## Facts

- In 1965, Beaunit Corporation (“Old Beaunit”) issued \$25,000,000 of 4¼% convertible subordinated debentures due August 1, 1990, under an indenture naming Manufacturers Hanover Trust Company as trustee.
- The indenture restricted Old Beaunit’s ability to merge unless the successor corporation assumed all obligations under the debentures and the indenture.
- The indenture also contemplated that, after a merger, the conversion privilege could be adjusted so that debentures would be convertible into “some other security” rather than Old Beaunit common stock.
- In February 1967, El Paso Natural Gas Company (“El Paso”) acquired Old Beaunit through a three-corner merger in which Old Beaunit was merged into EPNG Corporation, a wholly owned El Paso subsidiary.
- After the merger, the surviving corporation was renamed Beaunit Corporation (“New Beaunit”).
- New Beaunit executed documents (including a supplemental indenture) by which it assumed the debenture and indenture obligations.
- The supplemental indenture provided that, after the merger, the debentures would be convertible into El Paso common stock (instead of Old Beaunit common stock).
- Ora Alva Broenen purchased a \$2,000 face-value certificate representing two debenture shares on September 3, 1968, and held it without converting.
- Broenen sued El Paso, New Beaunit, and the trustee in federal district court (diversity), claiming the merger and related documents violated the indenture.
- Although her complaint asserted specific indenture breaches, her main theory was that the merger changed the federal income tax result of any future conversion: under then-existing Treasury regulations, conversion into stock of the obligor corporation was generally not a taxable recognition event, but conversion into El Paso stock (when New Beaunit was the obligor) could result in recognition of gain, which she claimed reduced the debentures’ market value.

## Issues

1. Whether the three-corner merger violated the indenture’s merger covenant requiring a successor to assume the debenture and indenture obligations.
2. Whether the supplemental indenture’s adjustment of the conversion privilege to permit conversion into El Paso common stock breached the indenture’s conversion provisions.
3. Whether the alleged loss of favorable tax treatment (and resulting decline in market value) could constitute a breach of the indenture absent an express tax-related promise.

## Decision

- The district court granted summary judgment for El Paso, New Beaunit, and Manufacturers Hanover, and the Seventh Circuit affirmed.
- The court held the merger did not violate the indenture because the post-merger successor (New Beaunit) assumed the debenture and indenture obligations as required.
- The court held the conversion adjustment did not breach the indenture because the indenture authorized an adjustment after a merger so that debentures could be converted into other securities.
- The court rejected Broenen’s tax-based theory because the indenture did not contractually guarantee any particular federal tax outcome for a conversion; a change in tax consequences, standing alone, did not establish an indenture violation.

## Legal Principles

- A convertible-debenture indenture is construed and enforced according to its expressed terms; merger restrictions and conversion protections are defined by the text the parties adopted.
- When an indenture permits a merger conditioned on successor assumption of obligations, and that assumption occurs, the merger does not breach the indenture.
- When an indenture authorizes post-merger adjustment of conversion rights into securities other than the original issuer’s common stock, a conversion into an acquiring company’s stock may be permitted if carried out through the indenture’s adjustment mechanism.
- Absent an express contractual representation or covenant about tax treatment, issuers do not breach an indenture merely because a permitted transaction changes the tax consequences of a holder’s future conversion or affects market value.

## Conclusion

The Seventh Circuit affirmed summary judgment for the defendants, holding that the three-corner merger and the supplemental indenture complied with the debenture indenture’s successor-assumption and conversion-adjustment provisions, and that the claimed loss of nonrecognition tax treatment on a potential future conversion did not create liability because the indenture contained no promise preserving that tax result.


Broenen v. Beaunit Corp., 440 F.2d 1244 (1970)