Shearman And Sterling

Financial Restructuring & Insolvency, Stock Market

October 19, 2022

Boardriders Minority Lenders Notch Initial Victory Challenging Uptier Transactions


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On October 17, 2022, Justice Andrea Masley of the NY Supreme Court issued a decision and order denying all but one of the motion to dismiss claims filed by Boardriders, Oaktree Capital (an equity holder, term lender, and “Sponsor” under the credit agreement), and an ad hoc group of lenders (the “Participating Lenders”) that participated in an “uptiering” transaction that included new money investments and roll-ups of existing term loan debt into new priming debt that would sit at the top of the company’s capital structure. This decision is the latest of a string of decisions that have had to grapple with the permissibility of uptiering transactions in loan/bond documentation, including Serta, TriMark and TPC Group, in the face of litigation brought by minority holders. As this case is only a decision at the motion to dismiss stage, it remains to be seen whether such claims will be litigated to judgment or the case will be settled.

Specifically, in Boardriders, Participating Lenders holding $286 million of $450 million of term loans issued pursuant to an April 2018 syndicated credit agreement (the “2018 Credit Agreement”), alongside Oaktree, which held an additional $35 million of term loans, entered into a series of transactions with the company in 2020 that resulted in the following debt instruments: (i) $45 million of new money super-priority ‘Tranche A’ Priority Loans from the Participating Lenders and Oaktree; (ii) ~$80 million of ‘Tranche B-1’ Priority Loans from Oaktree, split between new money ($45 million) and roll-up debt ($35 million); (iii) ~$286 million of roll-up ‘Tranche B-2’ Priority Loans held by the Participating Lenders and Oaktree; and (iv) a new $20 million super-priority delayed draw term loan facility from Oaktree. In connection with these transactions: (a) Deutsche Bank resigned as administrative and collateral agent, replaced by Alter Domus; (b) the 2018 Credit Agreement was amended, with the negative and affirmative covenants stripped and the lender action clause amended to restrict enforcement and require a cash indemnity bond to commence any action; and (c) the loan parties entered into a new credit agreement for the foregoing new super-priority debt instruments (the “Super-Priority Term Loan Credit Agreement”), with a new intercreditor agreement entered into between Alter Domus and the company, which subordinated the first lien debt of the non-participating term lenders to the new super-priority debt of the Participating Lenders and Oaktree under the Super-Priority Term Loan Credit Agreement.

Subsequently, an ad hoc group of non-participating term lenders challenged the transactions, filing a complaint in October 2020 before the NY Supreme Court arguing that the recapitalization, among other things, deprived non-participating lenders of their pro rata payment rights, was entered into in secret and in bad faith, thereby violating the implied covenant of good faith and fair dealing, and was not a true “open-market purchase.” This recent decision by Justice Masley leaves the non-participating lenders with almost all of their claims intact and is another chapter in litigation over what some commentators have termed as “creditor on creditor violence.”

Some key takeaways from the court’s decision:

  • The decision, at its core, is about the “Sacred Rights” granted to debt holders requiring unanimous consent to amend, especially as related to pro rata sharing and pro rata payments, key topics of challenge in “uptiering” transactions. The court refused to be limited to a narrow reading of the existing credit agreement and looked to the broader context of the agreement when determining whether such “Sacred Rights” were violated. As the amendments section of the 2018 Credit Agreement required affected lender consent to amend the pro rata sharing provisions contained in certain parts of the agreement, the court refused to read into a lack of an explicit “sacred right” prohibiting lien subordination to determine whether a sacred right was breached in allowing the uptiering transactions. This reasoning is somewhat at odds with prior decisions, such as Serta, that have taken a more literal reading of whether a credit agreement permits lien subordination with Required Lender consent.
  • The true “open market” nature of the debt purchases from Participating Lenders was a key challenge point. The Defendants argued that the credit agreement permitted non-pro rata open-market purchases, including debt for debt exchanges, as an exception to the pro rata sharing requirement. Despite being labeled “Open-Market Purchase Agreements,” the non-participating lenders argued that the purchases were no such thing, as they (i) were not at market value and done at par, despite a significant trading discount; (ii) were not standalone transactions, but part of a larger scheme; and (iii) were debt-for-debt exchanges, rather than for cash. The court refused to grant a motion to dismiss on this issue. While the credit agreement did not explicitly state that open-market purchases needed to be pro rata, unlike for Dutch auctions, the court found it equally reasonable for “open market” to have the ordinary and plain reading (meaning open to any and all), instead of reading into the absence of such language as meaning that it could be done on a non-pro rata basis.
  • No Action Clauses, once again, played a central role in an “uptiering” challenge case. The court here found that the dissenting lenders had standing to challenge the transactions, despite amended language to the 2018 Credit Agreement that would have required administrative agent authorization and the posting of a cash indemnity bond to cover the fees and costs of any litigation challenge. This holding is similar to holdings in other cases such as TriMark, which found an amended no action clause entered into in connection with the challenged transaction as not being a bar to minority lenders bringing suit.
  • Similar to the most recent decision in Serta, the court also refused to dismiss claims for the breach of the implied covenant of good faith and fair dealing, despite the company’s contention that the existence of a written contract barred such claims. In so doing, the court looked to the company’s lack of a response to dissenting lenders’ outreaches regarding capital needs, alongside the covenant stripping and No-Action Clause amendments, to find that the complaint sufficiently showed that the defendants acted in concert, in secret, and in bad faith to disadvantage non-participating lenders.
  • Tortious interference claims can be hard to win. As the only claim that did not survive the motion to dismiss stage, the “economic interest” defense proved too strong for an ultimate equity holder that was using its expertise and relationships to help the business grow. The court dismissed such claim, finding that the equity holder/lender would have needed to be committing acts that were fraudulent, malicious, or illegal to override the defense of “economic interest,” and no showing was made to that effect.

Special thanks to Josh Friedman, Senior Client Value & BD Lawyer, for co-authoring this publication.