Contracting with an Ad Hoc Committee
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As highlighted in Chapter 3 on the selection and organisation of members, the primary function of an ad hoc committee is to act as a sounding board or informal representative group for restructuring discussions with the debtor or with one or more stakeholder groups. In some cases, the ad hoc committee may also help to facilitate the flow of information as regards to a potential or ongoing financial restructuring to the applicable creditor syndicate or class. However, it is not the role of the committee to act as a fiduciary or agent for, or make commercial decisions on behalf of, each other creditor in the syndicate or class. As a result, the number and scope of contracts to which the committee will be party in its capacity as such will be very limited.
In the case of a more formalised coordinating or steering committee, the contracts they could enter into include:
- engagement letters with the legal and financial advisers;
- a committee appointment letter with the debtor and any accessions thereto (company appointment letter);
- a protocol or set of guidelines governing the relationship of the committee members among themselves (protocol);
- a committee appointment letter with the broader creditor syndicate or class (syndicate letter), although this has become less usual in the past three to five years; and
- certain restructuring implementation documents, such as a lock-up agreement or restructuring support agreement (implementation contracts).
We consider below the applicability and benefits of these contracts in the case of an ad hoc committee. It is the case that in any contract or arrangement entered into by an ad hoc committee or by a member of such ad hoc committee, (1) such member usually contracts in its capacity as a member of the ad hoc committee and not in any other capacity and (2) it is rare for members to be jointly and severally liable for the obligations (if any) of other members of the ad hoc committee.
Given that the role of the ad hoc committee is one with limited responsibilities and authority, it is appropriate that the committee does not seek to contract on behalf of other creditors or the creditor syndicate or class, or contract as a separate entity or institution. In the event that the committee is asked to enter into a contract, there must be a clear benefit to the committee and its members in doing so, such as (1) express provisions limiting the liability of the committee and its members, (2) confidentiality provisions protecting discussions undertaken by it in relation to the restructuring, (3) coverage of its costs and expenses and, in some cases, (4) indemnities provided to it in the event any person takes any action against it in the context of the financial restructuring and the role of the ad hoc committee.
As can be seen from the list in the ‘Introduction’ above, the primary contracts that may be put in place relate to the committee’s formation, composition and conduct. These documents are more typical in a traditional coordinating or steering committee context. An ad hoc committee may in fact choose to decline, or may be unable, to put these in place because of (1) these formal documents being unusual in the relevant jurisdiction (and therefore unlikely to be accepted by other parties), (2) concerns around timing, trading or cost, or (3) a lack of engagement or reluctance to engage by the debtor (or other creditors) at the time the relevant members of the ad hoc committee wish to form. This is particularly the case with regard to appointment documentation as referred to in points (b), (c) and (d) in the ‘Introduction’ above.
A number of provisions you would typically expect to find in a company appointment letter, or a syndicate letter in particular, are likely to be contentious and will entail significant negotiation. Such provisions include indemnities, syndicate voting majorities and cleansing mechanisms.
In cases where the debtor is heavily distressed or a waiver is urgently required, an ad hoc committee may determine that it does not have the luxury of time to negotiate such provisions and that the time available is more appropriately spent commencing the substantive discussions regarding the debtor’s financial situation and possible restructuring options. The committee may instead decide to tackle any issues regarding its composition, operation and liabilities as and when they arise.
Although this approach is understandable and has been known to occur in practice, there are certain minimum provisions that an ad hoc committee would be well advised to take the time to agree at the outset or soon after its (informal) formation (see further below).
Some institutions have been reluctant to enter into documentation formally recognising the existence of a committee and governing its conduct and operations because of the approach taken by the Loan Market Association (LMA) in its transparency guidelines (last updated in 2012). There the LMA suggests that a member of a coordinating committee may be in receipt of debtor confidential information, thereby potentially restricting it from buying or selling securities relating to that debtor as long as it remains a member of that committee.
However, and in light of this concern, it may in fact be better in some cases to expressly regulate the flow of information in a company appointment letter. There it can be agreed, for example, that the debtor only provides private information to the committee’s advisers, who then act as an information barrier. Alternatively, a cleansing mechanism can be agreed whereby the committee agrees to cease trading in the debtor’s securities for a short period of time following the receipt of private information, after which, the debtor is obliged to release this information to the market.
Such cleansing mechanisms are often contentious and take time to be agreed, but it may be time well spent to protect the committee in the long run, if only to ensure the debtor is alive to the risks of providing private information to the committee.
Adviser engagement letters
The ad hoc committee will enter into engagement letters with its legal or financial advisers and these will usually be one of the first contracts the committee signs. Such engagement letters are important in ensuring that all parties involved understand that the advisers act for the committee as a whole, rather than individual creditors (who may ultimately have their own agendas and strategies).
The engagement letters should also detail (1) from whom the advisers will receive their instructions, (2) how fees will be allocated among the members of the committee in the event that these are not paid by the debtor, (3) the method for creditors to leave and join the committee and how this impacts voting and each member’s relative rights and obligations, and (4) what happens if there is a conflict of interest between members of the committee.
Engagement letters are a standard protection for both the committee and its advisers, and because of this and the fact that it is not unusual for restructuring negotiations to (by their nature) be fraught at times, they are put in place in most ad hoc committee representations.
Company appointment letter
Company appointment letters are put in place during the initial stages of the restructuring discussions (time permitting) and are usually reasonably heavily negotiated with the debtor. The LMA has published a precedent letter and these contracts offer a number of protections in favour of an ad hoc committee. In practice, company appointment letters have evolved somewhat since the LMA precedent was published. Depending on commercial preference and convenience, parties have agreed more concise company appointment letters than the LMA’s precedent letter, while also including bespoke provisions required by the situation.
For reasons of market practice in the relevant jurisdiction, or owing to convenience or party dynamics, a company appointment letter may not be put in place.
If entered into by the debtor and ad hoc committee, a company appointment letter can be expected to cover most of the following:
- Recognition: Appointment and recognition of the ad hoc committee. The accession and resignation of members should also be permitted to ensure the committee does not lose its status or protections if members leave or join the committee during the restructuring process.
- Fees, costs and expenses: Payment of the committee’s fees, costs and expenses by the debtor. Although there may be cost coverage for committees under some post-2008 credit documentation, in many cases to date, cost coverage tends to still be limited to the costs of the agents (rather than the creditors themselves) or costs incurred by creditors enforcing their rights following the occurrence of an event of default. As an ad hoc committee is not an agent of the creditor class as defined under credit documentation, it is accordingly advisable to secure separate costs coverage for the committee at an early stage where possible.
- Indemnity protection: Indemnity protections by the debtor and debtor group under the credit documents may only benefit the agents and it may be advisable to secure a separate indemnity from the debtor against any actions brought against any member of the committee while acting in such capacity.
- Exclusions of liability: In any company appointment letter, the extent of the committee’s duties should be made clear, along with appropriate limitations on the liabilities and responsibilities of the committee. In particular, it should be clear that members of the ad hoc committee will not act as fiduciaries or agents of any other interested party.
- Cleansing mechanisms: Parties may agree the mechanism to cleanse private information at the outset, which should provide protection if the committee is inadvertently restricted during the course of the restructuring discussions. This should ideally include an ability for the committee to self-cleanse if the debtor fails to release the information to the market. This is often a heavily negotiated issue as the debtor wants to be in control of its own confidential information and does not want to disclose commercially sensitive information to the public, while members of the ad hoc committee do not wish to be restricted from buying or selling securities of the debtor during a potentially long-running restructuring process.
- Disenfranchisement provisions: Although often included in the credit documents, existing debt buy-back provisions may sometimes be supplemented in a company appointment letter to ensure the sponsor or group does not seek to influence the restructuring discussions by purchasing debt.
An ad hoc committee should consider allowing time to negotiate a company appointment letter at the outset of the transaction to ensure it benefits from the protections detailed above throughout the restructuring.
The LMA has also produced an example protocol that could be put in place to govern the conduct of committee members. Although not currently used in most restructurings, such a protocol could in theory help facilitate restructuring discussions by pre-empting issues that may arise, such as the procedure for reaching decisions and the difficulties presented by committee members trading in securities of the debtor group. A pre-agreed protocol can also provide comfort to the wider creditor syndicate or class represented by the ad hoc committee as to how members of the committee will conduct themselves, and ensure that committee members will be appropriately motivated while acting in their roles (e.g., because of a limit on cross-holdings or a requirement to hold a de minimis amount of debt).
Protocols, if adopted, will undoubtedly be subject to discussion on a case-by-case basis. Issues covered by such a discussion could include:
- eligibility: conditions for committee membership and resignation process/obligations if such conditions are no longer met;
- decision making: unanimity or majority required to reach committee decisions;
- information sharing: when and how to share information with the creditor syndicate or class; and
- conduct: approach to participating in meetings or discussions and instructing advisers.
As well as entering into a formal contract, an ad hoc committee may also agree these principles informally (e.g., over email).
Although less common, an ad hoc committee can choose to formally regulate its operation and responsibilities with the wider creditor syndicate. Between 2008 and 2013, it was the case that formal steering or coordination committees sometimes sought comfort from at least the majority of the relevant creditor syndicate that it had the support of that creditor syndicate for its appointment.
Since then, and as the number of ad hoc committee (as opposed to formal steering committee) situations increased, as well as restructurings involving larger creditor syndicates or bondholder syndicates (where identification of bondholders could prove difficult), the desire of institutions agreeing to act as part of an ad hoc committee to enter into appointment letters with the wider creditor syndicate has become less and less common, to the point of becoming an exception rather than the rule. Nevertheless, the LMA has prepared a precedent syndicate letter, which can act as a guide for situations where this may arise. Some of the areas to note in the LMA precedent are set out as follows:
- Indemnity protection: The committee may wish to benefit from an indemnity granted by the creditors in addition to an indemnity granted by the debtor pursuant to a company appointment letter. However, such indemnities are contentious, and difficulties will arise if not all creditors sign up to the syndicate letter or creditors trade out of the debt, as this may leave the remaining creditors shouldering a disproportionate allocation of any liability under the indemnity or a ‘gap’ in the indemnity coverage, as most creditors are likely to accept only several (and not joint) liability. In reality, the value of any indemnity coverage is limited, especially with regard to non-bank financial institutions or those creditors lending through a bankruptcy-remote vehicle or fund structure.
- Exclusions of liability: The committee can agree the extent of their role and responsibilities with the remainder of the syndicate, and in particular that (1) they do not represent the creditors or the debtor, nor do they owe any other interested party a fiduciary duty; (2) they will not be liable for any actions they take in connection with the restructuring; (3) they may continue to deal with the debtor in other capacities; and (4) the individual creditors remain responsible for their own assessment of the debtor’s financial situation and the draft restructuring documents. Such an express exclusion of liability should prevent a creditor bringing a successful action against the committee in the first place, rather than the committee risking being sued and then having to claim against the debtor under an indemnity granted in a company appointment letter.
- Distribution of information: Procedure for the committee to distribute information received by it and, in particular, how any sensitive information is handled.
- Decision making: Procedure for calling meetings to discuss any issues raised by the restructuring negotiations and the majority required to instruct the committee to the extent directions are sought as negotiations progress (which could also include snooze-you-lose provisions in the case of larger creditor syndicates).
- Resignation or termination process: Provision for the resignation of individual members from the committee or the termination of the committee as a whole.
Once the terms of the restructuring have been agreed, it may be determined that the members of the ad hoc committee will be party to key implementation contracts in their capacity as members of the committee, with certain rights and powers delegated to them under the contract. Such implementation contracts may include a lock-up agreement or restructuring support agreement, as well as an agreement setting out the specific implementation steps for a proposed restructuring, including any tasks to be undertaken by the ad hoc committee, such as specified decisions to be delegated to the committee to enable quick and agile decision making during the restructuring implementation phase. By way of example, if there is a coordinating committee in place, the committee will often be afforded the power under the lock-up agreement to approve actions that would otherwise be restricted, or to extend the long-stop date by which the restructuring must be implemented in the event of a delay.
In practice, it may not always be the case that the ad hoc committee is afforded such powers and agrees to undertake such obligations – these may be reserved for more formal coordinating or steering committee roles. From the perspective of the individual ad hoc committee members, they may be reluctant to undertake powers and responsibilities unless there is the potential for the timeline of the implementation of the restructuring to be shortened or made more efficient, or, indeed, if it is necessary for the ad hoc committee to undertake such tasks for the restructuring to be practically implemented at all.
If the ad hoc committee does decide to take on such a role under an implementation agreement or contract, the members should ensure that the contract itself contains fulsome exclusions of liability and (to the extent not already granted elsewhere and if feasible in the circumstances) indemnities from at least the debtor group.
In an ideal world, the members of the ad hoc committee would be afforded indemnities and exclusions of liability by both the debtor and the wider creditor syndicate in recognition of the value the ad hoc committee adds in facilitating the restructuring.
However, in practice, it is often not feasible or usual in today’s European restructuring market to have creditors enter into a syndicate letter, and the committee will be reliant upon the protections offered by the debtor if there is a company appointment letter in place. The ad hoc committee may, therefore, seek to ensure that the debtor (1) recognises the ad hoc committee and its role in the restructuring, (2) agrees to pay the fees, costs and expenses incurred by the ad hoc committee, and (3) indemnifies the committee against any actions taken against it in connection with its role in the restructuring.
The committee should also ensure it has engagement letters in place with its advisers that reflect the nature of the committee’s goals and operations. However, the committee should exercise more caution if the debtor requests that it enter into implementation contracts in such capacity – there should be a clear benefit to the committee in doing so and appropriate language included to manage the committee’s liability.