## Facts

- James River Corporation of Virginia issued $250 million of 30-year 10.75% debentures governed by an indenture containing a non-refund covenant limiting certain redemptions.
- The covenant prohibited redemption of the debentures with funds borrowed at an interest rate lower than 10.75%.
- In 1992, James River made a cash tender offer for the debentures; Merrill Lynch served as dealer-manager.
- James River financed the tender offer largely by issuing $200 million of notes at 6.75%, and about 98% of the debentures were tendered.
- After the tender offer expired, James River redeemed the remaining 2% of debentures using proceeds from an issuance of preferred stock, a permitted funding source under the indenture.
- A class of debenture holders sued James River and Merrill Lynch, alleging the tender offer and redemption were effectively one transaction that refunded the debentures with lower-rate debt, violating the covenant and coercing holders to tender.
- The trial court granted summary judgment for defendants; the debenture holders appealed.

## Issues

1. Whether the indenture’s non-refund covenant restricting certain “redemptions” also prohibited a debt-financed voluntary tender offer used to retire most of the outstanding debentures.
2. Whether the tender offer followed by a preferred-stock-funded redemption of the remainder constituted an impermissible refunding in violation of the covenant.
3. Whether the structure and marketing of the transaction supported fraud or other actionable misconduct by the issuer or dealer-manager.

## Decision

- The Supreme Court of Alabama affirmed summary judgment for James River and Merrill Lynch.
- The court held the non-refund covenant applied to formal redemptions, not to voluntary tender offers.
- Because the only formal redemption (the remaining 2%) was funded with preferred stock proceeds permitted by the indenture, there was no covenant breach.
- The court found no genuine issue of material fact; the dispute turned on contract interpretation as a matter of law.
- The court rejected claims of fraud or wrongful conduct where the transaction conformed to the indenture and lacked evidence of material misrepresentation or omission.

## Legal Principles

- A non-refund covenant is enforced according to its express contractual terms; courts will not extend it to economically similar transactions absent language covering them.
- Restrictions drafted to govern “redemption” do not, without more, restrict voluntary tender offers or other market purchases, even if financed with lower-cost debt.
- When the material facts are undisputed and the claim turns on interpretation of unambiguous indenture language, summary judgment is appropriate.
- Allegations that a transaction defeats a covenant’s perceived purpose do not establish fraud or breach where disclosures are not materially false or misleading and the issuer acts within the contract’s terms.

## Conclusion

The court held that the indenture’s non-refund covenant limited only specified redemptions and did not bar James River’s debt-financed tender offer; because the remaining bonds were redeemed with a permitted funding source, the transaction did not breach the covenant and summary judgment for defendants was proper.


Mut. Sav. Life Ins. Co. v. James River Corp., 716 So. 2d 1172 (Ala. 1998)