Poor Drafting in the Chesapeake Energy Debacle

In his most recent post on Weil’s Global Private Equity Watch (here), Glenn “Iceman” West discusses a recent Second Circuit opinion relating to Chesapeake Energy’s redemption of $1.3 billion in notes based on Chesapeake’s interpretation of the notes’ supplemental indenture.

The supplemental indenture designates the period between 15 November 2012, and 15 March 2013 as the “Special Early Redemption Period.” At the end of the Special Early Redemption Period, Chesapeake gave notice that it was redeeming the notes at par, and it redeemed the notes after the Special Early Redemption Period. The indenture trustee filed suit, arguing that under the supplemental indenture Chesapeake could redeem the notes at par only during the Special Early Redemption Period. On appeal, the Second Circuit agreed with the indenture trustee.

Here’s the relevant language from section 1.7(b) of the supplemental indenture:

At any time from and including November 15, 2012 to and including March 15, 2013 (the “Special Early Redemption Period”), [Chesapeake], at its option, may redeem the Notes in whole or from time to time in part for price equal to 100% of the principal amount of the Notes to be redeemed .… [Chesapeake] shall be permitted to exercise its option to redeem the Notes pursuant to this Section 1.7 so long as it gives the notice of redemption pursuant to Section 3.04 of the Base Indenture during the Special Early Redemption Period. Any redemption pursuant to this Section 1.7(b) shall be conducted, to the extent applicable, pursuant to the provisions of Sections 3.02 through 3.07 of the Base Indenture.

And here’s relevant language from section 3.04 of the base indenture:

(a) At least 30 days but not more than 60 days before a redemption date, [Chesapeake] shall mail a notice of redemption…to each Holder of Securities ….

Two things that come to mind:

First, Glenn says, “The actual subjective intent of the above provisions may well have been to provide Chesapeake a four month period in which to provide the required 30-60 days’ notice of redemption rather that to complete the actual redemption.” If that’s what the drafter intended, they screwed up. For Chesapeake’s meaning to apply, “redeem” would have to actually mean “give notice of redemption”. That interpretation is not only counterintuitive, it’s actually precluded by the way section 1.7(b) says both “may redeem” and “gives the notice of redemption”. That suggests that the drafter was aware of the distinction, and that “redeem” could mean only, well, redeem. If you argue that redeeming and giving notice of redemption mean the same thing, you would have to explain why the drafter in effect saw fit to say the same thing twice.

But the trustee’s interpretation is problematic, too. It’s odd that section 1.7(b) made it a condition to redemption during the Special Early Redemption Period that notice of redemption be given during the Special Early Redemption Period. That had the effect of shortening by 30 days the period for redemption. In effect, contrary to what section 1.7(b) says, Chesapeake could not redeem the notes during the entire Special Early Redemption Period. If that was what was intended, it would have been clearer to shorten the Special Early Redemption Period. I suspect that the requirement that notice be given during the Special Early Redemption Period was added later without fully considering the implications.

Accepting the trustee’s interpretation requires less in the way of contortions, so I can understand why the Second Circuit accepted it.

In his post, Glenn advises lawyers to stay current on important drafting-related caselaw “so that they are in a better position to be able to accurately ‘predict’ how a court will interpret the words used in those agreements.” That’s good advice, of course, but the Chesapeake dispute could have been avoided if something far more basic had been on hand when drafts were being circulated: a fresh pair of eyes.