Borrowers and lenders alike may be forgiven for running out of steam when, having negotiated ever more complex commercial grids, term sheets and loan agreements, one reaches the final line item – the governing law of the loan agreement. The borrower has elected for a governing law other than English law – should you care and why does it matter? In this Alert, we consider why this may have material implications, both legal and commercial, for market participants.
- Settled rules of interpretation – the LMA loan agreement which, to varying degrees forms the basis for most loan agreements used in English law leveraged finance loan agreements, has been crafted around a long-established set of fundamental legal principles, including those based on English common law – one cannot expect to change the governing law of a 300+-page document and expect the same outcomes when, for example, the guarantee contained therein is governed by the laws of and tested before the courts of, for example, a civil legal system, or the interpretation of the obligation to “use reasonable endeavours” is viewed without the wealth of judicial precedent behind the meaning of that phrase. Although the LMA has produced a select number of investment grade templates based on other governing laws (for example, for France, Germany and Spain) and a number of other trade bodies have created their own local law equivalents for other jurisdictions, these can only take parties so far when navigating lengthy leveraged and other complex financing structures.
- Specialist commercial courts – England is considered a commercially sophisticated jurisdiction where words in a contract are given effect and there is a history of predictability going back centuries. Many issues arising out of modern leveraged finance structures have actually been tested in the English courts, and disputes are generally determined in a relatively expeditious manner. Having such complex finance documents adjudicated by the judiciary of another legal system, less familiar with such documents, where there are few or no precedents, could lead to both delay and unexpected results.
- Helpful when things go wrong? Having an English law governed document can create the necessary nexus to the English courts that enables a foreign company to propose a scheme of arrangement – an extremely flexible and useful restructuring tool. Indeed, companies have changed the governing law/jurisdiction clauses of their financing documents to English law in order to take advantage of the English courts’ approach to scheme jurisdiction. Furthermore, in 2020, a new tool was introduced to the restructuring landscape – a restructuring plan. A restructuring plan is similar in scope and purpose to a scheme of arrangement (and, like a scheme, is available to foreign companies) but is an even more powerful tool, as it provides a company with the ability to cram down the plan on dissenting classes of creditors or shareholders who may be “out of the money” (and does away with the problematic numerosity test for voting purposes).
- Illiquid paper – in the event a lender wishes to trade out of the debt of a given credit, having the loan governed by a law other than English law may mean there are a reduced number of market participants who are willing (or even able, by virtue of the terms of their investment remit) to buy non-English law governed paper.
- Cost – there is a perception amongst some market participants that legal costs may be reduced if non-English law documents are adopted, and legal costs could be shifted away from (an often) London legal base. This may be somewhat of a false economy however, if consultation needs to be made with English lawyers to ‘convert’ an English law document to that of another legal system, and more time may be spent amongst non-English lawyers in interpreting or adapting clauses which are a matter of settled practice under English law. In addition, parties may be keen on taking advantage of the benefit of the recognition of trusts under English law for the benefit of secured debt being held for the benefit of an fluid class of creditors (although notably of course, ‘parallel debt’ structures are often used for entities formed in jurisdictions where the trust concept is not recognised); with this typically being housed in an English law intercreditor agreement, this calls for the engagement of English lawyers in any event.
- A postscript – Brexit – for those readers wondering why this has not hitherto been mentioned – the ability to choose English law remains unaffected by Brexit, although a connected and very relevant question is whether a judgment handed down by the courts of England of Wales will be recognised by an EU Member State court, which may be important if seeking to enforce such a judgement against a non-English borrower or guarantor in their jurisdiction. Leading up to the UK’s departure from the EU on 1 January 2021, there was real uncertainty as to the impact which Brexit would have on a successful litigant’s ability to enforce an English court judgment in an EU Member State. Two years on, we are reassured that the value of an English court judgment has not diminished, with EU Member States either recognising and enforcing a judgment in accordance with their local laws (as opposed to the Brussels Recast Regulation) or pursuant to the Hague Convention.1
In conclusion, there exists a wealth of financings based on non-English law terms for many reasons, and all parties may be comfortable with that. Hopefully, however, the bullet points above provide a little pause for thought before agreeing to a seemingly small change within a single provision of a loan agreement – for which there could be potentially extensive ramifications – even though one may be fatigued once reaching the end of that grid, term sheet or loan agreement (for which, well done).
1 To the extent that the agreement in question post-dates the UK’s accession to the Hague Convention in its own right (on 1 January 2021) and provides for the exclusive jurisdiction of the English Courts.
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
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