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General structuring of financing
Choice of law
What territory’s law typically governs the transaction agreements? Will courts in your jurisdiction recognise a choice of foreign law or a judgment from a foreign jurisdiction?
Loan and intercreditor agreements are typically governed by English law. However, there has been a recent increase in New York law governed term loan debt provided by US lenders. High-yield bond documents are governed by New York law in nearly all cases. Security documents are generally governed by the law of the jurisdiction where the assets are located, except in the case of security over claims, which is often governed by the law of the place of the debtor.
Subject to certain exceptions, the English courts will apply the Rome I Regulation ((EC) No. 593/2008) on the law applicable to contractual obligations to determine the governing law of a contract made on or after 17 December 2009. The general rule under Rome I is that a contract is governed by the law chosen by the parties. Subject to certain exceptions, an English court would also uphold an agreement made in advance to submit non-contractual obligations (eg, a claim in respect of a misrepresentation made in the course of contractual negotiations) to the law of a particular country, in accordance with the terms of the Rome II Regulation ((EC) No. 864/2007).
The recast Brussels Regulation ((EU) No. 1215/2012) provides for the recognition and enforcement by the English courts of judgments obtained in other EU member states within the scope of the Regulation. In addition, certain judgments for a specific sum of money obtained in uncontested proceedings can be recognised and enforced by the English courts under the European Enforcement Order Regulation ((EC) No. 805/2004) and, apart from where conflicting judgments exist, the defendant has very limited grounds to object.
The Lugano Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters applies to the enforcement of judgments from the courts of Iceland, Norway and Switzerland and is very similar to the recast Brussels Regulation. As a member of the European Union, the UK is also party to the Hague Convention on Choice of Court Agreements, which gives effect to choice-of-court agreements and recognition of resulting judgments between contracting states (currently the European Union member states (except Denmark), Mexico and Singapore). Once the UK leaves the European Union it will no longer be bound by the Hague Convention unless it signs and ratifies the convention on its own account.
The UK is party to various other treaties for recognition of foreign judgments, which are incorporated in statute. The main statutes are the Administration of Justice Act 1920 and the Foreign Judgments (Reciprocal Enforcement) Act 1933, which apply to the recognition and enforcement of certain judgments from the courts of Commonwealth countries and certain other countries with which the UK has historical links. Foreign judgments from the courts of countries with which the UK does not have any applicable treaty (such as Brazil, China, Russia and the United States) are not directly enforceable in the UK and recognition and enforcement will be subject to English common law principles. Such a foreign judgment will generally be treated as having created a contract debt due from the defendant, and the other party will need to bring a new action in the English courts to enforce it.
In 2017, the High Court upheld an asymmetric jurisdiction clause under the recast Brussels Regulation under which a bank could choose jurisdiction but the borrower was tied to the jurisdiction of the English courts. There had previously been doubt as to whether such clauses were effective.
Restrictions on cross-border acquisitions and lending
Does the legal and regulatory regime in your jurisdiction restrict acquisitions by foreign entities? Are there any restrictions on cross-border lending?
The acquisition of UK companies in certain sectors by foreign entities is restricted and sanctions restrict other acquisitions. There are also disclosure requirements and antitrust laws.
Entities that are subject to financial markets supervision are usually subject to change of control restrictions. For example, acquisitions of qualifying holdings (broadly speaking, acquiring a holding of 10 per cent or more of shares or voting power and each subsequent increase above the 20, 30 and 50 per cent thresholds) in banks, regulated financial services and insurance undertakings and certain regulated investment funds require prior regulatory approval pursuant to section 178 of the Financial Services and Markets Act 2000. Similar restrictions apply to the acquisition of other financial sector businesses including investment exchanges and e-money institutions. A prior notification requirement applies to the acquisition of a qualifying holding in a payment service provider authorised pursuant to the Payment Services Regulations 2009 or the Payment Services Regulations 2017. Acquisitions involving UK companies exceeding certain thresholds may trigger the merger control powers of the UK Competition and Markets Authority or the European Commission.
Acquisitions of listed UK companies and certain European Economic Area (EEA) companies listed only on a UK-regulated exchange are subject to the City Code on Takeovers and Mergers (the Takeover Code), which regulates the way that an offer is made for such a company, whether by way of a takeover offer or a scheme of arrangement and whether the acquisition is by a UK or a foreign entity. Changes to the Takeover Code became effective in January 2018 to extend the Takeover Code to certain asset disposals. Under the Takeover Code there are detailed notification requirements - both ‘opening position disclosures’ and ‘public dealing disclosures’ - with respect to bidders, targets and others who hold or, during an offer period, acquire interests in relevant securities of parties to an offer. Under the Disclosure and Transparency Rules, a bidder for a listed company must also disclose its shareholdings in the target company at various thresholds starting at 3 per cent, which may affect stake building. The Takeover Code further requires potential bidders that have approached a target to be identified in the first public announcement of a potential offer. Once the bidder is publicly named, it must, within 28 days, either announce a binding intention to make an offer or announce that it will not make an offer. A person who, together with its concert parties, acquires an interest in voting shares of 30 per cent or more of the target’s voting rights, must make a mandatory takeover offer. Break fees, inducement fees and work fees or similar fees payable by the target are restricted, except for fees paid after a bid has become unconditional by a target following a hostile bid to a white knight of up to 1 per cent of the value of the white knight’s competing bid or following a formal auction to a preferred bidder of up to 1 per cent of the value of its bid. A bidder can agree to pay a break fee to a target.
The Alternative Investment Fund Managers Directive (2011/61/EU) imposes disclosure obligations on managers of certain private equity and other unregistered funds that acquire major stakes in certain EU-based non-listed companies (including UK companies) carrying 10 per cent or more of the voting rights in the relevant company. More onerous reporting obligations are imposed on funds that acquire ‘control’ of EU-based non-listed companies and issuers whose securities are admitted to trading on a regulated market. Such funds are also subject, for a period of 24 months following acquisition of ‘control’ of the relevant company, to certain asset-stripping rules including restrictions on distributions, capital reductions, share redemptions and acquisition of own shares by the company.
Acquisitions involving a change of control of targets in oil and gas, electricity, telecommunications and broadcasting, defence and certain other sectors are subject to additional consents or other regulatory requirements. In October 2017, the UK government consulted on a review of foreign investments and takeovers to ensure that they do not raise national security concerns in the dual military use sector and parts of the advanced technology sector. It is envisaged that reforms will be made to laws in these areas in due course.
The United Nations, EU or UK may, from time to time, impose sanctions or other similar measures on cross-border payments, including exchange control restrictions (pursuant to the International Monetary Fund Act 1979 and the Bretton Woods Agreement Order in Council (SI 1946/36)). In July 2014, the EU passed ‘sectoral’ sanctions targeting Russia’s finance, energy and defence sectors, which are currently similar, but not identical, to sectoral rules published by OFAC. The European Union’s sectoral rules, generally, do not restrict the sale of UK companies to entities designated under the sectoral rules. There are, however, implications for cross-border lending, as lenders must ensure that they are not providing loans or credit to entities designated under the sectoral rules or their subsidiaries or agents. In view of this, credit agreements now contain a representation and undertaking relating to the borrower’s compliance with sanctions. It may be difficult in certain cases for a bank to identify whether it is transacting with a sanctioned entity, particularly where a counterparty is acting as agent of a designated entity. In addition to EU rules, US banks making loans booked in the UK must comply with OFAC rules as a result of being ‘US persons’. For further detail on the regulatory restrictions applicable to certain types of lending in the UK, see question 6.
Types of debt
What are the typical debt components of acquisition financing in your jurisdiction? Does acquisition financing typically include subordinated debt or just senior debt?
The typical components of debt financing vary depending on the size of the deal. Financing can include senior term and revolving loans, first and second lien debt in the form of loans or notes, mezzanine term debt, payment-in-kind (PIK) loans or notes, vendor financing, ‘unitranche’ facilities or high-yield bonds.
Mezzanine debt is usually guaranteed by, and secured on, the same assets as senior debt. Due to the relative costs involved, mezzanine financings have become less popular in recent times. Intercreditor arrangements are put in place, pursuant to which payments on the mezzanine debt is subordinated to the senior debt and the ability of the mezzanine lenders to enforce their guarantee and security package is subject to a standstill in certain circumstances. While a significant amount of the senior debt will be borrowed by the same holding company as the mezzanine debt, some senior debt may be borrowed at a structurally senior level to refinance existing debt within the target group at closing or for working capital. In cross-border financings, senior debt that is borrowed at operating company level and which is used to refinance existing debt may benefit from an enhanced guarantee and security package due to corporate benefit and other legal considerations. The mezzanine facility usually matures one year after the latest dated senior debt. Financing structures including second lien debt are similar to mezzanine debt. Under the intercreditor agreement, second lien debt is contractually subordinated to senior bank debt in a manner similar to mezzanine debt.
PIK debt and vendor financing are the most junior pieces of debt finance in the capital structure. They tend to be lent to, or issued by, holding companies of the borrowers of the senior and mezzanine debt and tend to have limited, if any, recourse in the form of security and guarantees from the obligors in respect of the senior or mezzanine debt. They mature after all the other debt in the structure. Interest on PIK facilities capitalises, or there may be an option for the borrower to pay part in cash, if permitted under the terms of the other debt in the structure.
Acquisitions have been increasingly financed with the proceeds of issues of secured bonds, combined with a revolving credit facility to finance working capital (often with priority over the realisations of security enforcement), or term debt (ranking pari passu). Bond issues are suitable for larger transactions where the debt will not be repaid quickly (due to the cost and non-call features), although the size of deals being financed with high-yield bonds has become smaller.
For mid-market transactions, borrowers have been able to finance acquisitions with unitranche facilities. Such facilities are priced with an interest rate that is a blend of rates that would have applied to a senior term loan and a mezzanine loan. A unitranche lender will often enter into a participation agreement with a pool of investors behind the scenes, allowing the borrower the relative ease of dealing with only one lender of record under the unitranche facility. Advantages of a unitranche facility include simplicity of documentation and speed of execution as no syndication is required. A disadvantage may be that the borrower has no direct relationship with investors who may be critical to pass certain consents and waivers. The borrower will also need to find a separate provider of working capital facilities and hedging arrangements.
Are there rules requiring certainty of financing for acquisitions of public companies? Have ‘certain funds’ provisions become market practice in other transactions where not required?
The UK Takeover Code requires that an announcement of a firm intention to make an offer for the acquisition of a UK company subject to the UK Takeover Code should only be made after the most careful and responsible consideration and when the offeror has every reason to believe that it can and will continue to be able to implement the offer. The announcement of an offer with any element of cash must include confirmation by the financial adviser (or other appropriate third party) that resources are available to the offeror sufficient to satisfy full acceptance of the offer (the ‘cash confirmation’ requirement). This generally means that the acquisition financing must only be subject to conditions that the bidder is sure it can satisfy or which are conditions to the offer (ie, the ‘certainty of funds’ requirement).
Certainty of funding has also become market practice for the acquisitions of private companies. A lender will typically only be entitled to withhold funding at closing in respect of representations, undertakings and events of default relating to the actions or omissions of the acquiring group companies (and not the target group) and any failure to satisfy the conditions to the acquisition.
Restrictions on use of proceeds
Are there any restrictions on the borrower’s use of proceeds from loans or debt securities?
Loan agreements usually include a purpose clause specifying how the loan proceeds are to be used. One reason for this is to attempt to create a trust over any monies advanced but not used for the specified purpose, particularly if the borrower becomes insolvent. In addition, if the proceeds are used to fund an acquisition of a UK public limited company, it and its subsidiaries may not be able to provide credit support (see question 15).
Under the Proceeds of Crime Act 2002, various types of arrangement involving the ‘proceeds of crime’ are criminal money laundering offences. For businesses in the regulated sector, failure to disclose knowledge or suspicion of money laundering may be a criminal offence. Businesses in the regulated sector include financial and other higher-risk businesses, including banks and other lenders. The Money Laundering, Terrorist and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692) require such businesses to implement anti-money laundering controls including customer due diligence, monitoring and record-keeping. It has become common to add express restrictions in a credit agreement on the use of the proceeds of a drawdown which would breach sanctions or anti-corruption laws.
Licensing requirements for financing
What are the licensing requirements for financial institutions to provide financing to a company organised in your jurisdiction?
Lending, ‘including… financing of commercial transactions (including forfeiting)’, is an ancillary banking activity under the Capital Requirements Directive 2013/36/EU (CRD). EU member states (including the UK) have discretion as to whether various types of lending may be carried out by entities that are not regulated as banks (credit institutions) or otherwise. Subject to exemptions, lending is generally not regulated in the UK but deposit taking is. The EEA passporting regime set out in the CRD permits a bank regulated in one member state to carry out all banking activities recognised under the CRD in other EEA member states. The EEA passporting regime does not offer passporting rights for unregulated lenders, nor for investment firms that wish to engage in lending activity on a cross-border basis.
CRD IV (which includes the CRD and also the Capital Requirements Regulation (EU) No. 575/2013 (CRR)) has also substantially increased the regulatory capital that financial institutions are required to allocate against their lending transactions.
Where the provision of financing does not involve any regulated activities such as arranging transactions in investments or advising on investments and does not include any involvement in regulated mortgages or consumer credit business, no licence is generally required.
The EU is working on proposed revisions to the CRR, CRD and BRRD. The proposals will, inter alia, introduce the Basel III capital standards into EU law and will implement the Financial Stability Board’s total loss-absorbing capacity standard into EU law.
Withholding tax on debt repayments
Are principal or interest payments or other fees related to indebtedness subject to withholding tax? Is the borrower responsible for withholding tax? Must the borrower indemnify the lenders for such taxes?
Repayments of principal are generally not subject to UK withholding tax. Prima facie, payments of interest by a UK borrower (or by a non-UK borrower where the payments are of UK source interest) are subject to withholding tax at the rate of 20 per cent. However, this general position is subject to various exemptions, such as interest paid on an advance from a UK bank or a non-UK bank or other financial institutions benefiting from an exemption provided by an applicable double tax treaty (the UK has a wide range of tax treaties). The UK has also introduced a withholding exemption for private placements, subject to certain conditions including in relation to the residence of the lenders. The borrower is responsible for accounting to the UK tax authorities for any applicable UK withholding tax. The facility agreement will normally allocate day one and change of fact withholding tax risk to lenders, while borrowers are generally only required to gross-up if the withholding arises as a result of a change in law. Lenders will generally expect to be indemnified for any taxes that arise in connection with the loan other than by way of withholding (excluding any taxes on net income imposed by the jurisdiction in which the lender is incorporated or resident or (if different) lends from).
FATCA clauses in a facility agreement commonly allocate the risk of US withholding tax under FATCA as a lender risk. Broadly, FATCA refers to US rules under which US source payments to non-US financial institutions and, potentially, payments between non-US financial institutions can become subject to US withholding tax unless, among other things, certain information has been reported to the relevant tax authorities by the relevant financial institution in relation to those of its account holders that have certain connections to the US. The clauses on the provision of information are also intended to cover information reporting regimes similar to FATCA, which relate to non-US account holders.
With effect from 1 April 2017, the UK introduced new rules to limit corporate tax deductions for interest expenses, broadly, by reference to 30 per cent of EBITDA in the UK or (if higher) group-wide EBITDA. These rules apply to large businesses that have group net interest expenses within the charge to UK corporation tax exceeding an aggregate £2 million per year.
Restrictions on interest
Are there usury laws or other rules limiting the amount of interest that can be charged?
There is no general prohibition on usury rates in the context of commercial lending.
An administrator or liquidator can apply to the court under the Insolvency Act 1986 to set aside an extortionate credit transaction entered into by a company up to three years before the day on which the company entered into administration or liquidation. A transaction is ‘extortionate’ if, having regard to the risk accepted by the person providing the credit, either: its terms require grossly exorbitant payments to be made (whether unconditionally or in certain contingencies) in respect of the provision of the credit; or it otherwise grossly contravenes ordinary principles of fair dealing.
Generally, an English court will not enforce a contractual provision for the payment of additional amounts if ‘the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation’ (Cavendish Square Holding BV v Makdessi; ParkingEye Ltd v Beavis  UKSC 67 at paragraph 32). As a result, excessive rates of default interest could be construed as a penalty and would be unenforceable.
What kind of indemnities would customarily be provided by the borrower to lenders in connection with a financing?
There are numerous indemnity provisions contained in a credit agreement covering various matters, including:
- stamp duty;
- loss to the lenders arising from an obligor’s failure to pay and various other defaults;
- the costs of conversion of a payment from one currency into the currency that was due under the finance documents;
- yield protection and costs and expenses arising from executing and documenting the transaction;
- amendments to the documentation;
- enforcement and preservation of security; and
- certain regulatory costs.
Assigning debt interests among lenders
Can interests in debt be freely assigned among lenders?
Typically following syndication, lenders can transfer or assign participations with the consent of the borrower (or after consultation) unless an event of default has occurred or the transfer or assignment is to another existing lender or affiliate or a related fund or entities on a restricted list, when no consent or consultation is needed. Usually, no restriction applies to sub-participations unless voting rights are transferred. Transfers to ‘competitors’, distressed debt funds and sometimes to lenders on a blacklist or, in the case of revolving credit facilities, to lenders below minimum credit rating are increasingly prohibited. Investment-grade loans may impose other restrictions such as a requirement that lenders of working capital are commercial banks or satisfy rating criteria.
Requirements to act as agent or trustee
Do rules in your jurisdiction govern whether an entity can act as an administrative agent, trustee or collateral agent?
If the agreed role of the security trustee or facility agent (taking into account all actions that could conceivably be required during the life cycle of the transaction) includes activities that are regulated in the UK, it is likely to require prior regulatory authorisation. Entities carrying on regulated activities in the UK must be authorised by the Financial Conduct Authority or, in the case of banks, building societies, credit unions, insurers and major investment firms, by the Prudential Regulatory Authority. The activities of security trustees in holding assets or enforcing a share security could fall within the scope of safeguarding and managing investments, arranging deals in investments or dealing in investments, but exemptions may be available where they hold assets on trust and solely as nominee.
Facility agents must generally be authorised as banks or investment firms, although this may not be required in every case, depending on the nature of their role. The facility agent may also be involved in carrying out payment services that are regulated in the UK pursuant to the Payment Services Regulations 2017, although exemptions are available for dividend, income and other payments for shares and bonds. Banks are not subject to the separate licensing regime that applies to payment services institutions. See also question 6 regarding licensing requirements.
Where the same entity acts as a security trustee for more than one group of creditors or is both security trustee and a creditor within one creditor group, there is a risk of a conflict of interest. The relevant entity must have information barriers so that information received by it in its capacity as creditor is kept separate from that received by it in its capacity as a security trustee. Conflicts may still arise even where a security trustee is following valid instructions from the majority lenders.
May a borrower or financial sponsor conduct a debt buy-back?
Under English law it is uncertain whether a borrower can buy back its own debt without such debt being extinguished, particularly if the documentation does not expressly provide for this. As a result, a buy-back may be structured as a purchase of the debt by a holding company of the borrower. Whether such purchaser can receive interest on the debt depends on the terms of the intercreditor agreement. A loan buy-back may also be effected by a synthetic route such as a fund sub-participation, total return swap (where the borrower receives the total return on the asset in return for paying the lender a periodic cash flow) or a trust.
The Loan Market Association (LMA) standard forms include optional buy-back provisions. One option prohibits debt buy-backs by a borrower and certain affiliates but permits purchases by sponsors. The second option permits debt purchases of term loans by a borrower at less than par by a prescribed solicitation process or open order process that results in the extinguishment of debt, where the purchase is funded from excess cash flow, and there is no continuing default existing. The purchaser of the debt is not entitled to exercise voting rights attached to the purchased debt under either option.
Other legal or regulatory considerations may also be relevant to certain debt buy-backs, such as the application of the Market Abuse Regulation (596/2014/EU) where any inside information exists and the debt securities being bought back are traded on an EU-regulated, MTF or OTF market, for example.
Is it permissible in a buy-back to solicit a majority of lenders to agree to amend covenants in the outstanding debt agreements?
Most English law-governed loans or bonds permit the issuer to amend the terms with the consent of the relevant majority. Such amendments can be challenged as an oppression of the minority, but the risk is reduced where the parties act in good faith with transparency and the same deal is offered to all parties in the same position, which is not a negative inducement.
An exit consent arrangement that imposes unfavourable consequences on the minority holders of debt who vote against the consent is likely to be declared invalid following the 2012 case of Assénagon Asset Management SA v Irish Bank Resolution Corporation Ltd  EWHC 2090. In that case, bondholders were asked to approve a proposal involving the exchange of their bonds for the issue of new bonds but dissenting bondholders would have their bonds cancelled for a nominal consideration. The judge appears to have been influenced by the fact that the minority would have suffered value destruction (ie, a ‘negative inducement’). However, it may still be possible to structure a restructuring as a drag along vote whereby bondholders that dissent are offered substantially equivalent value to those voting in favour. Payment of an incentive fee to all noteholders in a class voting in favour of a resolution in the event that the resolution was passed was found to be a valid arrangement in the 2013 case of Sergio Barreiros Azevedo v Imcopa  EWHC 1849. It is also not possible for all holders of a class of debt treated in the same way to claim oppression of the minority.
In the 2015 case of Myers v Kestrel Acquisitions Limited  EWHC 916 (Ch), the terms of certain notes provided that the relevant class of notes would be amended to reflect the terms of a class of shareholder debt. Such amendments would be made by the issuer without further consent of the noteholders of that class. The terms of the shareholder debt were amended and mirror amendments were made to the relevant notes that resulted in the subordination of both the shareholder debt and the notes to certain new debt. The noteholders claimed the amendments were invalid as an oppression on the minority but the court found that the noteholders formed the entire class of debt and there was no majority to oppress them.
Guarantees and collateral
Related company guarantees
Are there restrictions on the provision of related company guarantees? Are there any limitations on the ability of foreign-registered related companies to provide guarantees?
Guarantees must be documented in writing and are executed as deeds in certain circumstances. The availability of guarantees is, in the case of UK companies, restricted by financial assistance rules (see question 15), other capital maintenance rules and directors’ duties. Directors of an English company are under a duty to promote the success of the company for the benefit of its members. If the directors misuse their powers in entering into a transaction, and the lenders are aware of this, the lenders may in certain circumstances be liable to having to disgorge guarantee payments.
It is more difficult to establish that the directors are promoting the success of their company where the company provides an upstream or cross-stream guarantee or security. As a result, lenders usually require that the giving of the guarantee is authorised by an appropriate shareholders’ resolution, to avoid the possibility of the transaction being challenged by a shareholder on the basis that the directors have breached their duties. However, this will not cure a lack of corporate benefit if the company is in the zone of insolvency when the directors’ primary duty is deemed to be owed to the company’s creditors.
An upstream guarantee may result in an unlawful reduction of capital if the company does not have sufficient distributable reserves to cover any diminution in net assets. As a result, lenders may wish to see board minutes and or representations that address the issue of net assets or, where the company is in financial distress, a net assets letter from company’s auditors. Usually, the diminution in net assets has been determined in accordance with normal accounting principles by considering whether any provision is required for the guarantee in the company’s balance sheet. Recently, the Institute for Chartered Accountants and Institute for Certified Accountants published guidance suggesting that a company may not, in some circumstances, be able to grant an upstream guarantee without charging an arm’s length fee if it had a deficit in distributable reserves, even if the guarantee would not result in a diminution in net assets being recorded in the balance sheet. The guidance has generated a lot of ongoing debate but as a practical matter it has always been usual to check that a company does not have negative net assets or negative distributable reserves, not only for comfort that there is no unlawful reduction of capital or unlawful distribution, but also to check for insolvency avoidance risk and breach of directors’ duties.
Guarantees are also vulnerable to challenge when the guaranteed debt is amended, rescheduled or otherwise extended without the consent of the guarantor. Provisions are usually inserted into guarantees to provide advance consent to such amendments, but the effect of such provisions is limited and a prudent approach is to obtain guarantee confirmations whenever material amendments are made to the guaranteed debt.
There are no particular English law limitations on the ability of foreign-registered related companies to provide guarantees in an English law document.
See also question 31 as to situations where guaranteed claims would be voidable.
Assistance by the target
Are there specific restrictions on the target’s provision of guarantees or collateral or financial assistance in an acquisition of its shares? What steps may be taken to permit such actions?
The Companies Act 2006 prohibits:
- financial assistance given by a public company (or any of its UK subsidiaries, whether public or private) directly or indirectly for the purpose of the acquisition of shares in that company (or of reducing or discharging a liability incurred for such purpose); or
- financial assistance given by a public company subsidiary of a private company, directly or indirectly for the purposes of the acquisition of shares in that private company (or reducing or discharging a liability incurred for such purpose).
Outside the above scenarios, there is no longer a statutory prohibition on a private company giving financial assistance. Nevertheless, the provision of guarantees and security raises related issues (see question 14).
Types of security
What kinds of security are available? Are floating and fixed charges permitted? Can a blanket lien be granted on all assets of a company? What are the typical exceptions to an all-assets grant?
A debenture is often used to create various security interests covering all of the assets of a company. Lenders will usually take fixed security over assets that do not fluctuate in the business (such as shares, real estate, intellectual property and certain key receivables and contracts), with the remainder of the assets which do fluctuate, being subject to a floating charge. The position of a fixed-charge holder is stronger in an insolvency (see question 34). If a fixed charge is taken over assets but the chargor is, nevertheless, permitted to deal with those assets in the ordinary course of its business (such as book debts or inventory), the charge may be recharacterised by a court in an enforcement situation as a floating charge. To be a fixed charge, a charge must be characterised as fixed in the documentation and the chargee must have control over the charged asset.
Fixed security may take the form of a mortgage, an assignment, a charge or a pledge. A ‘pledge’ requires delivery of possession of an asset to the creditor by way of security and is rare in commercial lending, where a charge is more common.
Security over real estate assets is usually granted by way of a legal mortgage. Security over registered securities (eg, shares) is usually taken by way of a charge. Security over monetary claims and contractual rights can be secured by way of charge or security assignment.
Requirements for perfecting a security interest
Are there specific bodies of law governing the perfection of certain types of collateral? What kinds of notification or other steps must be taken to perfect a security interest against collateral?
Pursuant to Part 25 of the Companies Act 2006, almost all mortgages and charges created by companies incorporated in the UK must be registered with Companies House within 21 days of creation. The most significant exception is for security financial collateral arrangements in relation to cash, credit claims, shares, bonds and other securities. Registration at Companies House is necessary even where the assets charged are located outside the UK or where the security is governed by foreign law. Failure to register a registrable charge at Companies House will render the security void against a liquidator, administrator or other creditor of the company. Once registered (subject to limited permitted redactions), the charging instrument becomes a public document, accessible through the online register. An equivalent registration requirement exists for UK limited liability partnerships. Mortgages and charges created by overseas companies (even those that have registered an establishment in the UK) are not registrable at Companies House.
There are further rules for the perfection of security over land, intellectual property, ships and aircraft registered in the UK that have separate asset-specific registries with their own registration requirements. These apply to security created by both UK and overseas companies.
To perfect security over receivables and contractual rights, notice should be served on the contract counterparty, as priority of security over such rights is generally determined by the timing of the giving of such notice.
Security created by individuals or other non-corporate security providers needs to be registered with the High Court pursuant to the Bills of Sale Acts, which govern the ability of an individual or non-corporate debtor to leverage property (typically, personal chattels) as security (see Update and trends).
Renewing a security interest
Once a security interest is perfected, are there renewal procedures to keep the lien valid and recorded?
Once security created by a UK-registered company or LLP has been registered at Companies House, there is no need to renew the registration in order to preserve the validity of the security. Certain events arising post registration will require further actions to be taken. For instance, the charging company is required to keep certain related documents (including instruments amending the charge) available for inspection. Amendments to existing charging instruments that effectively create a new charge would be registrable. It is also possible to register at Companies House security existing on property acquired. Lastly, when a receiver or manager of the charging company is appointed, the appointee must notify Companies House within seven days of appointment.
Bills of Sale Act registrations (see question 17) are renewable every five years.
Stakeholder consent for guarantees
Are there ‘works council’ or other similar consents required to approve the provision of guarantees or security by a company?
In the absence of any express agreements with unions or other employee representative bodies that may oblige the employer to obtain consent or consult on this subject (which in practice are likely to be rare), there is no obligation to obtain consents from, or consult with, a works council, trade union or other employee representative body for the provision of guarantees or security by an English company. However, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246) and the Trade Union and Labour Relations (Consolidation) Act 1992 (both as amended by the Collective Redundancies and Transfer of Undertakings (Protection of Employment) (Amendment) Regulations 2014 (SI 2014/16)) contain information and consultation obligations that are likely to be triggered by the sale of the underlying business.
If the company has a defined benefit pension scheme, it may be necessary to obtain the consent of pension trustees or consult with the Pensions Regulator before encumbering assets if this weakens the company’s ability to meet its pension obligations.
The directors would approve the provision of guarantees or security, and in the case of upstream or cross-stream guarantees or security, it is also advisable to seek approvals from the shareholders.
Granting collateral through an agent
Can security be granted to an agent for the benefit of all lenders or must collateral be granted to lenders individually and then amendments executed upon any assignment?
Where there are several lenders, security is granted to a security trustee who holds the security on trust for the finance parties from time to time. As a result, assignments and transfers can be effected by lenders under a facility agreement without the need for any steps to be taken in relation to the underlying English law security documents for new lenders to benefit.
Creditor protection before collateral release
What protection is typically afforded to creditors before collateral can be released? Are there ways to structure around such protection?
Typically, release of security requires a deed of release unless assets are being sold by an administrator or liquidator or on enforcement.
There are few specific legal protections for creditors in relation to the release of security. However, the security trustee (or receiver) will owe a number of common law duties to secured creditors in the context of the sale of a secured asset under a charge or mortgage (eg, to act in good faith, to take reasonable steps to obtain a proper price for the asset, to obtain the best price reasonably obtainable and to act with reasonable care and skill). In addition, the intercreditor agreement may include further conditions for any release of security. Further protections apply in the case of asset-specific registers. For instance, in the case of registered land, the Land Registry would require a signed deed (in a paper form prescribed by the Land Registry) from the mortgagee authorising the release or an electronic form sent by the lender through the Land Registry’s portal.
Describe the fraudulent transfer laws in your jurisdiction.
See question 33 regarding voidable transactions.
Debt commitment letters and acquisition agreements
Types of documentation
What documentation is typically used in your jurisdiction for acquisition financing? Are short form or long form debt commitment letters used and when is full documentation required?
Credit agreements and intercreditor agreements will generally be based on the latest LMA forms.
For acquisitions of private companies, a commitment letter attaching a detailed long-form term sheet is generally used. On some transactions the arrangers will also commit to enter into an ‘interim facility’ agreement attached to the commitment letter. The interim facility agreement includes provisions for a facility that matures within a short period of time after closing and which is available to fund the acquisition at closing. In cases where an interim facility agreement is signed, a long form credit agreement is, nevertheless, usually agreed before the share purchase agreement is entered into. For transactions involving private equity houses, commitment papers will often follow papers for past transactions completed by that house.
For acquisitions of public companies, a fully negotiated and executed credit agreement and other ancillary financing documentation would be required to be in place at the time the offer is made in order to satisfy the certain funds requirements of the Takeover Code (see question 29).
Level of commitment
What levels of commitment are given by parties in debt commitment letters and acquisition agreements in your jurisdiction? Fully underwritten, best efforts or other types of commitments?
Commitment letters usually provide for underwritten debt or for a club of lenders to provide financing. Best efforts commitments are sometimes provided for bond transactions or refinancings. A bid for an acquisition is usually supported by a fully underwritten commitment letter.
Conditions precedent for funding
What are the typical conditions precedent to funding contained in the commitment letter in your jurisdiction?
Conditions precedent contained in the commitment letter will generally depend on the strength of the certain funds basis of the offer and of the underlying business as well as the duration of the commitment. They may include material adverse change clauses or specific financing conditions, or both, but generally do not. Conditions precedent to funding generally include:
- corporate formalities for all borrowers and guarantors (eg, board and shareholder resolutions, constitutional documents, specimen signatures and certificates certifying no breach of limitations relating to borrowing, the grant of guarantees or security);
- executed finance documents (eg, the facility agreements, security documentation, intercreditor agreement and fee letters);
- notices and any other relevant documentation under the security documentation;
- an executed acquisition agreement;
- details of insurance;
- copies of due diligence reports, including a tax structure memorandum and relevant reliance letters;
- financial projections;
- financial statements;
- a closing funds flow statement;
- proof that an agent for service of process has been appointed (if there is no English company in the group);
- a group structure chart;
- ‘know your customer’ requirements;
- evidence that fees and expenses have been paid;
- evidence that existing debt will be refinanced and security released on closing; and
- legal opinions.
Are flex provisions used in commitment letters in your jurisdiction? Which provisions are usually subject to such flex?
Market flex provisions are usually included in fee letters for financing to be syndicated to other lenders in the market. Such provisions may permit arrangers to increase the margin, fees or original issue discount (OID), move debt between tranches under the same agreement or create or increase the amount of a subordinated facility, remove borrower-friendly provisions or tighten others if this appears necessary or desirable to ensure that the original lenders can sell down to their targeted hold levels in the facilities. Market flex is often documented in the fee letter, for confidentiality reasons.
Are securities demands a key feature in acquisition financing in your jurisdiction? Give details of the notable features of securities demands in your jurisdiction.
Securities demands are typically included in commitment letters or fee letters where lenders are providing a bridge facility that is designed to be refinanced as soon as possible thereafter with the proceeds of a bond offering. The terms of the securities demand will provide that the lenders may force the borrower to issue securities, subject to certain agreed criteria. The negotiation may centre around when and how often the demand may be made, whether the issuance must be for a minimum principal amount of notes (to ensure some level of efficiency for the issuer in terms of transaction costs and management time), the maximum interest rate at which the issuer can be forced to issue the notes and the terms of the notes (eg, currencies and maturity).
Key terms for lenders
What are the key elements in the acquisition agreement that are relevant to the lenders in your jurisdiction? What liability protections are typically afforded to lenders in the acquisition agreement?
For acquisitions of private companies, lenders will wish to benefit from any business material adverse change clause that a buyer negotiates in the acquisition agreement for the target, but generally will not require these provisions to be replicated in the commitment letter or the credit agreement, which will provide instead that the conditions to the acquisition are satisfied and not waived. Business material adverse change conditions are not as common in the UK as in some other jurisdictions. The lenders will require controls on the ability of the purchaser to amend or waive certain material provisions of the acquisition agreement, such as the long stop date, price and the conditions to closing or termination rights.
The lenders will require security over the purchaser’s contractual rights contained in the acquisition agreement to seek recourse against the vendor. The ‘drop dead date’ for completing the acquisition should reflect the availability period for the financing. Financing agreements for the acquisition of public companies will impose restrictions on the conduct of the offer or scheme, such as the level of acceptances a bidder must obtain before declaring the bid unconditional.
‘Xerox’ provisions limiting the liability of lenders for failure to fund may occasionally be seen where US parties are involved. Provisions requiring the target to cooperate with a take-out financing are usual where a take-out debt issuance is proposed.
Public filing of commitment papers
Are commitment letters and acquisition agreements publicly filed in your jurisdiction? At what point in the process are the commitment papers made public?
There is generally no requirement to file in respect of acquisitions of private companies. The offer document for acquisitions of public companies subject to the UK Takeover Code must describe how the offer will be financed, including details of:
- the amount of each facility or instrument;
- the repayment terms;
- interest rates, including any ‘step up’ or other variation provided for (which may, subject to any grace periods granted by the Panel on Takeovers and Mergers (Panel), require market flex provisions contained in syndication letters to be disclosed);
- any security provided;
- a summary of the key covenants;
- the names of the principal financing banks; and
- if applicable, details of the time by which the offeror will be required to refinance the acquisition facilities and of the consequences of its not doing so by that time.
In addition, unless the Panel has granted a dispensation from doing so, copies of any documents relating to the financing of the offer must be published on a website by no later than 12pm on the business day following a bidder’s announcement of a firm intention to make an offer (or, if later, the date of the relevant document) until the end of the offer (including any related competition reference period). Subsequent amendments or updates to these documents must also be published during this period, with specific processes outlined in Rule 27 for announcing material changes and subsequent documents.
However, the Takeover Code Committee has indicated that these disclosure rules may be waived in relation to certain details of the financing. These include headroom elements (where the bidder has agreed a potential increase in its facility with its financing bank) and details of the structures for providing equity to private equity vehicles (meaning that the leverage within such funds does not need to be disclosed).
In a small number of cases, the Panel Executive has consented to the bidder redacting market flex arrangements from the financing documents, thereby providing the lead arrangers with an opportunity to syndicate the debt in the period of up to 28 days following the announcement before the offeror is required to publish its offer document. The terms upon which the debt for an offer is being provided must be described in the offer document, and the final form of the financing documents must be published on a website. If syndication has occurred prior to issue of the offer document, the market flex arrangements will no longer be relevant and need not be disclosed. However, if syndication has not occurred by the date the offer document is published, the market flex terms will need to be disclosed in the offer document.
Enforcement of claims and insolvency
Restrictions on lenders’ enforcement
What restrictions are there on the ability of lenders to enforce against collateral?
When an application for the appointment of an administrator is made or a notice of intention to appoint an administrator is filed an interim moratorium begins, which becomes final when an administrator is appointed. Once the moratorium has commenced lenders cannot enforce security (other than certain financial collateral arrangements) or institute or commence other legal proceedings. When a winding-up order has been made in a compulsory winding-up of a company no action or proceeding can be started or continued against the company but the moratorium will not prevent lenders enforcing their collateral. When a creditors’ voluntary liquidation of a company commences, no automatic stay on legal proceedings applies but a liquidator, creditor or shareholder can apply to court for a stay.
No automatic stay applies in a restructuring implemented by way of a scheme of arrangement. However, if a majority of creditors support the restructuring, the court has discretion to grant a temporary stay of legal proceedings to allow a company to carry on trading. This should not prevent secured lenders enforcing collateral, however.
A company that does not exceed certain size thresholds can apply for a 28-day stay while it attempts to implement a company voluntary arrangement (CVA) and can, with creditors’ consent, extend this by a further two months. A CVA does not bind secured creditors, however.
It is possible that security over shares is not enforceable if a UK company has not complied with requirements to disclose its ownership of shares by persons with significant control.
Does your jurisdiction allow for debtor-in-possession (DIP) financing?
No. However, an administrator or liquidator has the power to borrow and such borrowings will be an expense of administration ranking ahead of the claims of floating-charge holders; the rights and priority of fixed-charge holders are preserved. Most restructurings take the form of an out of court restructuring scheme or CVA and, in such a case, the priority of new money is contractually agreed.
An administrator can sell assets subject to a floating charge without the consent of the floating-charge holder and the floating-charge holder will have the same priority over property acquired with the proceeds as it had in respect of the assets disposed of. The administrator can only sell assets subject to a fixed charge with the consent of the fixed-charge holder or of the court and must account to the fixed-charge holder for the net disposal proceeds.
Stays and adequate protection against creditors
During an insolvency proceeding is there a general stay enforceable against creditors? Is there a concept of adequate protection for existing lien holders who become subject to superior claims?
See questions 30 and 31. Creditors are generally entitled to rely on insolvency termination clauses in contracts to terminate. This was, until recently, only subject to exceptions for landlords and utility providers. The Insolvency (Protection of Essential Supplies) Order 2015 (SI 2015/989) introduced a new definition of a ‘contract for the supply of essential goods or services’. In addition to gas, electricity, water and communications, this includes IT supplies. The Order contains provisions that void contract terms that allow such suppliers to withdraw their supply or demand additional payments when a business enters into administration or a voluntary arrangement. Instead, suppliers can ask the appointed insolvency practitioner to guarantee payments of charges incurred after the start of the administration or voluntary arrangement as a condition of continuing supply. Alternatively, the supplier may apply to court for permission to terminate the contract on the grounds that its continuation would cause the supplier hardship. Suppliers can also terminate the contract in any event if post-insolvency supplies are not paid for within 28 days of falling due.
In the course of an insolvency, describe preference periods or other reasons for which a court or other authority could claw back previous payments to lenders? What are the rules for such clawbacks and what period is covered?
Payments can be clawed back if made in the context of transactions at an undervalue, preferences, extortionate credit or defrauding creditors. A payment could be clawed back, for example, if a company made a voluntary prepayment of a loan when it was unable to pay its debts.
The vulnerable period for any transaction at an undervalue or for a preference given to a connected party is two years prior to the commencement of administration or liquidation or six months for a preference given to an unconnected party. The vulnerable period for a floating charge (which is not a financial collateral arrangement) granted to an unconnected party is 12 months prior to the commencement of administration or liquidation or two years for a floating charge granted to a connected party. A transaction at an undervalue, preference or floating charge can only be challenged by an administrator or liquidator and (except where a floating charge is granted to a connected party) only if the company was unable to pay its debts (or became unable to pay its debts) as a consequence of the transaction.
Security could also be challenged without time limit by a liquidator or administrator (or, with the consent of the court, a deprived creditor) as a transaction to defraud creditors (ie, a transaction at an undervalue where the purpose was to put assets beyond the reach of persons who may make a claim against the company) or otherwise prejudicing the interests of such a person in relation to such a claim. This is generally not a risk in a normal commercial lending.
A transaction at an undervalue, such as the grant of security, is a transaction entered into for no consideration or consideration in money or money’s worth, which is significantly less than the consideration provided by the company. It is a defence to such a challenge to show that the company entered into the transaction in good faith for the purpose of carrying on the business of the company and at the time there were reasonable grounds for believing the transaction would benefit the company. This is more difficult to show where a company provides a guarantee or security for the obligations of its sister or parent company, rather than for the obligations of its subsidiary. It is typical in an acquisition financing for a bidco to borrow debt and for the target subsidiaries to guarantee and secure the debt; here, lenders usually require detailed board minutes for each obligor setting out the benefit of the transaction to that obligor. In addition, a shareholders’ resolution is usually required, which will, unless the obligor is in the zone of insolvency, protect against a challenge by the shareholders for breach by directors of their fiduciary and statutory duties if there is a lack of corporate benefit.
A company grants a preference when it prefers a creditor, surety or guarantor by putting that entity into a better position than it would otherwise have been in without the preference if the company went into insolvent liquidation. This could be the case of a company granted security for an existing debt. A court will only make an order to unwind the transaction if the company was influenced by a desire to prefer the entity. The desire to prefer is assumed when the parties are ‘connected’ (eg, where the company gives security to another group company). Typically, in an acquisition financing, an obligor grants security as a condition precedent to funding or to avoid a breach of undertaking that will lead to an event of default and likely insolvency rather than from a desire to prefer.
A floating charge is hardened during the 12-month vulnerable period to the extent of money paid or goods or services supplied to, or a discharge or reduction of any debt of, the chargor at the same time as or after and in consideration of the creation of the charge, together with interest. As a result, it is common to require companies granting floating charges to borrow directly rather than through a holding company and to grant security when or before the loan is made.
Following the Financial Collateral Arrangements (No. 2) Regulations 2003 (SI 2003/3226), certain insolvency challenge risks and the moratorium on enforcement of security in administration do not apply to security over financial instruments, credit claims (including claims for repayment of money to and loans made by credit institutions) and cash.
Ranking of creditors and voting on reorganisation
In an insolvency, are creditors ranked? What votes are required to approve a plan of reorganisation?
Fixed-charge holders have priority. Other than the costs of preserving and realising fixed-charge assets, no creditor has a prior right to the proceeds of fixed-charge security ahead of the fixed-charge holder.
The proceeds of remaining and floating-charge assets are applied as follows:
- costs of preserving and realising the floating-charge assets;
- the administrator’s or liquidator’s remuneration and costs (although litigation costs need the consent of creditors);
- ordinary preferential debts (unpaid contributions to occupational pension schemes, unpaid employees’ wages (subject to a cap), debts owed to the Financial Services Compensation Scheme and deposits covered by the Financial Services Compensation Scheme);
- secondary preferential debts (deposits or parts of a deposit owed to depositors that are not otherwise protected by the Financial Services Compensation Scheme);
- a ring-fenced amount of up to £600,000 (unless the charge was created prior to 15 September 2003), payable to unsecured creditors (the ‘prescribed part’);
- sums owed to the floating-charge holder; and
- unsecured creditors.
The proceeds of uncharged assets after payment of administration and liquidation costs and expenses and any surplus from the enforcement of security are used to pay unsecured creditors pari passu. If the realisations of security are insufficient to fully repay the secured debt, the secured creditor will rank as an unsecured creditor for the balance but cannot participate in the prescribed part.
The advantages of a fixed charge over a floating charge are:
- priority in an insolvency;
- a fixed charge is not subject to the one-year avoidance period (see question 33); and
- an administrator cannot dispose of fixed-charge assets without court consent.
However, unlike the holder of a fixed charge, the holder of a floating charge with security over all or substantially all of a company’s assets can appoint an administrator using an out of court procedure.
In an administration, the administrator will make proposals for the rescue or sale of the company’s business or realisation of its assets. The plan cannot override the rights of secured creditors. Creditors vote on the plan and the level for approval is 50 per cent of unsecured creditors by value of claims although the administrator can carry out a pre-pack sale without approval of creditors. If the creditors do not approve the plan, the administrator will apply to court and the court can make such order as it sees fit.
A scheme of arrangement enables a company to enter into a compromise or arrangement with its creditors or any class under a court-based statutory procedure. A scheme can be used to cram down creditors within a class of creditors, such as a class of secured creditors. This requires the approval of a majority in number and at least 75 per cent in value of the creditors in each class present and voting and the approval of a majority of the shareholders. A court sanction is also required. A scheme of arrangement may be approved even if the shareholders vote against it if the company is insolvent. A scheme can only be used to cram down creditors in a class and creditors in one class cannot cram down an impaired class through a scheme.
A CVA is an agreement between a company and its unsecured creditors reached pursuant to a statutory procedure without the need for court approval. It requires the approval of a majority of 75 per cent or more in value of unsecured creditors present and voting and a simple majority of shareholders (although the creditors’ vote will prevail unless the shareholders apply to court to challenge the decision). If the creditors approve the CVA then the CVA will bind all creditors who were entitled to vote but not secured and preferential creditors unless they consent. A resolution of creditors approving a CVA will be invalid if the creditors voting against it include more than half in value of unsecured unconnected creditors to whom notice of the meeting was given. Whether a person is a connected person for this purpose is to be decided by the chairman of the meeting. Where a distribution is made under a CVA or scheme of arrangement, the terms of the CVA or scheme will provide for the order of distribution although CVAs cannot affect the rights of secured or preferential creditors without their consent.
Intercreditor agreements on liens
Will courts recognise contractual agreements between creditors providing for lien subordination or otherwise addressing lien priorities?
Courts will generally give effect to contractual subordination arrangements so long as they do not override mandatory insolvency laws such as the requirement that unsecured creditors (which are not preferential creditors) are paid pari passu. Therefore, different groups of lenders can agree priority between themselves but the lenders cannot agree with the borrower that the lenders will rank ahead of unsecured creditors other than through holding security. Structural subordination can be used to give one category of unsecured creditor priority over another.
Parties cannot contract out of the statutory rules for the realisation and distribution of assets in insolvency under the anti-deprivation rule. In the case of Belmont Park/Perpetual Trustee  UKSC 38,  1 All ER 505,  1 AC 383, the Supreme Court held that the anti-deprivation rule would unwind a transfer of assets from a company if the transfer is triggered by insolvency.
Discounted securities in insolvencies
How is the claim of an original issue discount (OID) or discount debt instrument treated in an insolvency proceeding in your jurisdiction?
Liability of secured creditors after enforcement
Discuss potential liabilities for a secured creditor that enforces against collateral.
If a secured creditor forecloses on mortgaged land, it can incur the liabilities of an owner such as liabilities to clean up environmental contamination. In addition, if a lender becomes involved in the chain of management leading to a breach of environmental law (whether as a result of involvement in a restructuring or enforcing security or otherwise) then it may incur liability because it has caused or knowingly permitted the breach. If a lender appoints a receiver to enforce and gives the receiver an indemnity against environmental liabilities then the lender may be liable under the indemnity.
An administrator or liquidator who runs a business will have all the liabilities associated with it and will be required to obtain all necessary licences and approvals (eg, alcohol and entertainment licences). As a result, administrators and liquidators will generally ask secured creditors for indemnities.
If a company is an employer with an occupational defined benefit scheme, the Pension Regulator can in certain circumstances require persons who are connected or associated with the company (including other members of a corporate group, directors and shareholders with one-third or more voting control) to provide financial support or a contribution to the deficit. If a lender becomes such a person (such as a shareholder of the company or another company in the same group), there is a ‘moral hazard’ risk the Pensions Regulator could require the lender to provide financial support or a contribution. The Pensions Regulator has rarely exercised such powers.
A secured creditor also has a duty to take reasonable care to sell at the best price reasonably available in the market and it is usually necessary, at a minimum, to obtain a valuation.
Update and trends
Update and trends
Updates and trends
In March 2017, the notice triggering Article 50 - the start of the two-year period before the UK leaves the European Union (Brexit) - was given by the UK government. A consequence of Brexit is that, once the UK leaves the EU, it will not be possible to rely on recognition of a UK court’s decision in an EU member state under the Judgments Regulation (EC) No. 44/2001 (Brussels I) and instead (in the absence of alternative arrangements being agreed) reliance will need to be placed on the rules of private international law of that EU member state. This will impact, for example, recognition of UK schemes of arrangement in EU member states. The Bank Recovery and Resolution Directive requires firms to include in certain non-EU law contracts governing liabilities a term by which the relevant creditor or party to the contract recognises that the liability may be bailed in (ie, subject to write-down or conversion into equity) if the bank goes into resolution by the Bank of England as resolution authority. We expect to see more financing documentation governed by English law include such clauses to take account of Brexit.
The UK government launched a consultation in 2016 on further reforms to the UK’s insolvency regime such as wider use of moratoria and restrictions on enforcing insolvency termination provisions, but there has been no announcement of any next steps.
The European Central Bank’s (ECB) Guidance on Leveraged Transactions entered into force on 16 November 2017. The ECB guidance is similar to the Interagency Guidance on Leveraged Lending issued in the US, which has been applicable to US-regulated banks since 2013. The ECB’s guidance applies to all ‘significant credit institutions’ in the eurozone supervised by the ECB and provides that syndication of transactions where the ratio of total debt to EBITDA exceeds six times should remain exceptional. It remains to be seen exactly how this will impact the European leveraged lending market, (which typically has transactions with leverage levels below the six times threshold), particularly as the US seems to be reeling back its Interagency Guidance.
The European Commission and various national and international bodies have been looking at tightening regulation for the ‘shadow banking’ sector. EU Securities Financing Transactions Regulation (EU) No. 2015/2365 came into force in January 2016 and requires greater reporting of securities financing transactions to improve transparency in shadow banking. The Money Market Funds Regulation (EU) No. 2017/1131) will apply, for the most part, from 21 July 2018 and will introduce new requirements regulating the liquidity and stability of money market funds. It is possible that lending by alternative credit providers will also be subject to regulation in the future.
The UK’s Financial Conduct Authority (FCA) has banned, with effect from 3 January 2018, the use of certain restrictive contractual clauses in investment and corporate banking engagement letters and contracts where these clauses cover future ‘primary market’ services (being capital markets and mergers and acquisition advisory work) carried out from an establishment in the UK. The ban prohibits the use of two commonly used forms of restriction: ‘right of first refusal’ clauses, which prevent clients from accepting a third-party offer to provide future services unless they have first offered the mandate to the bank or broker on the terms proposed by the third party; and ‘right to act’ clauses, which prevent clients from sourcing future services from third parties, regardless of any potential third-party offers. The ban does not apply to appointments for a non-primary market ‘specific piece of future business’.
In 2017, the FCA announced that the London Inter-bank Offered Rate will be replaced by alternative benchmark rates by 2021 and loan documentation will need to allow for this.
The recast Insolvency Regulation (EU) No. 2015/848) came into force in 2017. The Regulation applies to all new insolvency procedures from June 2017, has provisions to streamline group insolvencies and has a three-month look-back for changes to the centre of main interest of debtors prior to insolvency.
The Markets in Financial Instruments repealing Directive 2004/39/EC (MiFID II) and the Regulation on Markets in Financial Instruments Regulation (EU) No. 600/2014 (MiFIR) became effective on 3 January 2018, which introduce substantial changes in the ways banks operate are regulated and deal with their customers.