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Public companies may have caught a break from a federal court’s recent ruling that a company didn’t breach a debt agreement by delaying financial filings to address stock-options investigations. Cyberonics Inc.’s stock-options probe led to delayed Securities and Exchange Commission (SEC) filings and financial reports to debt trustee Wells Fargo & Co. The bank acted as the agent for noteholders funding $125 million in bonds issued by the company. The U.S. District Court for the Southern District of Texas agreed with medical device maker Cyberonics that the contract simply required the company to send copies of its SEC filings to Wells Fargo within 15 days of filing them with the SEC. When Cyberonics missed the SEC deadline, its report to Wells Fargo was delayed, and Wells Fargo sent Cyberonics a default notice right away. The court granted summary judgement to Cyberonics on June 13 and ruled that the company was required only to deliver documents to Wells Fargo after filing them with the SEC. Cyberonics Inc. v. Wells Fargo Bank National Association, No. 07-121 (S.D. Texas). Cyberonics tied its SEC filing delays to an informal SEC inquiry and a subpoena from the Southern District of New York, which “remain ongoing,” according to company reports. The government probes prompted Cyberonics to put its SEC financial reporting on hold for about six months while it investigated its stock-options practices. It eventually restated fiscal periods 1994 through 2006 to add stock-based compensation expenses. During those months, Cyberonics’ dispute with Wells Fargo escalated into a court case. ‘A big difference’ Cyberonics’ lawyer, Scott Fletcher, a partner at Houston-based Vinson & Elkins, said the ruling is important because it opposes a 2006 New York state court decision that found McLean, Va.-based BearingPoint Inc. liable for defaulting on its contract with a debt trustee by delaying SEC financial filings and reports. “[ Cyberonics] will make a big difference to companies in a similar situation who can’t make timely SEC filings,” Fletcher said. Fletcher also said the Cyberonics decision should discourage hedge funds that hold notes from prompting trustees to declare that companies are in default for late SEC filings. Wells Fargo had claimed that Cyberonics’ SEC delays entitled it an acceleration of the notes’ due dates or more than $20 million in damages. Samuel Stubbs, a Pillsbury Winthrop Shaw Pittman partner in Houston who represented Wells Fargo in the Cyberonics case, did not respond to requests for comment. In his Cyberonics order, Judge Kenneth M. Hoyt said the “obvious intent” of the company’s indenture agreement with trustee Wells Fargo was not to obligate Cyberonics to make timely SEC filings, but to “keep the trustee informed of company developments.” In contrast, the New York decision involving BearingPoint said the company was “obligated to accelerate immediately all principal and interest” because the late filings had breached its debt contract. Bank of New York v. BearingPoint, No. 06-600169 (New York Co., N.Y., Sup. Ct.). BearingPoint settled the case by agreeing to pay higher interest rates and higher fees to the note holders. New York case rejected In Cyberonics, Hoyt pointedly rejected the New York state court’s interpretation of “very similar” provisions in the companies’ agreements with the note holders. “ BearingPoint is an unpublished decision from a state trial court and is not binding on this Court,” Hoyt wrote. Jeffrey I. Ross, a shareholder at Minneapolis-based Anthony Ostlund & Baer who represented the Bank of New York on the BearingPoint case, believes Cyberonics will ultimately have no impact since most corporate indentures are subject to New York state law and disputes about them are decided by New York state courts. Ross said the BearingPoint judge is highly respected and knowledgeable about corporate indentures. “The force of his reasoning is compelling,” Ross said.

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