In AG Oncon, LLC et al v. Ligand Pharmaceuticals Inc., the Delaware Court of Chancery upheld an issuer’s right to conform an Indenture to the related description of notes contained in the offering memorandum used to privately place the convertible notes.

The Indenture authorized Ligand to conform its terms to the description of the notes in the offering memorandum. Three-and-a-half years after issuing the notes, Ligand invoked this right to replace a defined term in the conversion formula in the Indenture.

The offering memorandum explained that the conversion value of the notes would depend on the “daily VWAP,” defined as the value-weighted average price of Ligand’s stock on each day of a fifty-trading-day observation period. The offering memorandum stated that for each trading day, the conversion value would be divided by the daily VWAP, generating a value-equivalent number of shares for that day.

Unfortunately, the Indenture used a different term in the denominator of the conversion formula. Instead of referring to the daily VWAP, the Indenture referred to the “Daily Principal Portion.” That term was defined as one-fiftieth of the principal due on the note. It was a fixed dollar amount ($20 per $1,000 of issuance) that had nothing to do with the trading price of Ligand’s stock, and its use made no sense in light of what the formula attempted to calculate. Exercising its right to conform the terms of the Indenture to the offering memorandum, Ligand replaced the reference to the Daily Principal Portion with a reference to the daily VWAP, which the Court referred to as the Conversion Formula Amendment.

The plaintiffs were sophisticated bond traders who purchased the notes in the secondary market. In this lawsuit, they sought to invalidate the amendment and enforce the conversion formula as it originally appeared in the Indenture. The notes Ligand issued had a face value of $245 million. Four years after issuance, the plaintiffs claimed they are entitled to conversion consideration amounting to $4 billion.

The Delaware Court of Chancery granted Ligand’s motion to dismiss for failure to state a claim. Section 9.01(b) of the Indenture stated that Ligand “may amend . . . this Indenture or the Notes without the consent of any Holder to: . . . conform the terms of this Indenture or the Notes to the ‘Description of the Notes’ section of the Offering Memorandum,” which the Court referred to as the Conforming Amendment Provision. The Court rejected plaintiff’s claim that the Indenture constituted the complete and final agreement governing the notes such that Ligand could not rely on the Offering Memorandum when effectuating the Conversion Formula Amendment. The Court rejected this argument because the Indenture itself contained the Conforming Amendment Provision, which allowed Ligand to conform the Indenture to the Offering Memorandum. The right was not dependent on any language or document outside of the Indenture.

The plaintiffs also claimed that the Conversion Formula Amendment materially and adversely amended the noteholders’ rights without their consent in violation of two other provisions of the Indenture. The plaintiffs asserted that Ligand could not rely on the Conforming Amendment Provision, because that provision must be read in conjunction with the other provisions of the Indenture. Ligand argued that the Conforming Amendment Provision means what it says and permits any amendment necessary to conform the Indenture to the Offering Memorandum.

This Court agreed with Ligand. In this case, reading the Indenture as a whole established that Ligand could rely on the Conforming Amendment Provision to effectuate the Conversion Formula Amendment. The Indenture’s terms recognize that the Description of the Notes section in the Offering Memorandum established the baseline terms for the notes. In the Conforming Amendment Provision, the Indenture authorized any amendments necessary to conform the Indenture to those baseline terms. Other provisions in the Indenture restricted amendments that would depart from the baseline terms. Those other provisions limit midstream amendments. The other provisions did not apply to amendments necessary to conform the Indenture to the baseline terms set forth in the Offering Memorandum.

Finally, plaintiffs argued that the Conversion Formulae Amendment violated Section 316(b) of the Trust Indenture Act. That argument failed for several reasons. First, the notes were privately offered and thus the indenture was not required to be qualified under the Trust Indenture Act. The Court found that while some provisions of the Trust Indenture Act were incorporated into the Indenture, Section 316(b) was not. Finally, Section 316(b) by its terms protects “the right of any holder of any indenture security to receive payment of the principal of and interest on such indenture security, on or after the respective due dates expressed in such indenture security . . . .” According to the Court the protections of Section 316(b) do not extend to consideration received under a conversion right.