In the prior article, we discussed the representations that sophisticated investors may provide to broker-dealers in connection with securities offerings. We now turn our attention to the representations made by the issuers.
For most structured note programs, whether offered on a registered basis or a non-registered basis, the issuer makes a variety of representations about its business, finances and the offering documents. These are typically set forth in a program agreement or similar agreement with the distributors. These representations may be quite lengthy and detailed, or in the case of many seasoned issuers, may be more limited.
This program agreement is executed at the commencement of the program, while the actual offerings may take place over a period of years. Accordingly, how do the underwriters receive the benefit of these representations in subsequent offerings?
The designers of today’s program agreements anticipated this question. Structurally, these agreements are typically constructed such that the issuer automatically repeats the representations to the underwriters as of specified dates following the initially signing date: typically, the pricing date of any offering, as well as its closing date. These automatic representations replicate in a sense the manner in which representations are given in a classic “bullet” underwriting, where there is no program: the issuer is required under the terms of the underwriting agreement to make its representations as of the pricing date (when the agreement is signed) and as of the closing date.
As a result of these deemed representations in a program, the issuer effectively must monitor its business and affairs, particularly to ensure that it is not making statements in the offering documents (including any periodic reports that are incorporated by reference) that are no longer correct.
Many program agreements address the question of subsequent representations by having the issuer execute a short “terms agreement” at the time of each pricing. These agreements are often created in the form of an exhibit to the program agreement, with fairly simple blanks that can be filled at the time of each offering. Under these short agreements, the issuer may repeat the program agreement’s representations as of the pricing date.
Practice varies as to terms agreements. Some structured note underwriters insist on receiving them in connection with each structured note takedown, whether the principal amount is large or small, and whether the offering is underwritten or agented. Some underwriters dispense with terms agreements, relying instead on the “automatic representations” in the program agreement, together with the ongoing due diligence performed by both the investment bank and designated underwriter’s counsel. In the view of the latter group, the time and expense involved in creating these terms agreements is not necessarily justified by the benefit provided. For example, under the analysis applied in the “Worldcom” case,1 an underwriter’s due diligence is judged by the adequacy of its investigation of the issuer’s business and affairs, and not necessarily the frequency of the written representations and other “due diligence” documents that it receives.
Impact of Representations
Whether the representations are being provided automatically, through the program agreement’s terms, or through a dealspecific terms agreement, the issuer is “on the hook” to the underwriters (and to potential investors) as to the accuracy of the offering documents, and as to the other representations. Accordingly, all issuers of structured notes maintain reporting mechanisms to ensure that they are effecting their offerings at appropriate times, when these representations can be appropriately relied upon.