The Scope of Section 316(B) After Marblegate

Capital Markets Law Journal (Forthcoming)

NYU Law and Economics Research Paper No. 18-01

13 Pages Posted: 6 Feb 2018 Last revised: 9 Feb 2018

See all articles by Marcel Kahan

Marcel Kahan

New York University School of Law; European Corporate Governance Institute

Date Written: February 1, 2018

Abstract

Section 316(b) of the Trust Indenture Act provides that right of any to receive payment of the principal and interest may not be impaired or affected without the holder’s consent. This article analyzes the recent case law on whether corporate restructurings that impair the practical ability of bondholders to obtain payment on their bonds violate Section 316(b) of the Trust Indenture Act. After concluding that the Court of Appeals for the Second Circuit was correct in confining the scope of Section 316(b) to formal amendments to core payment terms, the article turns to an issue left open by Marblegate: whether formal amendments that release a guarantor or that expand the conditions in which a guarantor is automatically released are within the scope of Section 316(b) and thus require the consent of each affected holder. Based both on the literal wording of Section 316(b) and, as far as parent-guarantors are concerned, on its economic function, Section 316(b) should be held to require the consent of each affected holder for an amendment releasing a guarantor from its obligations under the guarantee. By contrast, applying Section 316(b) to subsidiary guarantors does neither much harm nor much good since indentures leave companies with significant scope to eviscerate the economic benefit of subsidiary guarantees.

Suggested Citation

Kahan, Marcel, The Scope of Section 316(B) After Marblegate (February 1, 2018). Capital Markets Law Journal (Forthcoming), NYU Law and Economics Research Paper No. 18-01, Available at SSRN: https://ssrn.com/abstract=3118641

Marcel Kahan (Contact Author)

New York University School of Law ( email )

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European Corporate Governance Institute ( email )

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Belgium

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