Trésorier/Treasurer magazine - N°98 - July/Aug/Sep 2017 - 20

Push legal advisors to think out of
the box and to provide satisfactory
solutions to borrower and lenders.

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N°98

- JULY /

AUG / SEP 2017

The right in rem exists upon perfection of the security interests. Perfection consists of giving notice of the creation
of the security interests to the entity that has issued the
pledged equity or debt interests and/or registration of the
security interest in the register of pledged interests, if any
(for example a register of shareholder or bondholder). It is
worth noting that additional registration steps may have
to be taken in the jurisdiction of the grantor of the pledge if
the grantor is not incorporated in Luxembourg.
- Rights in personam are enforceable only against the persons who have consented to owe the right in personam, as
well as against persons who have assumed such obligation
by operation of law3 . Rights in personam in security documents include arrangements on voting rights and economic
rights attached to the collateral, restrictions on the use of
collateral by the pledgor and often also the obligation to
report certain events to the lenders. The lenders may agree
in advance that their rights in personam may be transferred under certain conditions, for example to the new owner
of pledged shares if the share transfer is permitted by the
credit agreement.
The following parameters should be taken into account
by borrowers when assessing the impact of a corporate
reorganisation on the lenders' interests: does the corporate
reorganisation result in the dissolution of the grantor of a
security interest, a borrower or guarantor of the lenders; is
the new collateral giver already party to a finance document
with the lenders; does the corporate reorganisation affect
the enforceability of the security interests; do the laws of the
jurisdiction of the transferee of the collateral affect in any
way the rights of the lenders.

be implemented within a tight deadline, having to obtain the
approval of uncooperative lenders may have damaging consequences for the borrower.
It would not be usual that lenders are entitled to the payment
of a fee for their involvement with the corporate reorganisation. This leaves good faith and caring about the long
term relationship with the borrower as sole incentive for the
lenders to devote resources that will enable the borrower
to perform the corporate reorganisation within the timeline
established by the borrower. When the lenders are not banks,
but investment structures that are part of what is called the
shadow banking industry, the lenders do not have an incentive to maintain a long-term relationship with the borrower.
For non-bank lenders the only horizon is the repayment of
the loan, not cross-selling new services to the borrower. At
the same time, less stringent processes and requirements
regarding the content of credit agreement could be expected
from non-bank lenders, resulting possibly in more openness
to variations from the forms of credit agreements released by
professional associations such as the Loan Market Association and Euro Private Placement.
If according to the credit agreement or the security documents the lenders' prior consent is required to perform
the corporate reorganisation, then the failure to obtain the
lenders' prior consent may trigger an early repayment of the
credit agreement. In that case, after lapsing of any cure period, the lenders will be able to enforce the security interests.
The credit agreement usually allows the lenders to enforce
the security interests even if the borrower fully meets the
financial covenants, and even if there is generally no concern
about the borrower's creditworthiness.

LE MAGAZINE DU TRESORIER / TREASURER MAGAZINE

4. Proposed solution

20

3. What the lenders' involvement means in practice
Where it is imposed expressly or implicitly by the credit
agreement or the security documents, the involvement of
the lenders in a corporate reorganisation consists in having
the lenders signing off on legal documentation affecting
the security interests granted to the lenders, and additional
documents that the lenders may ask for (corporate approvals,
incumbency certificate, legal opinion).
Involving the lenders means de facto requiring the lenders'
consent. This should be an anomaly in circumstances that do
not have a negative impact on the lenders' interests.
The involvement of the lenders increases the time required
for the preparation of the corporate reorganisation. It also increases costs of the reorganisation, since the borrower typically assumes all costs incurred by the lenders, in particular
legal fees, in connection with the preservation of the security
interests granted to the lenders. For transactions that have to

The borrower should have the primary responsibility to
assess the impact of the corporate reorganisation on security
interests and the type of remedies to be provided to the
lenders. Lenders' reliance on the borrowers is already a pillar
of the credit agreement: lenders rely on borrowers to provide,
for the most part without independent verification, data on
income and profits of the borrower which are the primary
source of information that enable lenders to assess the borrower's creditworthiness.
Once the principle of shifting more responsibility to the
borrower's side is agreed, the lenders and the borrower
should agree on a process and assurance to be provided to
the lenders in connection with corporate reorganisations,
such as the following assurances: written confirmation by the
transferees of pledged shares and loans that they assume
the obligations of the transferor under the security documents signed by the transferor, a written confirmation of the
borrower as to the impact of the corporate reorganisation on
Trésorier/Treasurer magazine - N°98 - July/Aug/Sep 2017

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