The corporate parties to this action are among the country’s most sophisticated financial institutions, as familiar with the Wall Street investment community and the securities market as American consumers are with the Oreo cookies and Winston cigarettes made by defendant RJR Nabisco, Inc. (sometimes ‘‘the company’’ or ‘‘RJR Nabisco’’). The present action traces its origins to October 20, 1988, when F. Ross Johnson, then the Chief Executive Officer of RJR Nabisco, proposed a $17 billion leveraged buy-out (‘‘LBO’’) of the company’s shareholders, at $75 per share. (Court’s footnote: ‘‘A leveraged buy-out occurs when a group of investors, usually including members of a company’s management team, buy the company under financial arrangements that include little equity and significant new debt. The necessary debt financing typically includes mortgages or high risk/high yield bonds, popularly known as ‘‘junk bonds.’’ Additionally, a portion of this debt is generally secured by the company’s assets. Some of the acquired company’s assets are usually sold after the transaction is completed in order to reduce the debt incurred in the acquisition.’’ [See Chapter 37.]) Within a few days, a bidding war developed among the investment group led by Johnson and the investment firm of Kohlberg Kravis Roberts & Co. (‘‘KKR’’), and others. On December 1, 1988, a special committee of RJR Nabisco directors, established by the company specifically to consider the competing proposals, recommended that the company accept the KKR proposal, a $24 billion LBO that called for the purchase of the company’s outstanding stock at roughly $109 per share. 

***

   Plaintiffs * * * allege, in short, that RJR Nabisco’s actions have drastically impaired the value of bonds previously issued to plaintiffs by, in effect, misappropriating the value of those bonds to help finance the LBO and to distribute an enormous windfall to the company’s shareholders. As a result, plaintiffs argue, they have unfairly suffered a multimillion dollar loss in the value of their bonds.

***

   Although the numbers involved in this case are large, and the financing necessary to complete the LBO unprecedented, the legal principles nonetheless remain discrete and familiar. Yet while the instant motions thus primarily require the Court to evaluate and apply traditional rules of equity and contract interpretation, plaintiffs do raise issues of first impression in the context of an LBO. At the heart of the present motions lies plaintiffs’ claim that RJR Nabisco violated a restrictive covenant—not an explicit covenant found within the four corners of the relevant bond indentures, but rather an implied covenant of good faith and fair dealing—not to incur the debt necessary to facilitate the LBO and thereby betray what plaintiffs claim was the fundamental basis of their bargain with the company. The company, plaintiffs assert, consistently reassured its bondholders that it had a ‘‘mandate’’ from its Board of Directors to maintain RJR Nabisco’s preferred credit rating. Plaintiffs ask this Court first to imply a covenant of good faith and fair dealing that would prevent the recent transaction, then to hold that this covenant has been breached, and finally to require RJR Nabisco to redeem their bonds.

   RJR Nabisco defends the LBO by pointing to express provisions in the bond indentures that * * * permit mergers and the assumption of additional debt. These provisions, as well as others that could have been included but were not, were known to the market and to plaintiffs, sophisticated investors who freely bought the bonds and were equally free to sell them at any time. Any attempt by this Court to create contractual terms post hoc, defendants contend, not only finds no basis in the controlling law and undisputed facts of this case, but also would constitute an impermissible invasion into the free and open operation of the marketplace.

   For the reasons set forth below, this Court agrees with defendants. There being no express covenant between the parties that would restrict the incurrence of new debt, and no perceived direction to that end from covenants that are express, this Court will not imply a covenant to prevent the recent LBO and thereby create an indenture term that, while bargained for in other contexts, was not bargained for here and was not even within the mutual contemplation of the parties.

  Background
        ***

The Parties

Metropolitan Life Insurance Co. (‘‘MetLife’’), incorporated in New York, is a life insurance company that provides pension benefits for 42 million individuals. According to its most recent annual report, MetLife’s assets exceed $88 billion and its debt securities holdings exceed $49 billion. [Citation.] MetLife alleges that it owns $340,542,000 in principal amount of six separate RJR Nabisco debt issues, bonds allegedly purchased between July 1975 and July 1988. Some bonds become due as early as this year; others will not become due until 2017. The bonds bear interest rates of anywhere from 8 to 10.25 percent. MetLife also owned 186,000 shares of RJR Nabisco common stock at the time this suit was filed. [Citation.]

   Jefferson–Pilot Life Insurance Co. (‘‘Jefferson–Pilot’’) is a North Carolina company that has more than $3 billion in total assets, $1.5 billion of which are invested in debt securities. Jefferson–Pilot alleges that it owns $9.34 million in principal amount of three separate RJR Nabisco debt issues, allegedly purchased between June 1978 and June 1988. Those bonds, bearing interest rates of anywhere from 8.45 to 10.75 percent, become due in 1993 and 1998. [Citation.]

   RJR Nabisco, a Delaware corporation, is a consumer products holding company that owns some of the country’s best known product lines, including LifeSavers candy, Oreo cookies, and Winston cigarettes. The company was formed in 1985, when R.J. Reynolds Industries, Inc. (‘‘R.J. Reynolds’’) merged with Nabisco Brands, Inc. (‘‘Nabisco Brands’’). In 1979, and thus before the R.J. Reynolds–Nabisco Brands merger, R.J. Reynolds acquired the Del Monte Corporation (‘‘Del Monte’’), which distributes canned fruits and vegetables. From January 1987 until February 1989, codefendant Johnson served as the company’s CEO. KKR, a private investment firm, organizes funds through which investors provide pools of equity to finance LBOs. [Citation.]

The Indentures

The bonds implicated by this suit are governed by long, detailed indentures, which in turn are governed by New York contract law. No one disputes that the holders of public bond issues, like plaintiffs here, often enter the market after the indentures have been negotiated and memorialized. Thus, those indentures are often not the product of face-to-face negotiations between the ultimate holders and the issuing company. What remains equally true, however, is that underwriters ordinarily negotiate the terms of the indentures with the issuers. Since the underwriters must then sell or place the bonds, they necessarily negotiate in part with the interests of the buyers in mind. Moreover, these indentures were not secret agreements foisted upon unwitting participants in the bond market. No successive holder is required to accept or to continue to hold the bonds, governed by their accompanying indentures; indeed, plaintiffs readily admit that they could have sold their bonds right up until the announcement of the LBO. [Citation.] Instead, sophisticated investors like plaintiffs are well aware of the indenture terms and, presumably, review them carefully before lending hundreds of millions of dollars to any company.

***

   Further, as plaintiffs themselves note, the contracts at issue ‘‘[do] not impose debt limits, since debt is assumed to be used for productive purposes.’’ [Citation.]

 Discussion
     * * *

   The indentures at issue clearly address the eventuality of a merger. They impose certain related restrictions not at issue in this suit, but no restriction that would prevent the recent RJR Nabisco merger transaction. * * *

***

   In contracts like bond indentures, ‘‘an implied covenant * * * derives its substance directly from the language of the Indenture, and ‘cannot give the holders of Debentures any rights inconsistent with those set out in the Indenture.’ [Where] plaintiffs’ contractual rights [have not been] violated, there can have been no breach of an implied covenant.’’ [Citation.] (emphasis added).

***

   It is not necessary to decide that indentures like those at issue could never support a finding of additional benefits, under different circumstances with different parties. Rather, for present purposes, it is sufficient to conclude what obligation is not covered, either explicitly or implicitly, by these contracts held by these plaintiffs. Accordingly, this Court holds that the ‘‘fruits’’ of these indentures do not include an implied restrictive covenant that would prevent the incurrence of new debt to facilitate the recent LBO. To hold otherwise would permit these plaintiffs to straightjacket the company in order to guarantee their investment. These plaintiffs do not invoke an implied covenant of good faith to protect a legitimate, mutually contemplated benefit of the indentures; rather, they seek to have this Court create an additional benefit for which they did not bargain.

***

   The sort of unbounded and one-sided elasticity urged by plaintiffs would interfere with and destabilize the market. * * * The Court has no reason to believe that the market, in evaluating bonds such as those at issue here, did not discount for the possibility that any company, even one the size of RJR Nabisco, might engage in an LBO heavily financed by debt. That the bonds did not lose any of their value until the October 20, 1988 announcement of a possible RJR Nabisco LBO only suggests that the market had theretofore evaluated the risks of such a transaction as slight.

*** 

   [Judgment for defendant on count of breach of implied covenant.]