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This site is a personal website of Herman Park.
Herman Park (박재웅) (Partner, 법무법인(유) 광장) is a corporate lawyer in Seoul, South Korea focusing on acquisition finance and corporate finance.
He helps companies raise capital to execute their growth plans and, on other occasions, he is found helping investors deploy capital towards promising companies. He understands that finance is a means to an end and he is partial to projects and initiatives that are premised on the fundamentals and a long-range vision.
He has lived, studied and worked across South Korea, Germany and England which experience informs his approach towards working with clients and counterparties from varied backgrounds. He is fluent in Korean and English. He admires the Michael Dell style of doing business.
He holds a First Class degree in law and he is admitted to practice in England. He has worked for market-leading law firms originating from England, the United States of America and South Korea.
He has published legal commentary via Practical Law and LexisNexis. Apart from his legal work, he enjoys photography, tennis, writing, and theatre.
These are in note form only and should not be construed as legal advice. Speak to a lawyer - they are more useful than they are given credit for (opinion mine).
Certain Funds Clause
This clause is intended to ensure that the borrower (which will be acting as a purchaser of the target company in a parallel M&A transaction) encounters as few obstacles as possible when it comes to its drawing at will on the loans committed by the lenders under the relevant facility agreement. This clause will help the borrower demonstrate to the seller that its offer to purchase the target company is a strong one and that uncertainty of financing will not present an impediment to completion of the acquisition. Under the facility agreement, the lenders’ duty to lend will have been conditioned on there being no breaches of the facility agreement – which breaches may take the form of representations being untrue, undertakings not being performed, mandatory prepayment events occurring, or events of default (contractually agreed events which may hinder or jeopardise the borrower’s ability to repay) occurring. The effect of a certain funds clause is that, as an exception to the rule and for a limited window of time only (a period of time sufficient for the seller and the borrower to agree to a sale and purchase of the target company and to implement such transaction), only certain of these breaches will entitle the lenders to refuse to lend.
Financial Assistance
The law seeks to prevent a purchaser from acquiring a target company using substantial resources of such target company (or of a subsidiary such target company owns). Financial assistance has a wide meaning - monetary assistance granted by the target company (or its subsidiary) to facilitate the purchaser’s acquisition of such target company. If the purchaser is using debt to fund the acquisition and the target company or its subsidiaries are granting guarantees or security to the purchaser’s lenders - such guarantees or security would fall within the ambit of financial assistance that the law seeks to regulate. Depending on the jurisdiction where the target company (or the grantor of financial assistance) is based, the relevant law may (i) prohibit financial assistance absolutely or (ii) permit financial assistance upon completion of a whitewash procedure (which would mainly require a solvency declaration by the grantor’s directors (i.e. there should be net assets as opposed to net liabilities) and a special resolution passed by the grantor’s majority shareholders approving the relevant financial assistance). For instance, where the target company is a public company based in England, such company and its (private or public) subsidiaries are absolutely prohibited from providing financial assistance to facilitate the acquisition of such target company by any person. Parties may consider converting the target company from a public company to a private company prior to the grant of any financial assistance given the strictness of English law rules here. Where the target company is a private company based in England, such company and its (private but not public) subsidiaries may provide financial assistance to facilitate the acquisition of such target company by any person.
Equity Cure Right
Financial covenants are designed to impose financial discipline on the borrower. However, their breach does not always lead to a subsequent default in payment or may have been caused by cyclicality or seasonality of demand in the borrower’s markets in general. An equity cure right gives the borrower a second chance at compliance with a financial covenant. It is the borrower’s right to secure new funding from its shareholders (a new intercompany loan or a new equity contribution) post-breach (for example, within 30 days after the occurrence of a breach) and to have the financial covenant in question re-run (where such new funding shall be deemed to be part of the borrower’s balance sheet prior to the test date). It is open to negotiation which part of the relevant financial covenant such new funding should be applied towards (e.g. numerator versus denominator in a leverage ratio); whether the borrower is obliged to use such new funding to make a mandatory prepayment of loans or whether it can retain such new funding for future use in its discretion; whether such new funding can be used for purposes other than curing a financial covenant breach (such as triggering a reduction in interest (i.e. a margin ratchet) due to a lower leverage ratio being achieved); whether the exercise of an equity cure right in fact cures the relevant event of default (which may not be the case if a “continuing” event of default can only be waived by lender as opposed to remedied by borrower). The lenders will likely impose restrictions on the use of an equity cure right on multiple, consecutive test dates and on the aggregate number of times such right can be used by the borrower between drawdown date and maturity date. There are other ways to lessen the burden of financial covenants. Financial covenants can be framed as incurrence covenants (no periodic testing) or as mulligans (non-compliance on multiple, consecutive test dates are required to even constitute a breach). A deemed cure provision (a breach is deemed to be cured if the relevant financial covenant is complied with on the next test date and, in the intervening period between the first and second test dates, the lenders did not take action against the borrower on account of the event of default constituted by a breach of financial covenant (nor did they waive such event of default)) may be used in place of an equity cure right.
Thresholds and Baskets
Undertakings are restrictions on what the borrower can and cannot do. They are perceived by the borrower’s management as a fetter on their discretion to run the business as they see fit. They provide an important level of protection to lenders who cannot otherwise control what happens to their funds post-drawdown. In the course of negotiation, undertakings will usually be made subject to variations in testing date (some undertakings may not need to be complied with every day of the year which reduces the burden of compliance on the borrower), qualifiers (breaches which are not capable of a precise formulation or which have less than disastrous impact on the borrower are effectively waived), thresholds (breaches whose monetary value is negligible are effectively waived), and baskets (specific types of transactions which otherwise run contrary to the undertakings are effectively waived provided that such transactions are routine in the market to which the borrower belongs (market-specific) or are entered into by the borrower in the ordinary course of its business (borrower-specific) and provided that any supplementary conditions are met such as monetary caps, financial covenants, grant of security, or execution of a subordination deed (between the lenders under the facility agreement and the counterparty under the infringing transaction so that the former’s debt claim prevails in case of intercreditor conflict); and any other infringing transactions (transaction type undefined) are effectively waived provided that the value of such transactions falls within a monetary cap). “Grower baskets” have become popular in recent years meaning that the upper end of monetary caps for baskets may be defined as a fixed percentage of the borrower’s latest EBITDA (as opposed to a fixed dollar amount which stays immutable from year to year). This rewards the borrower with additional headroom to enter into infringing transactions if its financial performance (and hence its creditworthiness) improves in a particular financial year. “Carry forward” and “carry backward” mechanisms are sometimes employed, enabling the borrower to move unused capacity under a particular basket from one financial year to another. This balances out fluctuations in the borrower’s cash receipts and working capital needs from time to time.
Use of Proceeds
The most common types of loan are term loan and revolving loan. The former is intended to cover expenses of a capital nature, such as purchases of plant and machinery or of a business entity; while the latter is intended to cover expenses of a recurring nature, such as wages and interest payments. A key difference between the two, as will be apparent from the purpose clause, is that a revolving loan (but not a term loan) can be repaid by the borrower on its due date and then borrowed again by the borrower (up to the contractually agreed principal amount for the revolving facility) without needing to seek the revolving lenders’ consent. In effect, this re-borrowing amounts to lending of a new loan or an extension of the maturity date on an existing loan. The borrower will have uneven cash receipts throughout the year and yet its recurring obligations will fall due and payable on even dates throughout the year; hence the revolving facility provides a useful tool for the borrower to cover unexpected shortfalls in cash reserves from time to time. Based on its customary wording, a purpose clause (which is designed to give rise to a constructive trust potentially) is unclear as to what it obliges the borrower to do. For the sake of clarity, a use of proceeds undertaking may be added under which the borrower promises to apply a particular loan towards its designated purpose and not any other purpose. Furthermore, to reinforce the point that a revolving loan should not be used to pay for a capital asset, a “clean down” provision may be added. This provision would require the borrower to set aside a continuous period of days in each financial year during which period no revolving loan whatsoever (whether an original borrowing or a re-borrowing) must be outstanding.
Most Favoured Nations Clause
Where more than one debt instruments are outstanding with respect to the same borrower and one of them is being amended resulting in preferential treatment for the lender concerned compared to the position under corresponding terms of the other instruments, the lenders under the other instruments are given advance notice of such proposed amendment and the preferential terms (usually limited to pricing and major undertakings) are extended to such lenders equally through a formal amendment or a deemed incorporation of terms.
Material Adverse Effect
This term is used as a standalone event of default or as a qualifier to undertakings and other provisions of the facility agreement. The term is a reference to an event which has, or is reasonably expected to have, a considerable adverse effect on the borrower group’s solvency, liquidity or ability to discharge debt service. Its purpose is to avoid disproportionate consequences on the borrower for relatively minor or less than wholly disastrous transgressions.
Floating Charge
A peculiar form of security interest recognised under English law. A charge is a secured party’s entitlement to dispose of the charged assets and to apply the resulting proceeds of sale towards satisfaction of the debt owed to such secured party. Normally, the security grantor should be prohibited from selling or disposing of the charged assets but this is expressly permitted under the concept of floating charge. Therefore, the charged assets upon which a floating charge has been imposed will be diminished each time there is a sale or disposal. A floating charge may be converted into a fixed charge upon the occurrence of certain events such as an event of default and this is called a “crystallisation” of the floating charge.
Value Leakage
Cash generated by the borrower and the guarantors (and used towards prepayment or repayment of loan) and value stored in the security assets give the necessary comfort to the lender that debt obligations owed to it will be honoured one way or another. On the other hand, restricting the borrower’s operations to an excessive degree will likely cause a deterioration in the borrower’s financial performance and its capacity to meet debt service. The covenant package and the security net are adjusted accordingly so that there is a reasonable balancing of borrower and lender interests.
Contractual Waterfall Clause
If the lenders (or their security agent) have enforced transaction security following an event of default under the facility agreement and the proceeds of such enforcement are insufficient to repay indebtedness owed to all classes of lender (or all lenders within the same class), the waterfall clause determines the sequence in which the different debts are to be repaid out of the enforcement proceeds meaning that any debt to be repaid last may need to be written off.
Structural Subordination
Different classes of debt may be extended to different companies in the corporate structure for subordination reasons. Lenders who have extended debt to a parent company will be disadvantaged as compared to lenders who have extended debt to a subsidiary upon that subsidiary’s insolvency. Lenders to the parent company (i.e. subordinated lenders) will most likely have taken share security over the shares in the subsidiary and they may exercise their right thereunder to have the shares transferred to them. The statutory waterfall, however, places creditors ahead of equity holders with the likelihood that the insolvent company’s assets may have been distributed in their entirety before the equity holders’ turn arrives.
Turnover Undertaking and Trust
A junior lender which makes recoveries under the junior loan may be required to transfer such proceeds to the senior lender in an undertaking known as a turnover clause. The same outcome may be reached by obliging the junior lender to hold such proceeds on trust for the senior lender so that the beneficial ownership of such proceeds lies with the senior lender.
More to come...
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