficial Interest Owners, however, asserted that BMS did not use diligent efforts, as required under the CVR Agreement, to obtain such approvals.
Prior to commencing litigation against BMS, a group of Beneficial Interest Owners beneficially owning more than a majority of the CVRs issued, took action to remove the existing trustee under the CVR Agreement and appoint a successor trustee. The terms of the CVR Agreement specifically provided that only the majority of the registered holders of the CVRs have the right to remove an existing trustee and appoint a successor trustee, and the registered holder of the CVRs was Cede & Co.
Under the CVR Agreement, only the trustee could bring suit to assert the interests of the CVR holders. BMS asserted that, because the Beneficial Interest Owners did not act through DTC or via an omnibus proxy from DTC in removing the existing trustee and appointing the proposed successor trustee, the existing trustee was never properly removed as trustee and the purported successor trustee was never properly appointed as the successor trustee and therefore lacked standing to bring the lawsuit against BMS. The purported successor trustee asserted that any technical issues with the removal and appointment were either waived or ratified by BMS’s execution of a notice regarding its appointment or by DTC’s execution of retroactively effective proxies for the removal and appointment. The District Court agreed with BMS and dismissed the case without prejudice, noting that the defects with the removal and appointment could not be cured retroactively but that the complaint could be refiled by a properly appointed trustee.
Implications
The District Court’s decision in the BMS case has far reaching implications for the capital markets. It is not uncommon for beneficial owners of notes or securities held through the DTC system to certify as to their holdings and for issuers and trustees to rely on such certifications in receiving consents and directions and ultimately taking action based upon such consents or directions. This market accepted practice has the effect of both increasing efficiency and reducing costs associated with a full DTC solicitation.
However, the District Court’s decision in BMS cautions market participants to be mindful in the negotiation of indenture terms, in particular, regarding which rights are reserved for the registered holder of notes versus which rights are exercisable by the beneficial owner of such notes. The District Court emphasized that it could not disregard the contract’s plain language which required action by the registered holder, and specifically rejected the plaintiff’s non-contractual arguments, including that “it is common industry practice for trustees to accept proof of a majority of beneficial holders’ direction of a corporate action, instead of requiring DTC to act as their intermediary.”
Given the ruling’s emphasis on the registered holder language, it is critical that beneficial owners of notes obtain DTC authorization or proxies in advance of taking certain actions or, alternatively, make sure that the applicable indenture or other governing agreement provides for the authorization of owners of beneficial interests to act on behalf of DTC in respect of such actions. Parties need to be cognizant of these provisions and related requirements, especially in the context of contentious issuer-investor relationships, and should strive to obtain all necessary DTC authorizations in advance of taking such actions in order to avoid potential attacks on whether such actions were properly authorized by the terms of the governing contract.
If you have any questions regarding the matters covered in this alert, please contact Gregg Bateman (212-574-1346), Ronald Hewitt (212-574-1367) or Sagar Patel (212-574-1422).
