#10315 - Ws 3 Prep Task And Ws Tasks - Finance and Capital Markets

Consolidation note

1. In this workshop we reviewed 7 clauses from the Facility Agreement and considered the Bank’s and the Borrower’s point of view.

2. When going over the clauses:

1. Beware of repeating representations (this is with reference to the No Default, the No proceedings pending or threatened and the Title clauses. They are repeated here and this affects the position of the Borrower whilst giving the bank more security)

2. Never give a repeating representation that there is “default” or “potential events of default” (in our case, the No Default clause is a repeated representation which was unqualified and extremely broad. It was necessary to change “default” for “event of default” which is the industry standard. Similarly, if the clause had read “potential events of default” it would have been necessary to replace this with “event of default”. This is a way to protect the borrower from very broad representations. See p.51+p.96).

3. Watch out for the words Would or Might and replace with “WILL”

4. Apply a “De minims” to clauses like “litigation clause” (i.e. use it to qualify the clause)

5. Qualify and give Materiality to clauses

6. Limit the liability of the borrower by stating the “reasonable knowledge or belief”

7. Carve-out (i.e. exclude) any claims (this is beneficial to the borrower)

8. Beware of undertakings that restrict how the borrower operates

Prep task and Workshop task

Instructions

Your task is to prepare for forthcoming negotiations. You are to prepare notes such that your supervising partner may be fully informed of all arguments and that may be stances taken by either party.

1. You are to review the following provisions:

(a) introductory wording to Clause 18;

This clause is not controversial.

(b) Clause 18.8 (No default);

18.8(a)

Borrower’s view: This is a clause that is too wide as it refers to “No Default. The industry standard is “event of default” not “default”. The representation should refer to “event of default” and not the LMA definition of “default” or “potential event of default”(P.51).

- Borrower will also want to negotiate the definition of Material Adverse Effect. In this case, a this is the “opinion of the Agent”. The “Agent” is Danton and it holds 33% of the rights. Danton wants to keep the privilege to decide and not be subject to the rest of the banks. However, it is likely that the Borrower will want the “reasonable opinion of the majority of the banks” and not just the “Agent”. This is unlikely to succeed.

18.8(b) The Borrower wants the word “Subsidiary” removed as they may allege that they are not member of the Agreement. The borrower also wants the definition of “Material Adverse Event” to be modified. Material Adverse Event (is defined as the opinion of the Agent) the word “opinion” is too subjective and unqualified. The word should be replaced with “Reasonable” or “all reasonable” or “best endeavours” (P.138). and Agent be replace by “the majority of the lenders” thus benefiting the position of the Borrower (Page 94+P.138-139). However, the word “reasonable” poses difficulties to the bank as it will introduce uncertainty to the provision in the sense that it will make a bank hesitate before calling default as it may be sometimes difficult to determine what is reasonable (P.139).

18.8(b)The borrower will argue that the word “might” is too vague it will have to be changed to “will”. However, the Bank will not be happy with the word “will”. The parties might agree on something like “is reasonably likely to” or “will in the bank’s opinion”. (P.139)

(c) Clause 18.12 (No proceedings pending or threatened);

• The borrower will want to have the word “threatened” removed, it seems too vague (we don’t know what threatened means). However, the Bank will want to know about any threatened litigation and therefore will not accept the removal of this word. The borrower will then want to limit this by qualifying to say that it should be to the “best knowledge” of the borrower. The Bank will not accept this qualification; the Bank will want to qualify the knowledge by stating that it should be to the “reasonable knowledge of the borrower”.

• The borrower will also want to include a “De minimis” statement in the clause. For example state a specific minimum amount (the aggregate outstanding maximum amount; here they will want 5% of the value of the loan) for a specific period of time (a year for example) (p.139). The borrower will want “de minimis” as it will allow it sufficient “leeway” to run its day-to-day business.

• The borrower wants the word “subsidiaries” removed. But the bank will want the clause to apply to future subsidiaries which might affect the way the business is run. The definition of subsidiary in the definitions section of the FA is that of s.1159 of the CA 2006. This is the commercial standard and therefore is reasonable.

• The Borrower will want to carve-out any known potential litigation. We know from the facts that there are two threats of litigation against the company. Therefore, the borrower will use the “de deminis” not only to allow it to run its business efficiently but, to make sure that “trifle” commercial bumps will not be considered as an event of default by the Bank. Carving-out the current and any future threatened litigation guarantees that. One way to do this is to draft the representation to exclude frivolous and vexatious claims, to refer to the “reasonably likely outcome”.

(d) Clause 18.15 (Title);

- The borrower is not happy with 18.15(b)(i) and (ii). These areblanket clauses which state that nothing has happened to the property owned by Eldeberry. The Borrower, Eldeberry, will want to qualify the clause by stating that there is nothing material that has affected the property. This is mainly in relation to contamination of the land stated in the facts in the “extract form replies to Pre-Contract Enquiries” from when Eldeberry D purchased the land. In the facts, the land has suffered some contamination which may affect the marketability of the land. Clauses 18.15(b)(i) and (ii) presuppose that this contamination has not happened.

- The borrower will want to change Clause 18.15(b)(ii). The clause is too inflexible as it will prevent the borrower from leasing or granting a licence over the Properties. The borrower will want to qualify its obligation under this clause to allow it to deal with the land. It is most likely that the grant will agree to qualify it by stating that dealings with the land have to be approved by the bank, i.e. that prior consent from the bank will be required before dealing with the land.

(e) Clause 18.16 (Repetition);

The clause is standard and neutral. See (P.54)

(f) Clause 21.3 (Negative pledge); and

- Want to make sure that the Borrower does not charge the property with other borrowings. Moreover, the bank wants to make sure that his security over the property...