A Synchronoss Technologies, Inc. bondholder group, representing a majority of the company’s USD 230m of convertible notes, sent the company a letter on 15 November alleging that the Synchronoss’ 14 November sale of subsidiary Intralinks Holdings, Inc. constituted a sale of “substantially all” of the company’s consolidated assets. Under the notes’ indenture, a sale of “substantially all” of Synchronoss’ assets triggers a requirement to offer to repurchase the notes at par and a requirement that the buyer assume the notes. The noteholder letter reportedly argues that Intralinks comprised approximately 73% of the total value of Synchronoss, based on Synchronoss’ market value. In this report, the Debtwire legal analyst team discusses the default allegations and surrounding transactions and provides historical precedents to use in analyzing whether the sale of Intralinks actually did constitute a sale of “substantially all” of Synchronoss’ assets. Unfortunately, caselaw provides little guidance on what constitutes “substantially all” of a company’s assets, a problem compounded by Synchronoss’ financial reporting issues.
The convertible notes
Synchronoss (NASDAQ:SNCR) is a Delaware corporation headquartered in Bridgewater, New Jersey. In August 2014, Synchronoss issued USD 230m of 0.75% convertible senior notes due 2019, which were marketed under a prospectus that described Synchronoss as a “a mobile innovation leader that provides cloud solutions and software-based activation for connected devices globally.” The notes’ indenture is governed by New York law and bars Synchronoss from optionally redeeming the notes.
Under the indenture, a “Fundamental Change” is triggered upon a sale of “all or substantially all of the consolidated assets of the Company and its Subsidiaries, taken as a whole,” requiring Synchronoss or a third party to, within 20 calendar days, offer to repurchase the notes at par. The notes recently traded at 93.7%. In addition, and as is typical, the ‘Successor Obligor’ provision of the Merger covenant also uses the phrase “substantially all” assets, prohibiting Synchronoss from selling “substantially all of its properties and assets” unless the buyer assumes the notes pursuant to a supplemental indenture and, immediately after giving effect to the sale, no default or Event of Default exists. Thus, a sale of substantially all of Synchronoss’ assets presents its noteholders with a choice: either cash out at par or look to the purchaser as their new obligor. The company’s failure to comply with those requirements would trigger an Event of Default, which could lead to an acceleration of the notes or other legal and equitable remedies, such as specific performance.
The Intralinks acquisition
Synchronoss announced on 6 December 2016 that it had agreed to acquire Intralinks, a software-as-a-service provider of secure, cloud-based content collaboration software for the enterprise, M&A, and debt capital markets. The stated purpose of the acquisition was to shift Synchronoss’ focus to the enterprise market, with the CEO of Intralinks to replace the existing CEO of Synchronoss. The acquisition of Intralinks closed on 19 January 2017 for a purchase price of USD 851.6m, financed with a USD 900m senior secured term loan due 2024. Intralinks did not guarantee the convertible notes.
From December 2016 to February 2017, Synchronoss sold various assets including the following: 70% of its carrier activation business for USD 146m to Sequential International Holdings, LLC (f/k/a Omniglobe International), with the intent to sell the remaining 30% within the following 18 months; its Mirapoint activation business for an undisclosed amount, at a USD 1.4m gain; and its SpeechCycle business for USD 13.5m of proceeds. The stated purpose of the Sequential sale was to shift Synchronoss away from its legacy activation business to a cloud, enterprise, and software driven model.
The Intralinks divesture
On 5 May, private equity firm Siris Capital Group, LLC announced that it had acquired 12.93% of Synchronoss’ common stock, and on 19 May the companies entered a non-disclosure agreement in connection with a potential strategic transaction.
On 22 June, Synchronoss stated in an investor presentation that the “Intralinks business is healthy and integration is on track” and that the “Intralinks strategic rationale remains intact and integration is progressing with early cross-sell opportunities starting to materialize.”
The next day, Synchronoss announced that Siris Capital had expressed interest to acquire Synchronoss at USD 18 per share, and, on 6 July, Synchronoss announced that that it had hired financial advisors and its board of directors was considering “a broad range of strategic alternatives that may have the potential to unlock shareholder value.” On 19 September, Synchronoss announced that it was fielding interest from multiple parties in addition to Siris Capital.
Then, on 17 October, Synchronoss announced that it had concluded its evaluation of strategic alternatives and would “double down” on the media and communications business and sell Intralinks to Siris Capital for USD 977m of cash plus up to USD 25m of contingent consideration (triggered upon a future sale by Siris Capital at specified amounts). Synchronoss characterized the sale as a divesture of a “non-core asset.” Synchronoss also announced a sale to Siris Capital of a newly created series of preferred convertible stock for USD 185m, which is expected to close in February 2018.
Subsequently, on approximately 9 November, prior to deal closing, Synchronoss received a letter from a group representing a majority of Synchronoss’ convertible notes due 2019, alleging that a sale of Intralinks would constitute a sale of “substantially all” of Synchronoss’ assets. On 14 November, Synchronoss announced that it had closed on the sale of Intralinks, and, one day later, the noteholder group delivered another letter, described by Debtwire sources as a notice of default for failure to assume the notes. Neither of the letters have been made publicly available, but the letters reportedly argue that, based on key market indicators such as the Synchronoss stock price, Intralinks comprised 73% of the total value of the company. 
In a comment to Debtwire, a representative of Synchronoss stated that “[t]he Company does not agree that the Intralinks sale constituted a sale of substantially all of the assets and the Company has sent a letter [to the noteholder group] stating disagreement with the merits of the claim.”
So how substantial is Intralinks?
As is typical, “substantially all assets” is not a defined term in the bond indenture, and, as discussed below, there is also no generally recognized definition of that term. Therefore, as expected, the prospectus for the 2014 offering of the convertible notes contains a customary disclosure, stating that “[t]he definition of fundamental change includes a phrase relating to the … sale … of ‘all or substantially all’ of our consolidated assets. There is no precise, established definition of the phrase ‘substantially all’ under applicable law. Accordingly, the ability of a holder of the notes to require us to purchase its notes as a result of the … sale … of less than all of our assets may be uncertain.”
Further complicating the question, Synchronoss’ 10-K for YE16 does not account for the Intralinks acquisition as it closed in January 2017, and Synchronoss has not filed its 10-Qs for 1Q17 to 3Q17. Synchronoss did, however, file unaudited pro forma financial statements on 6 April 2017 that account for the Intralinks acquisition, but the company disclosed on 13 June 2017 that it would need to restate its financials for FY15 and FY16 to correct the accounting treatment of certain licensing transactions, calling into question whether those financials should be relied on in analyzing whether the sale of Intralinks constitutes a sale of “substantially all” of Synchronoss’ assets. Per the 13 June disclosure and a 22 June 2017 investor presentation, Synchronoss estimated that the restatements would impact revenue no more than 10% for each of the fiscal years and were not expected to impact total cash flows. As such, the pro forma financial statements filed 6 April are, unfortunately, the best (and only) reported financials available to analyze whether Intralinks constituted “substantially all” of Synchronoss’ assets.
Substantially little precedent
Case law isn’t much help either as there are only a few judicial cases that have opined on what constitutes “substantially all” assets in the context of an indenture, and the New York Court of Appeals (the highest state court) has not spoken on the issue. Below, we discuss six cases that have addressed the topic. 
What we do know is that, under New York law, there is no bright-line rule of what constitutes “substantially all” assets in the context of an indenture. Courts interpreting indentures consider quantitative and potentially qualitative factors. It is unknown the extent to which a New York court interpreting a New York-governed indenture would consider qualitative factors, which are highly subjective, but Delaware courts recognize such an analysis when interpreting New York law.
Quantitative factors that courts have used or mentioned include the following:
- book value of assets;
- book value of operating assets;
- operating revenues;
- operating profits;
- earnings potential; and
- valuation methods, such as discounted cash flow, comparable transactions, and comparable company analyses.
Book value of assets is considered a conservative metric, because it ignores a company’s going concern value, but it is the most widely used metric in considering whether a sale of substantially all assets has occurred.
Qualitative factors that courts have considered include the following:
- noteholders’ expectation of continuity of assets;
- whether the sale involves the company’s primary operating assets;
- whether the sale fundamentally changes the nature or character of the company’s business; and
- whether the sale is outside the ordinary course of business.
The American Bar Association’s 1965 Commentaries on Model Debenture Indenture Provisions advises that the guiding inquiry when evaluating a sale qualitatively is whether the company “would cease to operate the business to which, in practical effect, the debentureholders have looked for payment of the debentures.” 
First, in the 1964 case of B.S.F. Company, the Supreme Court of Delaware, interpreting a Pennsylvania-governed indenture for convertible debentures (not New York law, which governs Synchronoss’ notes), held that a sale of “substantially all” assets occurred when a company sold the equity of a subsidiary that, at the debentures’ issue date, constituted ~75% of the company’s consolidated total assets and was the company’s “only substantial income-producing asset.”  In the court’s view, “[p]resumably the debentures were purchased on the faith of that, and presumably the Indenture was intended to insure that major asset would not be dissipated… No other conclusion seem[ed] justified since the major asset leading to the purchase of the debentures ha[d] been disposed of.”
Second, in the seminal 1982 case of Sharon Steel, the Second Circuit held that a sale of “substantially all” assets did not occur when a company sold assets that accounted for only 51% of the book value of the seller’s total assets.  The court found the question to be “easily answered” and did “not regard the question … as even close.” “In no sense” was it a sale of “substantially all” assets. The court also mentioned other metrics, including book value of operating properties – 41%, operating revenues – 38%, and operating profits – 13%. But the court did not factor in those metrics, as it found the book value of total assets sufficient to determine that a sale of “substantially all” assets did not occur. Thus, Sharon Steel is generally interpreted as setting the minimum quantitative threshold a transaction must cross to call into question whether a “substantially all” issue exists – 51% of the book value of total assets. The court did not discuss qualitative factors, and some therefore interpret Sharon Steel as providing for a purely quantitative analysis. Others cite the court’s discussion of Successor Obligor clauses ensuring a “continuity of assets” as evidence the court considered qualitative factors.
Third, in the 2000 case of Angeion, the Court of Appeals of Minnesota, interpreting a New York-governed indenture for convertible notes, reversed a summary judgment decision that was in favor of the company and remanded the case for further discovery.  Of note, the court stated that the company had not disclosed the extent to which the divested assets constituted a percentage of book value of assets, operating revenue, or operating profit, and, therefore, all of the information the trustee “needed to demonstrate a material issue of fact on whether [the company] transferred ‘all or substantially all’ of its assets was within [the company’s] possession.” “Without [that] information, it [was] nearly impossible to weigh any of the factors that have been used by the courts to determine whether a corporation has transferred all or substantially all assets.”
Fourth, in the 2004 unpublished trial opinion of HFTP Investments, the New York Supreme Court, interpreting convertible notes and a note-linked security, weighed both quantitative and qualitative factors and held that a sale of “substantially all” assets occurred.  Quantitative factors the court discussed for the previous fiscal year included total assets – 75%, total revenues – 60%, and operating income – a “substantial majority.” The court also found that the qualitative factors listed above were satisfied. To our knowledge, HFTP Investments represents one of the first times a New York court expressly weighed qualitative factors, but, note, the decision is not binding authority.
Fifth, in the 2012 case of BankAtlantic Bancorp, the Delaware Court of Chancery, interpreting New York-governed indentures for trust preferred securities (TruPS), held that a sale of “substantially all” assets occurred when a bank holding company divested a subsidiary that constituted 85-90% of the company’s book value.  Of note, the court stated the following: “Nothing in New York law suggests that a court is limited to book value when evaluating a parent corporation’s 100% equity interest in an operating subsidiary. A court readily could value a 100% equity interest using other methodologies, such as a discounted cash flow analysis, comparable transactions analysis, or comparable company analysis. A court could take into account factors such as earnings potential and goodwill. Yet even under the conservative book value metric, [the company] will transfer 85-90% of its assets.” Also of note, the court in BankAtlantic Bankcorp engaged in a lengthy qualitative analysis, citing the HFTP Investments case for the legal rule that New York courts consider both quantitative and qualitative factors.
And sixth, in connection with the 2006-07 acquisition by Rite Aid Corporation of the US retail segment of The Jean Coutu Group (PJC), Inc., noteholders of JCG’s subordinated notes walked away with a significant payout.  There, JCG sought a judicial declaration that the sale constituted a sale of “substantially all” of the company’s assets, arguing that the assets to be sold represented the entire retail business, virtually all the company’s operating assets, and over 90% of its total capital assets, intangible assets, and goodwill. In response, noteholders contended that the company’s Canadian operations, comprising mainly real estate assets and commercial leases with franchisees, constituted 56.3% of the company’s operating income for the most recent fiscal year. Ultimately, the parties settled before the court ruled, with noteholders negotiating a T+150bps make-whole payout.
As is obvious from the above precedents, and as Synchronoss’ 2014 prospectus explained, the outcome of a dispute over whether Intralinks constituted substantially all of Synchronoss’ assets could prove unpredictable. But we do at least have some guidance on the bounds of the analysis a court would undertake:
Quantitative Analysis: Under Sharon Steel, the initial inquiry is whether the book value of Intralinks constituted at least 51% of the book value of Synchronoss. Per the pro forma financial statements Synchronoss filed 6 April 2017, which account for the Intralinks acquisition as of FY16 and which are subject to restatement, the book value of Synchronoss’ pre-transaction assets (USD 1,164.7m) and the book value of the combined company’s pro forma assets (USD 2,184m) imply that Intralinks accounted for roughly 46.7% of Synchronoss’ total assets on a pro forma basis. Therefore, it’s questionable whether noteholders could even survive the initial stage of inquiry. As to the other customary metrics, including book value of operating assets and operating revenues and profits, Intralinks does not appear to cross a majority threshold, using the 6 April financial statements.
All of these percentages could be higher, including book value of assets, because a court could possibly also account for other assets that Synchronoss has divested if considered part of a single overarching transaction, including the sales of the carrier activation business, the Mirapoint activation business, and the SpeechCycle business.
As discussed above, Synchronoss’ noteholders have not yet made any specific arguments concerning the customary quantitative factors and, per Debtwire intelligence, instead initially argue that that Intralinks comprised approximately 73% of the total value of Synchronoss, based on Synchronoss’ market value. Taking that figure as true, noteholders would need to convince a court to (a) disregard the customary metrics and (b) recognize market value as the governing factor in this situation. We are unaware of any cases that have used such a metric, which appears to be borrowed from caselaw for Delaware shareholder protection statutes.  There is a chance that a court could potentially dismiss such an analysis outright.
On the other hand, noteholders have—or more correctly the company has—an information problem, as Synchronoss has not provided any of its 10-Qs for FY17 and has yet to publish segmented financials. Thus, similar to the Angeion case, all of the relevant information is in Synchronoss’ possession, and a court could be reluctant to make any ruling without extensive discovery. Therefore, similar to the JCG / Rite Aid situation, there could be value for noteholders in simply calling the Intralinks sale into doubt and subjecting it to prolonged litigation.
Qualitative Analysis: A qualitative analysis presents unpredictable questions of its own. As a threshold matter, a qualitative analysis would be driven by whether a court evaluated Synchronoss at the 2014 issue date or pro forma for the Intralinks acquisition. The indenture contains no requirement that an analysis should be limited to Synchronoss’ assets on the notes’ issue date, and noteholders could allege that they purchased the notes in 2016-17, based on the expectation of Synchronoss acquiring Intralinks and moving into the enterprise space. On the other hand, it will be difficult to craft compelling arguments for an asset Synchronoss owned for only ~10 months.
A lawsuit over the sale could be filed by anyone at this point, and noteholders would probably prefer that suit to be in Delaware, where courts have expressed a willingness to extend a “substantially all” analysis beyond the customary quantitative factors. Although Intralinks likely constituted less than a majority of Synchronoss’ book value of assets, analyzing whether Intralinks constituted “substantially all” of Synchronoss’ assets is not a simple inquiry. Ultimately, the answer may not even matter, as there may be value for noteholders in simply calling the transaction in to question.
To avoid a potential unwinding of the Intralinks sale, Synchronoss may consider setting aside in a special fund proceeds of the Intralinks sale sufficient to prepay, if necessary, the outstanding USD 230m of convertible notes. As of 30 September, Synchronoss had USD 215m of balance sheet cash and approximately USD 75m of cash proceeds are expected from the Intralinks sale, after prepayment of the USD 900m term loan.
by Joseph Henry
Joseph (“Jody”) Henry is a member of Debtwire’s legal analyst team. Jody previously worked as an associate analyst at research firm Covenant Review and joined Acuris in 2015, where his coverage has focused on LBOs, refinancings, and out-of-court restructurings.
Any opinion, analysis, or information provided in this article is not intended, nor should be construed, as legal advice, including, but not limited to, investment advice as defined by the Investment Company Act of 1940. Debtwire does not provide any legal advice, and subscribers should consult with their own legal counsel for matters requiring legal advice.
 Independent of the “substantially all” issue, Synchronoss received a notice of default on 13 October 2017 from holders representing 25%+ of the convertible notes for failure to comply with the notes’ Reporting covenant. Per the indenture, an Event of Default for noncompliance with the Reporting covenant does not trigger an acceleration right for the first 360 days following the EoD, and noteholders instead receive a step-up in coupon during that period.
 We do not discuss a handful of cases that interpret the phrase “substantially all” in the context of an indenture vis-à-vis spin-offs and also aggregation of multiple divestures, and also in non-indenture contexts such as shareholder protection statutes that require a company to obtain shareholder approval to sell all or substantially all of its assets, which might provide additional guidance. For example, see Bank of New York v. Tyco International Group, S.A., 545 F. Supp. 2d 312 (S.D.N.Y. 2008) (analyzing phrase in context of spin-off under an indenture); Bank of New York Mellon Trust Co., N.A. v. Liberty Media Corp., 29 A.3d 225 (Del.Sup.2011) (analyzing aggregation in context of spin-off under an indenture); and Hollinger Inc. v. Hollinger International, Inc., 858 A.2d 342 (Del. Ch. 2004) (considering a multitude of quantitative and qualitative factors in context of shareholder protection statute).
 American Bar Association, Commentaries on Model Debenture Indenture Provisions (1965), § 10-13, pg. 423.
 B.S.F. Co. v. Phila. Nat’l Bank, 204 A.2d 746, 42 Del.Ch. 106 (Del. 1964).
 Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d 1039 (2d Cir. 1982), cert. denied, 460 U.S. 1012 (1983).
 U.S. Bank Nat’l Ass’n v. Angeion Corp., 615 N.W.2d 425 (Minn. Ct. App. 2000).
 HFTP Investments, L.L.C. v. Grupo TMM, S.A., 2004 WL 5641710 (N.Y. Sup. Ct. 2004).
 In re BankAtlantic Bancorp, Inc. Litigation, 39 A.3d 824 (Del. Ch. 2012);
 Debtwire’s 2006-07 coverage of that situation can be found here. The complaint is available here, and the noteholders’ answer is available here. The 6-K announcing resolution of the dispute is available here.
 See Hollinger Inc. v. Hollinger International, Inc., 858 A.2d 342 (Del. Ch. 2004).