1. Information and Questions to CPE Fasch and Co (CPEF&Co)
In order to provide comprehensive advice regarding an upstream security/guarantee by the Ruritarian subsidiary (IPCo) of Mega Intangibles group (Target) (together referred to as Target Group), the following information is provided to CPEF&Co:
Our Client intends to acquire Target Group on the leveraged buy-out basis. The bank who provides the acquisition debt (Lender) requires IPCo to grant security over its intellectual property (IP). This potentially creates some issues under your jurisdiction.
(2) Typical Buyout Structure
Set out below is the potential structure which could apply to the proposed transaction. Please note that the transaction structure has not been decided yet, below is indicative only.
The following are several important points to be noted:
· “without recourse”
This is a fundamental part of this transaction because our Client in this structure is not liable for the debt (except for some cases) and is not a party to any agreement with Lender. BidCo is the one who is liable.
Since BidCo’s asset is limited, often just the shares in Target, the Lender requires upstream security/guarantee from the Target Group which gives the Lender the ability to take control of Target Group’s cash-flow in the event of default.
BidCo is the newly incorporated company that will receive the acquisition funding from the Lender and act as Lender’s counterparty and vendor’s counterparty.
The Lender’s debt usually comes in the form of first-ranking secured loan. It always wants to ensure that all other debts are structurally and contractually subordinated to its debt. With regard to the facilities which is provided, it provides at very least a term facility (which is used to fund the acquisition), almost invariably a revolving credit facility (which is used for the working capital needs of Target business) and may also a capital expenditure facility and investor debt (which will depend on the nature of the Target Group business).
(3) Debt Layering
Notwithstanding the above, it is also possible that the structure involves the debt layering which is as follow:
On the above structure, the Lender requires to lend the senior debt to BidCo, so the mezzanine debt is structurally subordinated to the senior debt. Although there are different types of debt, they are classified as one debt package in which each participant’s right and obligation is stipulated under inter-creditor agreement. Please note that these layers are only possible in the large transactions with stronger credit quality. Occasionally, it also supplemented by vendor debt and high-yield debt for the larger transactions.
Given the above information, we would appreciate it if you could confirm:
(1) Buyout structure
(a) Are there any laws and regulations that contravene the above proposed structures?
(b) If so, what are the legal consequences and what are the alternative solutions to this situation?
(2) Upstream security/guarantee
(a) Is the granting of upstream security/guarantee permissible under Ruritanian law?
(b) Are there any legal principles that potentially be violated due to that action (e.g. financial assistance, capital maintenance, corporate benefit, taxation rules, breach of directors’ duty)?
(c) What are the legal consequences of violating such rules (i.e. invalidity of security, civil or criminal liabilities of director or shareholder or lender)?
(d) Is it common to use guarantee limitation language (to avoid/minimize risks related to upstream security/guarantee) under the Ruritanian law? If so, what are the legal consequences?
(e) What are other methods commonly used to avoid/minimize risks related to upstream security/guarantee under the Ruritanian law?
(3) What are the steps and requirements (e.g. board of directors’ or shareholders’ approvals, external regulatory requirements) including its estimated timeline for granting and perfecting security over IP and guarantee? How should the security arrangement be structured?
(4) What are the steps and requirements (e.g. exchange control) to enforce the security over IP and guarantee?
What are alternative permitted structures (besides upstream security/guarantee) that give the Lender similar benefit (with security interest) from IPCo?