Posted on July 24, 2009 by Susan Alker

Reforming Financial Markets - The UK Perspective

While we engage in debate about how to reform our own financial markets here in the US, similar activities are going on in other parts of the world.  There's a new government proposal in the UK that includes plans to strengthen their regulatory entities, focusing on managing "high impact" institutions, increasing market transparency, improving consumer protection and education, and enhancing market access.  Though our goals may be similar in the US, under this proposal the means for getting there would be somewhat different.  

The UK proposal adds an interesting perspective to the ongoing international discussion on this vital topic.   If you're interested in learning more, my partner Jacqui Hatfield in the London office here at Reed Smith has written a helpful summary of the UK proposal. 

 

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Posted on July 20, 2009 by Susan Alker

Commitment Letters: A Cautionary Tale

At long last, the Huntsman case has settled.  As recently reported, the banks providing the commitment for the acquisition financing have agreed to pay $1.7 billion (in a combination of cash and debt) to end the litigation. 

This case provides a good reminder of the need to be careful when issuing commitment letters.  Even though your commitment is conditioned on many things, and even though there are significant events that would appear to trigger a condition that lets you out of the commitment, you can still find yourself out of pocket.

In the Huntsman case, the commitment letter provided by the lenders included a typical condition that the borrower not be insolvent at the time the loan was to be made.  When it came time to fund, the banks thought the borrower was in fact insolvent, and refused to fund.  Regardless, these lenders have now spent significant time in litigation over this matter, and ended up settling for a not inconsequential sum.

Lenders, like all contracting parties, should be able to rely on the language of their commitment letters.  If the commitment letter provides the lender a right to refuse to fund under certain circumstances, and those circumstances come to pass, that right should be given effect.  Conditions on the obligation to fund are a necessary part of a commitment, particularly in an acquisition financing where the letter is usually issued in the early stages of the deal - at a time when there are still many unknowns.  Including a very clearly worded set of conditions, with strong language that makes the lender's intentions plain, can help protect the lender.

Of course, most lenders understand that they need to take litigation risk into account, especially when providing commitments for significant acquisitions.  It's part of the cost of doing business.  And, any time a very large dollar amount is at stake, the risk of litigation will increase.  As the Huntsman case illustrates, nothing is ever certain when litigation is involved. There are costs associated with defending the case even if you ultimately win.  Even with a strong case, you may find it advantageous to settle - sometimes for a rather large sum.

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Posted on July 17, 2009 by Susan Alker

Protecting LBO Payments Under the Bankruptcy Code

When closing a leveraged buyout, if the buyer makes its payments to the company’s shareholders through a financial institution - even in an acquisition of a privately held company - those payments may be protected from being clawed back in a bankruptcy. 

The Quality Stores Case

A recent federal case involving Quality Stores Inc. was decided in favor of the shareholders on appeal, permitting them to keep the payments they received for their shares when the company was acquired.  This has long been the case for public company acquisitions, but now the rule has been extended to private companies as well.

The sale price for the Quality Stores acquisition was paid to the shareholders through a financial intermediary, who distributed the cash to the shareholders in exchange for their shares. The court found that use of the financial intermediary for payment and settlement was sufficient to entitle the shareholders to the protections of Section 546(e) of the Bankruptcy Code. This means that the payments cannot be unwound, and the cash cannot be pulled back into the company to be accessed by the company’s creditors.

What This Means For Financial Institutions

On one hand, it seems odd that the mere use of an intermediary would create such a result, when there is nothing else different about this transaction from most others.  Steve Bobo, who is one of my bankruptcy partners here at Reed Smith, has been watching this case for some time.  He recently explained that the exemption exists to protect financial institutions (i.e., the intermediaries) from instability and risk.  But, as Steve also points out, this particular transaction had no economic or substantive difference from any other private LBO.  The shareholders got paid for their stock just like in any other acquisition.

For financial institutions that act as intermediaries in settlements like these, this is good news. There is additional certainty that once you’ve transferred the funds to the shareholders, they can stay there.  However, for financial institutions that act as senior creditors, the fact that these funds cannot be brought back into the bankruptcy estate means there may be less cash from which you can have your loan repaid, and you have less likelihood of recovery.  Whether you cheer or decry this decision depends which side of the table you’re on in any particular deal.

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