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Giving security is a complicated business

Posted
August 22, 2017
Business Law

When client companies undertake a material acquisition of shares or substantial assets often they finance it through a Bank loan. There are myriad types of funding, but the essence is, of course, that a substantial sum is lent by the Bank for the company to use and the Bank takes ‘security’ over assets such as property or shares as a guarantee of getting repayment.   

Many smaller client companies initially think it is a simple transaction – a loan agreement and then something akin to their house mortgage and similar to loans you get as a consumer/individual. As mortgages for houses are simple, many think it is just as simple in the corporate arena. Unfortunately, it is quite a bit more complicated and so I thought it might be beneficial to explain what is often required, particularly as the work of the Borrower’s solicitor can take a great deal of time and therefore be expensive. I’d like clients to understand why it can take significant time and effort to deal with. The Bank and its solicitors have no pressing timescale like you may have, they just want everything done perfectly according to their preferred documentation text which we have to consider, make fit to the circumstances, negotiate and agree (often the initial drafting can be simply wrong). So they control the pace and dictate their requirements. Let’s take an example: Alpha Ltd (owned by Mr Jones) is buying all the 100 shares in Omega Ltd from a single individual Seller, Mr Smith, for £2m with a loan from Bank A.  Omega Ltd owns a property worth £1m from which it conducts its business – and this has a mortgage on it with its day-to-day different Bank (which also provides overdraft facilities), Bank B.  Additionally, Alpha Ltd will also issue some new shares in itself to Beta Ltd to raise £500,000 extra capital so that the Bank borrowing is £1.5m. So, how many documents do you think have to be drafted, negotiated and agreed and matters checked before the money can be released; and what information does the lending Bank A want in order to make itself comfortable that it has enough security for the loan? 

It is likely that at least the following may be required, in addition to all the normal company share acquisition and due diligence process and ancillary documents, such as the Share Purchase Agreement, Disclosure Letter approvals, all property forms and other practical matters investigated etc:

  • An Investment Agreement between Alpha Ltd and Beta Ltd (20 to 40 pages);
  • Possibly a replacement set of Articles of Association of Alpha Ltd (5 to 20 pages);
  • Detailed Board minutes of a) Alpha Ltd and b) Beta Ltd approving the new issue and the new Articles of Association;
  • A Subscription letter for the new shares;
  • A waiver of Mr Jones’ pre-emption rights for new shares
  • Various Companies House share capital forms to be filed, sending full hard copy set of the new Articles to Companies House;
  • A Shareholders Agreement between Mr Jones, Beta Ltd and Alpha Ltd as to how they agree to govern Alpha Ltd (20 to 60 pages);
  • Written Special Resolutions for the share issue and new Articles by a) Alpha Ltd in issuing the shares and getting new Articles; and perhaps by b) Beta Ltd taking them and paying the issue price;
  • The Bank’s list of conditions and information requests, every single one of which has to be satisfied before setting a Completion date and organising getting the advance (these can number 100!), a major part of which is called the ‘Conditions Precedent’;
  • A Solicitor’s Undertaking to the Bank or its Solicitors from us concerning fees and other tasks we must do to satisfy their ‘Conditions Precedent’;
  • A Facility (or Loan) Agreement (50 to 80 pages) with Alpha Ltd (and perhaps Omega Ltd as well) which has various documentary attachments;
  • A Debenture given by Alpha Ltd (30 to 60 pages);
  • A Legal Charge given by Alpha Ltd over any real property it owns;
  • A Debenture given by Omega Ltd (30 to 60 pages), once the shares are bought;
  • A Legal Charge given by Omega Ltd over the property, once the shares are bought;
  • A Corporate Guarantee by Omega Ltd, once the shares are bought, guaranteeing Alpha Ltd’s repayments;
  • An Intercreditor Deed between Bank A, Alpha Ltd, Beta Ltd and perhaps Bank B, if different and if its security rights continue – this sets the precedence of the parties’ rights in order;
  • Various sets of Alpha Ltd board minutes, separately approving the purchase of the Omega Ltd shares, the terms of the Facility Agreement and the other security documents with commercial justifications, solvency statements;
  • Alpha Ltd Written Special Resolutions approving the same;
  • Various sets of Omega Ltd board minutes, separately approving the terms of the Facility Agreement and other security documents it has to execute with commercial justifications;
  • Omega Ltd Written Special Resolutions approving the same;
  • A Personal Guarantee from Mr Jones;
  • Possibly a Legal Charge given by Mr Jones over the shares he holds in Alpha Ltd;
  • A certificate of independent legal advice given to Mr Jones relating to his Personal Guarantee;
  • An Officers Certificate by Mr Jones as director of Alpha Ltd;
  • A separate Officers Certificate by Mr Jones when he is a director of Omega Ltd;
  • Companies House forms and Land Registry forms filing the Bank’s security there;
  • If a prior charge/debenture exists on either or both of Alpha Ltd or Omega Ltd and if they have to be removed on the grant of the new loan, the release documents relating to this (there may be several documents to do this for each); and
  • Ancillaries such as Funds Flow Statements, statement of solvency, anticipated balance sheets, specific insurance cover terms over a variety of things over several different policies.

  All of these documents have to be drafted, reviewed, negotiated and agreed, and this is all in addition to the purchase of shares work.  Furthermore, much of our Due Diligence work is reviewed by the Bank’s solicitors.   I hope this gives just a flavour of the extensive work and time needed to sort out the security for the Bank funding being given, and why it may take time and incur significant cost.  Of course, the client has to pay Bank A’s solicitors’ fees, those of Bank B as well as its own solicitors’ costs relating to the acquisition work, the new shares issue work and of course all this security work and Due Diligence in relation to what may have been seen at the outset as a simple Bank Loan.   

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