03. Representations and Warranties, Conditions to Lending

Overview

Reps and Warranties
MACs and Materiality
Structure of Covenants
Information Rights and Default Notices
Merger and Asset Sale Covenant

Representation and warranties: claim of something as it is existing now

When do reps have to be true as of?
What is function of reps?
Conditions to closing the contract: all reps have to be true on the closing date, like a closing checklist
True in future points of time
FMC 4.02 Conditions Precedent to Each Revolving Loan Borrowing, Swing Loan Borrowing and Letter of Credit Issuance.
- “The obligation of each Lender to make a Loan… on the occasion of each Borrowing (including the initial Borrowing), and the right of the Borrowers to request a Swing Loan Borrowing or the issuance of a Letter of Credit, shall be subject to the further conditions precedent that:
- (b)(i) The representations and warranties contained in Article V (Representations and Warranties) (except the Excluded Representations) are correct in all material respects on and as of the date of such Borrowing or issuance, before and after giving effect to such Borrowing or issuance and to the application of the proceeds therefrom, as though made on and as of such date, other than any such representations or warranties that, by their terms, refer to a date other than the date of such Borrowing or issuance, which are true and correct as of such earlier date”
Borrower can no longer borrow

Material Adverse Change versus Material Adverse Effect

Definition of “Material Adverse Effect” means an effect that results in or causes, or could reasonably be expected to cause, a Material Adverse Change
- Doesn’t have to actually result, only need to be a reasonably expected cause that there would be a change
“Material Adverse Change”

Compare:

events that, in the aggregate, have had a Material Adverse Effect [5.04];
- 5.04 “Since December 31,2010, there has been no Material Adverse Change and there have been no events or developments that, in the aggregate, have had a Material Adverse Effect.”
events that, in the aggregate, could reasonably be expected to have a Material Adverse Effect [5.05];
- 5.05 “there are no pending or, to the knowledge of the U.S. Borrower, threatened actions, investigations or proceedings… that, in the aggregate, could not reasonably be expected to have a Material Adverse Effect”
events that, in the aggregate, would reasonably be expected to have a Material Adverse Effect [5.10, 5.11];
events that are reasonably expected to occur that would reasonably be expected to result in a Material Adverse Effect [5.09].
- 5.09 “Event has occurred or is reasonably expected to occur with respect to any Plan that has resulted or would reasonably be expected to result in a Material Adverse Effect.”

So 5.09 includes

A reasonable expectation that an event 1 would occur [but has not yet]
Which event 1 [if it in fact occurs] would be reasonable expected to generate an effect 2 [but may also not generate the effect]
Which effect 2 [if it is in fact generated] could be reasonably expected to result in a change 3 [but may also not result in a change]
Which change 3 [if it is in fact the result] is materially adverse as to…

Material Adverse Effect: reasonably be expected… reasonably… reasonably expected… In practice, court would treat all as one layer of expectation
Material = substantial likelihood that reasonable investor would change decision
‘Material Adverse Effect’ means a material adverse change in any of
- (a) the business, condition (financial or otherwise), operations or properties of the U.S. Borrower and its Subsidiaries taken as a whole,
- (b) the legality, validity or enforceability of any Loan Document,
- (c) the ability of the Borrowers to repay the Obligations or to perform their respective obligations under the Loan Documents or
- (d) the rights and remedies of the Administrative Agent or the Lenders under the Loan Documents”

Issues with this clause:
1. Material adverse change as to whom
  - (a): business etc of US Borrowers and Subs as a whole
  - (c) the ability of the Borrowers to repay
  - As a whole or only a single Borrower? (b) and (d)
  - ‘Taken as a whole’ under (a) but not (c) implies not taken as a whole under (c), applies to each borrower, to perform any obligation
  - Whether intentional or mistake?
  - Insolvency of one of the Borrowers may not be material for creditors of the Borrowers, but may be a MAC as to that Borrower to repay the obligations or perform any other obligations, e.g. provide information
  - Unclear from which perspective do you judge materiality
2. Judged from whose perspective, and
  - (a): shareholder or creditor or banks?
  - From which perspective are you looking at material adverse change in the business: shareholder/ company/ option holder?
  - E.g. cashed airplane is bad for shareholders, but if company is well capitalized, it would not affect creditors as much
  - Court normally think in context of shareholders
3. As to what baseline/ starting point?
  - Do you compare it to the ability of all FMC companies to pay the debt; or ability of one co. within the group to satisfy one particular obligation? Not specified.
  - Material change in the enforceability in the immaterially loan agreement would also be material change
4. Material adverse change means a material adverse change
  - E.g. material as to that borrower’s ability to satisfy that obligation
  - Change implies a chronological order, things now is worse than before, but worse then when? Whether at the time of agreement or immediately prior to change?
  - 5.04 Material Adverse Change. “Since December 31, 2010, there has been no Material Adverse Change and there have been no events or developments that, in the aggregate, have had a Material Adverse Effect.” aggregate interpretation of changes: if things can get better then worst, but no worse than date of agreement it would still be a material adverse change
    - ‘since’ = at any time from that time
    - ‘in the aggregate’ not clear that it refers to ‘no Material Adverse Change’ easily fixed clause, poorly drafted
    - ‘Aggregate’...

#16507 - Representations And Warranties Conditions To Lending - Corporate Bonds and Credit Agreement

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