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Guide The Law of Corporate Finance: General Principles and EU Law: Volume II: Contracts in General

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Hardcover Springer. The law of corporate finance has been defined in a modern and more holistic way in this three-volume book. In this book, corporate finance law is studied from the perspective of the firm. Like modern commercial law in general, the law of cor- rate finance helps the firm to reach its legal objectives management of cash flow and the exchange of goods, management of risk, management of agency relati- ships, and management of information.

When trying to reach its legal objectives, the firm typically applies generic legal tools and practices incorporation and choice of business form, contracts, regulation of internal processes through c- pliance and otherwise, typical ways to manage agency relationships, and typical ways to manage information problems and takes into account legal rules that - long to different traditional fields of law contract law, company law, banking law, 2 tax law, competition law, and so forth.

Argo sought repayment in full of the debt that it had purchased. Now,Clause 27 of the LMA Agreement provided for two modes by which Syndicate memberscould pass their rights under the Agreement to another: one by way of assignment on noticeto Essar, the other by way of transfer, which also operated to transfer obligations as well asrights, amounting to a novation.

The Court of Appeal held that theprovisions of the version of the LMA agreement permitted a transfer to a hedge fund. It can be expensive both for lenders and the borrower the firm ifthe lenders actually use the remedies available to them upon the occurrence of anevent of default. Both the firm and the lenders may therefore prefer to restructurethe debt when the firm gets into trouble. Restructuring could take the form ofchanging the terms of the debt or converting the debt into shares equity.

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Restruc-turing can range from voluntary restructuring based on an agreement between theparties to involuntary restructuring based on a court order. The easiest way to restructure the debt is by changing its terms. The borrowermight negotiate to change the repayment date or alternatively it might take outnew borrowing on completely different terms, with the new borrowing beingtreated as repaying the old borrowing.

Alternatively, the lenders may agree to convert the debt into shares. The termsof the conversion will indicate whether there is a release of part of the debt in ex-change for the issue of shares, and how much of the debt is treated as released.

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Inthe EU, the conversion of debt into shares will be constrained by the legal capitalregime see below and require shareholder consent pre-emptive rights. In addi-tion, the conversion may be regarded as a form of issuing shares other than for acash consideration, in which case particular requirements as to form, expert opin-ion, valuation, and the minimum value of the consideration would have to becomplied with see section 5.

This is important, because the reason why debtis converted in the first place is that the firm will not be able to repay it in full. It typically requires either consensus or a major-ity decision. As the old Act is less flexible than English law, it is in theprocess of being modernised. In the past, the insolvency lawsof European countries were very severe.

The board of a company that became un-able to pay its debts often had a duty to file for insolvency within a short period oftime and insolvent companies often ended up being liquidated. Many countries haveintroduced reforms for the purpose of rescuing firms see Volume I.


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The Regulation enables the main insolvency proceedings to be opened in theMember State where the debtor has the centre of his main interests and secondaryproceedings to be opened in the Member State where the debtor has an establish-ment. However, the main rule is that the law of the Member State of the openingof the proceedings lex concursus determines all the effects of the insolvency44 Sections 5 a and 3 of the Companies Act Perspectives and Principles.

Cam U P, Cambridge pp — In the Schefenacker case, the restructuring of what was basically a German firm was movedto England. Such formal restructuring proceedings would nevertheless be expensive. The par-ties would not have full discretion to decide on the restructuring because, depend-ing on the governing law, core decisions in formal restructuring decisions tend torequire either a court order or approval by a majority of creditors or each class ofcreditors.

Some creditors might therefore be able to block the restructuring andcause further costs. This risk is characteristic of mezzanine financing.

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Some clauses are nevertheless characteristic of loan agreements. Different loan agreements contain dif-ferent terms, because the terms of the loan must be tailored to suit the borrower,lenders, market practice and the prevailing economic circumstances. Jordans, Bristol ; Diem A, Akquisitionsfinanzierungen.

Third Edition. Jordans, Bristol Although each loan transaction has its unique fea-tures, typically they will not influence the basic structure of the agreement and theprimary categories of clauses that will be included in the agreement.

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The core features of the loan agreement are determined by the nature of theloan transaction itself: the lender provides credit to the borrower who promises torepay the credit with interest according to the terms and conditions established inthe loan agreement. For this reason, all loan agreements tend to have the samestructure and the same basic categories of clauses. They will include clauses onconditions precedent, representations and warranties, covenants, events of default,and dispute settlement, because the core elements of all loan transactions are simi-lar and the fundamental risks associated with all loan transactions are identical.

There is nevertheless diversity in the way in which clauses that belong to thosecategories of clauses are drafted. For example,when securities are offered to the capital market, the expectations of investors candictate the terms of those securities and — in the case of securitisation and collater-alised debt obligations — the terms of underlying agreements.

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The number of mar-ket customs can thus be limited in order to ensure the efficient functioning of fi-nancial markets. Structure of the loan agreement. Clauses in loan agreements can be categorisedin many ways. The facility or theamount of loan; b. Currency provisions; c. Rate of interest; d. Interest period and its calcu-lation; e. Other charges; f. Pre-payment of the loan amount; g. Repayment; h.

birthwatliecam.ml Loan agreements appear to be heavily biased in favour of the lenders. The lender isgiven the right to call the loan in default and accelerate the loan repayment if cer-tain described events occur. Loan agreements can be very detailed. De-fined terms can be understood and negotiated only with reference to the operativeclauses of the agreement in which the term appears. For example, the borrower should pay attention to the definition of indebted-ness. The lender, in contrast, will prefer a wide definition of in-debtedness.

Apart from a long list of definitions, loan agreements tend tocontain a long list of other detailed clauses. Typical clauses that the borrowerwould, in any case, need to understand include clauses on: a the facility andother financial obligations; b the purpose of the facility; c drawdown; broken56 Ibid. Euromoney Publica- tion, London pp 21— There is a distinction between aloan facility clause or agreement and a loan agreement, although those two termstend to be interchangeable.

If the agreement contains a loan facility clause, that clause outlines the type offacility the lender will provide under the agreement, as well as the amount to bemade available. The borrower may not haveany obligation to borrow. Under a loan agreement, however, the borrower has agreed to borrow money,and is obliged to draw down. A loan agreement and a loanfacility agreement can be regarded as two separate agreements. This means that,unless the parties have agreed otherwise, default on an individual loan agreementdoes not necessarily amount to breach of the loan facility agreement under the le-gal background rules, and termination of a loan facility agreement does not meantermination of individual loan agreements.

Representations and warranties. Jordans, Bristol p The choice between a loan facility and a loan agreementand generally the choice of the type of the loan influence the financial obligationsof the parties. Both the lender and the borrower can undertake financial obliga-tions. However, it is normal to agree on the financial obligations of the borrowerand not of those of the lender or lenders. They can bediscussed in two stages.

In a loan agreement, the first stage is the taking of a loan from the lender. Aloan agreement normally provides the disbursement date or dates and last date forthe drawdown. It is a financial obligation of the borrower to ensure that he com-plies with all the conditions precedent within the time prescribed in the loanagreement, if any, and draws the money before the expiry of the last date fixed forits withdrawal. At the second stage, the borrower assumes three kinds of financial obligations. The first financial obligation is the repayment of the loan amount in accordancewith the terms and conditions of the loan agreement.

The second obligation is thepayment of interest as and when it falls due and payable to the lender.

The thirdobligation is the payment of other sums due to the lender under the agreement. Where the loan agreement provides for the payment of the loan amount in lumpsum or in one instalment, no financial obligation of the lender remains to be per-formed after the loan amount is paid by the lender to the borrower.

The agreementwould thus not lay down any financial obligations of the lender. On the other hand, if the loan agreement provides for the payment of loanamount to the borrower in instalments, some obligations of the lender remain to beperformed on subsequent dates. But it is presumed that a lender would be in a po-sition to discharge its obligations under the loan agreement.

Therefore, no provi-sion is added in a loan agreement covering the situation of non payment of loaninstalment by a lender. Other financial obligations. Other financial clauses address basic questions ofpayment obligations such as interest, repayment and pre-payment. The legal as-pects of payment obligations have already been discussed in Volume II. Purpose clause. In order to reduce counterparty risk, the lender will want theloan agreement to state explicitly how the borrower may use the funds. OUP, Oxford pp — The agreement contains a drawdown, availability or utilisationclause. The drawdown clause deals with the modalities of when and how the bor-rower can actually borrow money under the loan.

Before the first drawdown, the borrower must fulfil all conditions that usuallybelong to conditions precedent to closing. More sophisticated facilities might allow the borrower to utilise thefacility in a number of tranches up to the available amount. The loan facilityagreement usually provides for minimum and maximum amounts.

Revolvingcredit facilities offer even more flexibility, allowing repeated utilisation and re-payment throughout a substantial part of the term.