Contract Drafting Class 18 Thurs. Mar. 22 University of Houston Law Center D. C. Toedt III

Syntactic sins

Before “Without a certain amount of initiative and drive, the chances that they will never actually learn anything and end up left behind doing simple spellcheck kinds of administrative-assistant work on HTML pages for the rest of their lives is high.” From

After “Without a certain amount of initiative and drive, the chances are high that they will never actually learn anything and end up left behind doing simple spellcheck kinds of administrative-assistant work on HTML pages for the rest of their lives is high.” From

Z&B Chapter 5A Loan Agreement A guided tour

Loan Agrmt (Z&B pp ) Preamble: Who are the various parties to the Loan Agreement?

Loan Agrmt (Z&B pp ) Preamble: Who are the various parties to the Loan Agreement? Borrower Parties:  Borrower: L.S. Wholesale, Inc.  Parent / Guarantor: Little Switzerland, Inc. (a public company, apparently) Lender: Tiffany & Co.

Loan Agrmt (Z&B p. 317, top) Recital D: Why are Borrower Party “affiliates” entering into the Affiliate Loan Documents?

Loan Agrmt (Z&B p. 317, top) Recital D: Why are Borrower Party “affiliates” entering into the Affiliate Loan Documents? Answer: Probably to put up affiliates’ assets as collateral for Borrower’s debt to Lender.

Collateral Assets are pledged somehow  Home mortgage; stocks; bonds; bank accounts  Business inventory, equipment  Pawn shop IF: Borrower defaults; THEN:  Assets are foreclosed & sold (at auction?)  Secured party keeps $ to pay off debt  Borrower gets remaining balance – if any ….

Loan Agrmt (Z&B p. 317) § 1.1, “Affiliate” definition: What does “control” mean?

“Control” – Common Draft def’n “ For purposes of determining affiliate status, control of an organization (whether or not the term is capital- ized) refers to the direct or indirect possession of (i) voting control — via ownership, a voting agreement, or otherwise — of securities of the organization car- rying at least 50% of the aggregate right to vote for the organization's board of directors or comparable governing body, or (ii) the right to select, or to pre- vent the selection, of a majority of the members of such board or other body.”

“Control” – alternative definition “ Control of an organization also includes the power to direct or cause the direction of the management and policies of the organization, by contract or otherwise.” See, e.g., Rule 1 ‑ 02(g) of SEC’s Regulation S-XRule 1 ‑ 02(g)

“Control” – alternative definition FACTS: Vendor makes and sells widgets. Hall-Mart buys ~90% of Vendor’s output. Master Purchase Agreement requires Vendor to consult w/ Hall-Mart about various business decisions QUESTIONS: Does Hall-Mart “control” Vendor? Any employment-law implications for Hall-Mart?

Loan Agrmt (Z&B p. 319) § 1.1, “Subsidiary” definition: Is a Subsidiary automatically an Affiliate?

Loan Agrmt (Z&B p. 319) § 1.2: Can the Advances ever exhaust the Commitment?

Loan Agrmt (Z&B p. 319) § 1.2: Can the Advances ever exhaust the Commitment? A: Probably not – see definition of “Commit- ment” (p. 318) (Should drafter / reviewer have caught this?)

Loan Agrmt (Z&B p. 319) § 1.3(a), last full line: What are “same day funds”?

Loan Agrmt (Z&B p. 319) § 1.3(a), last full line: What are “same day funds”? A: A bank deposit that can be transferred or withdrawn the same day it’s deposited – e.g., wire transfers, FedWire, interbank transfers.

Loan Agrmt (Z&B pp ) § 1.3(b), second sentence: Could this provision be better-drafted?

Loan Agrmt (Z&B pp ) § 1.3(b), second sentence: Could this provision be better-drafted? IF: Borrower requests [vice “gives notice of”] an Advance; BUT: The applicable conditions for funding the Advance, as stated in Article II, are not met; THEN: Borrower will indem- nify Lender ….

Loan Agrmt (Z&B p. 320) § 1.4: Why have a promissory note in addition to the Loan Agreement?

Loan Agrmt (Z&B p. 320) § 1.4: Why have a promissory note in addition to the Loan Agreement? Negotiability Easier enforcement Confidentiality of Loan Agrmt and other docs (but they were filed w/ SEC ….)

Loan Agrmt (Z&B p. 320) § 1.7(b): Why a 360-day year for interest computation?

Loan Agrmt (Z&B p. 320) § 1.7(b): Why a 360-day year for interest computation? A: Slightly-higher interest yield (i.e., more money to Lender)

Loan Agrmt (Z&B p. 321) § 2.1(a): Must the Note be signed? (See also the definition in 1.4.)

Loan Agrmt (Z&B p. 321) § 2.1(a): Must the Note be signed? (See also the definition in 1.4.) A: The Loan Agreement doesn’t explicitly say so.

Loan Agrmt (Z&B p. 321) § 2.1(c): Why require certified copies of board resolutions?

Loan Agrmt (Z&B p. 321) § 2.1(c): Why require certified copies of board resolutions? A: Because board resolutions are the “gold standard” of corporate authority. (Personal liability for Secretary if the certification is “erroneous”?)

Loan Agrmt (Z&B p. 321) § 2.1(d): Why require an opinion of the Borrower’s counsel?

Loan Agrmt (Z&B p. 321) § 2.1(d): Why require an opinion of the Borrower’s counsel? A: To shift risk from Lender to Borrower’s law firm and individual lawyers --- their malpractice insurance and their assets will be available to Lender

Loan Agrmt (Z&B p. 321, 329) § 2.1(f) and 4.2(b): Will Borrower continue to have any on-going relationship with Bank of Nova Scotia (“BNS”)? A. Yes – normal banking relationship B. No – BNS debt is being paid off C. Unknown – Loan Agreement doesn’t say

Loan Agrmt (Z&B p. 321, 329) § 2.1(f) and 4.2(b): Will Borrower continue to have any on-going relationship with Bank of Nova Scotia (“BNS”)? A. Yes – normal banking relationship B. No – BNS debt is being paid off C. Unknown – Loan Agreement doesn’t say

Loan Agrmt (Z&B p. 322) § 2.2(a): Why require, on the date of each Advance, a certificate concerning the reps and warranties?

Loan Agrmt (Z&B p. 322) § 2.2(a): Why require, on the date of each Advance, a certificate concerning the reps and warranties? A1: Make sure reps and warranties survive the “closing” (i.e., the Advance) A2: Establish Lender’s reliance on Borrower’s representations

Reps & warranties - review To recover for breach of a warranty, must the party that received the warranty prove that it relied on the warranty? A. Yes B. No C. Only if non-reliance would have been reasonable

Reps & warranties - review To recover for breach of a warranty, must the party that received the warranty prove that it relied on the warranty? A. Yes B. No C. Only if non-reliance would have been reasonable

Loan Agrmt (Z&B p. 322) FACTS: (a) Borrower needs to draw an Advance. (b) Borrower’s Parent is out of compliance with one of its reps and warranties, but it’s a minor non-compliance. QUESTION: Can Borrower and Parent sign the certificate of § 2.2(a) anyway?

Loan Agrmt (Z&B p. 322) FACTS: (a) Borrower needs to draw an Advance. (b) Borrower’s Parent is out of compliance with one of its reps and warranties, but it’s a minor non-compliance. QUESTION: Can Borrower and Parent sign the certificate of § 2.2(a) anyway? No – there’s no materiality qualifier for the certificate (specific R&W themselves might have materiality qualifiers)

Loan Agrmt (Z&B p. 322 et seq.) Q: Overall purpose of reps and warranties?

Loan Agrmt (Z&B p. 322 et seq.) Q: Overall purpose of reps and warranties and Borrower covenants? A: (1) Give Lender some assurance the loan will be repaid; (2) protect the collateral.

Loan Agrmt (Z&B p. 323) § 3.1(c): “This Agreement is a legal, valid and binding obligation of the Borrower Parties ….” QUESTION: If this rep is false, does it have any effect?

Loan Agrmt (Z&B p. 323) § 3.1(c), last sentence (Borrower Parties have made their own investigation without relying on Lender): QUESTION: Why is this included?

Loan Agrmt (Z&B p. 323) § 3.1(c), last sentence (Borrower Parties have made their own investigation without relying on Lender): QUESTION: Why is this included? A: To try to prevent Borrower Parties from making a claim of fraud or negligent misrepre- sentation against Lender

Loan Agrmt (Z&B p. 324) § 3.1(d)(iii)(B) – “internal controls” Sarbanes-Oxley Act requires this of public companies

Loan Agrmt (Z&B p. 325) § 3.1(g), last sentence: None of the Parent Securities Filings “[1] contained any untrue statement of material fact or [2] omitted to state a material fact [i] required to be stated therein or [ii] necessary to make the statement contained therein, in light of the circumstances under which they were made, not misleading.”

Loan Agrmt (Z&B p. 325) § 3.1(i), second line: What does “Knowledge” mean?

Loan Agrmt (Z&B p. 325) § 3.1(i), second line: What does “Knowledge” mean? A: Actual knowledge after reasonable inquiry (see definition on p. 318) Q: Whose actual knowledge? Janitor’s?

Loan Agrmt (Z&B passim) What does “Material Adverse Effect” mean?

Loan Agrmt (Z&B passim) What does “Material Adverse Effect” mean? A: Actual knowledge after reasonable inquiry (see definition on p. 318) Q: Whose actual knowledge? Janitor’s?

Loan Agrmt (Z&B p. 326) Top two lines: No opinion, legal memo, legal advice or notice from counsel Q: What if Lender asks for copies?

Loan Agrmt (Z&B p. 326) Top two lines: No opinion, legal memo, legal advice or notice from counsel Q: What if Lender asks for copies? A: Could destroy attorney-client privilege

Loan Agrmt (Z&B p. 327) § 4.1(c): What is “working capital”?

Loan Agrmt (Z&B p. 327) § 4.1(c): What is “working capital”? A: Short-term “ordinary” liabilities (salaries, raw materials, rent, etc.)

Loan Agrmt (Z&B p ) Negative covenants – those can get a company into trouble if things start going badly

Loan Agrmt (Z&B p ) Events of default – what can the Lender do? (Class discussion)