Thursday, December 31, 2015

‘Confusing’ Reg. S-X Guidance Helps Caesars Defeat Summary Judgment on Guarantee

By Anne Sherry, J.D.

A dispute over the meaning of “wholly owned subsidiary” in Regulation S-X defeated Caesars Casino noteholders’ attempt at summary judgment. The plaintiffs argued that Caesars improperly removed its guarantee on the notes (issued by its subsidiary) without their consent. Caesars countered that if the issuer had already ceased to be a wholly owned subsidiary, the guarantee was inoperative anyway. The dispute on this issue precluded summary judgment, the Southern District of New York held (MeehanCombs Global Credit Opportunities Master Fund, LP v. Caesars Entertainment Corp., December 29, 2015, Scheindlin, S.).

Guarantee’s release. The opinion focuses on the interplay between the Trust Indenture Act and the indenture itself, which in turn incorporates Regulation S-X’s definition of “wholly owned subsidiary.” The indenture governing the notes issued by Caesars Entertainment Operating Co., Inc., releases the parent, Caesars Entertainment Corp., from its guarantee obligations when CEOC ceases to be a wholly owned subsidiary. Under Regulation S-X, a subsidiary is wholly owned if “substantially all of its outstanding voting shares are owned by its parent and/or the parent’s other wholly owned subsidiaries.” CEC argued that its August 2014 amendment of the indenture was irrelevant because CEOC ceased to be a wholly owned subsidiary after CEC sold off about 11 percent of its holdings in May 2014.

The court rejected the plaintiffs’ argument that “absolute and unconditional” language of the guarantee provision conflicted with the indenture’s release provision. That interpretation failed to give meaning to the terms of the guarantee and the provisions permitting its release, and the plaintiffs did not point to any conflict between the provisions. Judicial admission and judicial estoppel also did not preclude Caesars from asserting that the May transactions released the guarantee. CEC’s consistent position on the guarantee’s release was evidenced in press releases it issued to that effect in May.

Confusing staff guidance. Having rejected the plaintiffs’ arguments, the court concluded that a genuine issue of material fact as to whether CEOC was a wholly owned subsidiary as of August 2014 precluded summary judgment. The court did not agree with CEC that SEC staff guidance on Regulation S-X was irrelevant—the indenture made it relevant by referencing the applicable section of the regulation—but wrote that “it is certainly confusing.” The guidance refers to the concept of “substantially wholly owned,” but neither Regulation S-X nor the indenture include the extra adverb. The concept of “substantially wholly owned” makes even less sense when looking at Rule 3-10 of Regulation S-X, which uses the concept of a “100% owned subsidiary” in the context of parent guarantees. Although the SEC staff guidance discusses qualitative factors, the plaintiffs failed to establish those factors.

The case is No. 14-cv-7091.

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