backBackground
Almost all credit agreements which are based on Loan Markets Association templates contain an ‘Obligors’ Agent’ provision, which is designed to help borrowers and finance parties to minimise the administrative burden of operating a credit agreement.
Under the construct, one designated group company (often a holding company in the borrower group) is authorised to act as the agent for and on behalf of the other group companies. This means that notices, regular communications or even some simple amendments can be administered efficiently by that one agent on behalf of the remaining obligors.
It is intended to facilitate communication between the parties where the borrower-group contains numerous group companies. When used correctly, it minimises the duplication of paperwork and communications which would otherwise need to be sent to and from all those group companies when liaising with the lenders and other finance parties.
However, recent market practice demonstrates that some lawyers have been using the construct to serve as the legal basis for entering into material finance documents. This article assesses the implications of doing so by exploring the limits of the ‘Obligors’ Agent’ clause and cautions against over-reliance on it.
The Limits of the ‘Obligors’ Agent’ construct
Execution of deeds
Usual practice is to appoint the parent of a corporate group as the agent for the purpose of executing documents on behalf of the remaining obligors. As a matter of legal principle, this is an ordinary contractual grant of express authority by a principal in favour of an agent. It is worth noting that credit agreements are very rarely executed as deeds, but rather as contracts under-hand. Therefore, as established by longstanding judicial authority, the scope of the principal’s authority “is to be ascertained by applying ordinary principles of construction of contracts, including any proper implications from the express words used”.
The LMA standard ‘Obligors’ Agent’ clause is widely drafted: “[e]ach Obligor […] appoints the Parent […] to act on its behalf as its agent in relation to the Finance Documents”, as the definition of ‘Finance Documents’ usually includes all documents relevant to the transaction. Crucially, this includes fundamental documents such as the intercreditor agreement and transaction security documents. These documents are usually executed as deeds to effectively grant security or establish trusts, but under common law, authority to execute a deed must itself be granted by way of deed.1 Berkeley v Hardy (1826) 5 B. & C. 355; Powell v London & Provincial Bank [1893] 2 Ch. 555, 563; Windsor Refrigerator Co v Branch Nominees [1961] Ch. 88; Phoenix Properties Ltd v Wimpole Street Nominees Ltd [1992] B.C.L.C. 737. This means that the obligors’ agent likely lacks proper authority to enter such documents on behalf of the other obligors under the LMA standard obligors’ agent provision because, as noted above, the credit agreement would likely not have been executed as a deed.
While using the obligors’ agent to execute the intercreditor agreement or transaction security documents might appear to helpfully reduce the number of signatures required, it potentially exposes the finance parties to risk that the relevant document(s) might not be validly entered into by all of the relevant borrower group companies.
Incremental facilities
In addition to the wide-ranging reference to the finance documents referred to above, the leveraged finance LMA standard ‘Obligors’ Agent’ clause specifies certain other actions that an obligors’ agent may undertake, including the authority “to agree any Incremental Facility Terms and to deliver any Incremental Facility Notice”.
We regularly see this authority used appropriately, where new incremental facilities which are commercially consistent with its existing facilities are established. Where new facilities are structured in a manner that materially and substantively amends the existing contractually agreed architecture of the parties’ relationship (for example, through significant changes to ranking, security, tenor or pricing), then there could be a strong argument that this would fall outside the agent’s authority to bind the other group companies.
Legal counsel will need to actively consider this risk on a case-by-case basis, but a one size fits all approach is unlikely to be appropriate.
Furthermore, when agreeing incremental facilities, to protect their position finance parties routinely require supplementary or confirmatory security to be given by the borrower-group companies. Such supplementary or confirmatory security would usually be set out in a finance document and so we do occasionally see lawyers assert that it may be made by the obligors’ agent on behalf of the other borrower-group companies. However, supplementary or confirmatory security is subject to the same concerns as for transaction security documents referred to above and should therefore be made by deed and entered into by all obligors.
Foreign-law limitations
Parties should avoid relying on English-law agency provisions in relation to execution by overseas companies without taking advice from suitable local counsel. Civil-law jurisdictions often have similar concepts (for example, Mandat under the Code civil in France and Auftrag and Vollmacht in Germany), but they are subject to their own limitations and validity requirements and often feature strong statutory protections. US entities may be subject to the ‘equal dignities rule’, an American law doctrine which can require authority to execute a deed to be itself in the form of a deed, similar to the position under English law discussed above.
It may be tempting for parties to look to rely on an obligors’ agent to avoid the need for local legal review, but there is a material risk that agreements might not be validly entered into in these circumstances.
Summary
Where the nature of the amendments or agreement are significant, or deeds or foreign-law jurisdictions are involved, there are a number of risks associated with relying on the Obligors’ Agent construct. The primary risk is that the relevant new agreement might be unenforceable against certain counterparties, potentially undermining the security or subordination structures for example.
The construct should continue to be used for minor and administrative communications to be made under the credit agreement, in accordance with its terms. Parties, and their legal counsel, should ensure that material documents (including those made by deed) are properly executed by all the parties, or under valid powers of attorney, where required.
With contributions on foreign-law limitations from Marisa Sotomayor, George Komnenos, Sebastian Kaufmann, Delphine Guillotte and El Sayegh, and support and research from Jasen Pomakov.