The concept of MFA in financing agreements has evolved considerably since its inception as a stand-alone default event. As lenders` reluctance to rely on an EAW as a singular default has grown, its use in such a context has fallen out of favor, but its appearance as a modifier of restrictive covenants, insurance, and collateral has increased. As a result, the MFA CONCEPT remains more important than ever for documentation and negotiations. As the COVID-19 pandemic continued to rage, the definition of EMM was adjusted to address emerging concerns. Changes to the term can be substantial and sometimes even detrimental (depending on your point of view), but as long as the sales teams and their consultants understand the issues, we hope that any concerns can be resolved in a mutually acceptable way. Neil E. McCullagh is a lawyer who works with banks on a variety of topics, including lending, bankruptcy, reorganization, creditor rights, bankruptcy and debt collection. Our Mergers & Acquisitions and Financing practice group is available to companies to review financing agreements to determine which options are available for amendment or otherwise. However, not all loan agreements have financial performance obligations, and not all borrowers are immediately affected by the various state and local closures. It is possible that if the pandemic continues, lenders will turn to the definition of EAW to take corrective action under loan agreements or to refuse to fund a loan application. If you think your business is particularly affected by the COVID-19 pandemic, it may be time to discuss credit changes to provide additional liquidity or short-term relief.
These changes are supported by the inter-agency statement of the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Office of Consumer Financial Protection, and state banking regulators, released on March 22, 2020. The inter-agency statement encourages lenders to work with borrowers who may not be able to meet their contractual payment obligations due to the impact of COVID-19, and agencies will avoid making credit changes that meet certain guidelines (for example.B. a deferral of payment of six months or less), as a ”problematic debt restructuring”. Financing agreements are not the only place where EAW regulations can impact a capital transaction. MFA provisions are often included in agreements related to corporate mergers and acquisitions (M&A). The mame provisions are present in M&A agreements in two cases – 1) in the seller`s statements in which the seller states that there has been no EAW for his business for a certain date and/or that an EAW is not reasonably likely; and (2) under closing conditions, under which a buyer may refuse to enter into the transaction if an EAW has occurred within certain time limits set out in the agreement. Due to the COVID-19 pandemic, our firm has received a number of requests for contractual clauses on ”force majeure” and ”material adverse changes”. Some of my colleagues have already written about clauses on ”force majeure” (article available here). Typically, a material adverse change clause (”MAC”) allows one of the parties to a loan agreement or other agreement to fail to perform its obligations or to declare the other party in default if a change in circumstances compromises the value of the agreement. For example, a loan agreement often gives the lender the opportunity to stop financing the loan and/or declare a default in the event of a significant adverse change in the financial situation of the borrower, another debtor on the loan (for example.
B, a guarantor) or a project financed by the loan. Forecasts regarding the total impact of COVID-19 (better known as coronavirus) on the economy remain extremely uncertain and continue to reflect a variety of results. As a result of this uncertainty, entities that have remaining credit capacity under existing credit facilities are considering using some or all of the remaining credit capacity they may have under their credit facilities. In fact, as has been widely reported, many companies have already decided to do this and take advantage of all or most of their available credit capacity. For some companies, these considerations were motivated by the general fear that a rush on the bank by other borrowers could cause a liquidity crisis for lenders and potentially make financing unavailable if necessary. The usefulness of a MAC clause for a lender seems obvious in light of the COVID-19 pandemic. Nevertheless, although the reported case law on MAC clauses in the context of credit is limited, it cautions against a lender invoking a MAC clause without first carefully examining the loan agreement, the circumstances of its creation, the reasons why it relies on the clause and the supporting evidence. In this article, we review some of this case law and propose several principles that can be derived from it.
In determining whether a single event would result in a material adverse effect, a significant adverse effect shall be deemed to have occurred, notwithstanding the fact that such an event in itself does not have such an effect, if the cumulative effect of such an event and all other events then existing would result in a material adverse effect. Strict contractual approach. There is no stand-alone definition of a MAC – it`s simple regardless of the definition the parties include in the agreement. In general, the courts have interpreted THE MAC restrictively, based on the specific terms of the agreement, and have not ”read” the concepts that the parties have not expressly provided. The 2018 Akorn decision is the first in which a Delaware state court found that a company had undergone a MAC allowing an acquirer to terminate a merger agreement (Akorn v. Fresenius (Del. 2018)). We note that very few disputes at the CMA were heard until the verdict; and that strong arguments in favour of asserting a MAC have generally led to a renegotiation of terms or a settlement. Third, a general exception (i.e., should everything that happens as a result of the COVID-19 pandemic be allowed, or should a list of effects be relied upon as set out in writing? This has an impact on the time problem discussed earlier. From a lender`s perspective, the more specific the reserve and the tighter the exclusion, the better. This way, if the borrower wants a passport, the event must be identified in advance with the lender.
The bottom line is clear: a lender who wishes to invoke a mac mac clause must (a) read its loan agreement carefully and (b) define the material change from one or more of the borrower`s obligations under the agreement. The lender in In re Lyondell Chem. Co. may have thought it obvious that it should not be required to provide an unsecured loan of $750 million to a company whose assets had behaved so badly and was on the verge of bankruptcy, but in retrospect, if possible, it should have linked the alleged significant adverse change to one of the borrower`s obligations. Considerations relating to other contractual provisions. In many agreements, in determining whether the conditions for entering into an agreement or loan are met, it will also be relevant whether the company`s representations and guarantees can be credibly ”closed” (for example. B those relating to undisclosed liabilities; the adequacy of reserves; Status of existing suppliers and other contracts and business relationships; labour availability; and similar) and whether the company materially complies with its obligations (e.B.B. operated in the ordinary course of business until certain capital or leverage requirements are established and maintained). .