In brief: guarantees and collateral for acquisition financing in USA – Lexology

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Guarantees and collateral
Are there restrictions on the provision of related company guarantees? Are there any limitations on the ability of foreign-registered related companies to provide guarantees?
There are no restrictions on the ability of US entities to guarantee the obligations of related entities, other than any restrictions that would otherwise apply to debt incurrences by such guarantor entities or limitations on fraudulent transfers. To the extent that such guarantees are secured, standard filing fees and recording taxes may be payable, but these are not different from those that would be payable if the guarantor were providing security for its own debt (and not a guarantee).
Guarantees and grants of liens by foreign subsidiaries in support of the indebtedness of US borrowers may trigger tax consequences under the US Internal Revenue Code, although relatively recent tax law changes have, in some cases, reduced or eliminated the negative effects of such actions. Specifically, foreign subsidiaries that guarantee parent company debt may be deemed, for the purpose of federal taxation, to have paid a taxable dividend to the parent company in an amount equal to the greater of the earnings and profits of such subsidiary and the amount of debt guaranteed. Because no funds would actually have been repatriated in such a transaction, a deemed dividend may result in tax liabilities to the parent company without the parent company having actually received any cash. The law provides a safe harbour that allows pledges of less than two-thirds of the voting equity (and 100 per cent of the non-voting equity) of first-tier foreign subsidiaries, but does not allow any guarantees or additional liens on the assets of such entities, or any credit support from indirect foreign subsidiaries. As a consequence, most US acquisition financings do not require guarantees or collateral from foreign entities beyond the safe harbour equity pledges.
Are there specific restrictions on the target’s provision of guarantees or collateral or financial assistance in an acquisition of its shares? What steps may be taken to permit such actions?
No. US law is extremely flexible in allowing targets to guarantee and provide collateral for acquisition financing and the norm is for such support to be provided. No whitewash or similar procedure is required.
What kinds of security are available? Are floating and fixed charges permitted? Can a blanket lien be granted on all assets of a company? What are the typical exceptions to an all-assets grant?
Blanket liens on personal property – which is the general term for assets other than real property and includes accounts receivable, inventory, intellectual property, debt and equity securities, money, bank accounts, brokerage accounts, equipment, fixtures, contract rights, commercial tort claims, letter of credit rights and general intangibles and goods (a catch-all terms for other personal property not included in the foregoing list), as well as proceeds thereof – are permitted in the United States. The norm in secured acquisition financings is for borrowers and guarantors to grant liens on substantially all of their assets as collateral for their obligations. As there is no distinction between fixed and floating charges on personal property in the United States, grants of security over personal property security routinely cover both presently owned and after-acquired assets.
The creation of a security interest in most forms of personal property is governed exclusively by state law, specifically by the terms of the Uniform Commercial Code (UCC) as adopted in the state where the obligor or property is located. While the terms of the UCC vary slightly among states, it is, for the most part, uniform, with the UCC of each state permitting the creation of a valid security interest in personal property using a security agreement entered into under the laws of any other state (so long as such security agreement contains a clear description of the collateral, is signed by the grantor and contains a provision granting a security interest in the collateral to the secured party). Therefore, only a single security agreement (usually governed by the same state law as the related credit agreement) is required to create security interests in all UCC-governed personal property owned by a borrower and any guarantors in the United States.
In transactions where an all-assets lien is granted, typical exclusions to the grant of collateral include:
Security interests in real property are also governed by state law, but there is significant variation among the states in the required terms of a real property mortgage (or, in some states, a deed of trust) and the laws applicable thereto. Generally speaking, the creation of a lien on real property is accomplished by having a mortgage or deed of trust executed by the grantor (that is, the property owner) and the secured party, which is then recorded with the local (usually county-level) recording office. Lenders and borrowers will typically hire local counsel (sometimes to be shared by the parties) in each jurisdiction where real property collateral is located to navigate local requirements.
Are there specific bodies of law governing the perfection of certain types of collateral? What kinds of notification or other steps must be taken to perfect a security interest against collateral?
Perfection of security interests in most forms of personal property is generally governed by the Uniform Commercial Code (UCC) as adopted in each state. The UCC generally provides that such security interests over most personal property may be perfected by filing a UCC financing statement naming the debtor and secured party and providing a general description of the collateral with the appropriate state filing office. In the case of grants of collateral by corporations and similar entities formed in the United States, the appropriate filing office is that of the state of incorporation or formation of the relevant grantor.
Perfection of security interests in copyrights (and, by custom, patents and trademarks) requires filing with the US Copyright Office (or the US Patent and Trademark Office), in accordance with federal law. For perfection of security interests in deposit accounts, the UCC requires that either the secured party is the relevant depositary bank or that the secured party, grantor and the depositary bank enter into an agreement granting ‘control’ (as such concept is understood under the UCC) over such deposit accounts to the secured party. Various state and federal laws govern perfection of security interests in motor vehicles, aircraft, ships and railcars, with separate registries and perfection steps required for such categories. Mortgages in real property are perfected by recording such mortgages (or equivalent documents) with the local (usually county-level) recording office where the real property is located.
In addition to the perfection steps with respect to personal property described above, the UCC grants priority to liens in certificated securities and certain other investment property that are perfected by the delivery of such items (together with signed instruments of transfer) into the possession of the secured party. Consequently, such delivery is a required step in most US transactions for certificated securities and certain other investment property.
Once a security interest is perfected, are there renewal procedures to keep the lien valid and recorded?
Generally, the perfection of a security interest by filing a financing statement under the UCC in each state is valid for a term of five years from the initial filing date. If a security interest is to remain in effect for longer than five years, a continuation statement must be filed prior to the lapse of the existing filing. Typically, such a filing is made during the six months preceding the fifth anniversary of the initial filing date. It should be noted that a change in the name of the grantor or its jurisdiction of incorporation or formation will require the timely filing of an amendment financing statement (for a different name) or new financing statement (for a new jurisdiction) for the security interest to remain perfected.
Other forms of perfection (such as control or possession) generally remain in effect indefinitely (though state laws may differ in certain cases with respect to non-UCC governed property).
Are there ‘works council’ or other similar consents required to approve the provision of guarantees or security by a company?
The United States does not have any equivalent of a works council. Ordinarily, only the consent of the board of directors or similar governing body of the guarantor or grantor would be required to provide a guarantee or security. Unlike the United Kingdom, the consent of an entity’s shareholders or other equity holders is typically not required for the entity to provide a guarantee or security.
Can security be granted to an agent for the benefit of all lenders or must collateral be granted to lenders individually and then amendments executed upon any assignment?
Yes. Security is commonly granted to a single agent (either an administrative agent or collateral agent) or trustee in US financings. Such common security is held for the benefit of all lenders and, if applicable, other ‘secured parties’.
What protection is typically afforded to creditors before collateral can be released? Are there ways to structure around such protection?
Most credit agreements and indentures allow releases of collateral in connection with permitted dispositions of collateral. Releases of collateral that is not permitted to be disposed of typically require the consent of an agreed percentage of the lenders or noteholders. The release of all or substantially all of the collateral typically requires the consent of all lenders or, in some cases, a substantial majority thereof.
In the case of secured notes, the Trust Indenture Act of 1939 (TIA) may be implicated in releases of collateral. It is common to structure secured notes as second lien or otherwise junior in right of security, so that releases of collateral may be approved by the first lien lenders and binding on the second lien noteholders and trustee
Describe the fraudulent transfer laws in your jurisdiction.
The US Bankruptcy Code provides that a transfer (which includes the incurrence or guarantee of indebtedness, the granting of a lien and the transfer of assets) may be avoided if it occurred within two years of the filing of a bankruptcy petition and the debtor, voluntarily or involuntarily:
Each state also has its own fraudulent transfer laws, which may also be applied in bankruptcy proceedings, and which generally include longer look-back periods (typically as long as four years) than the Bankruptcy Code.
For many states, these fraudulent transfer laws may be based on the Uniform Fraudulent Transfer Act (UFTA) or the more recent Uniform Voidable Transactions Act (UVTA), which endeavoured to address certain issues that had been identified in or arisen under the UFTA. New York adopted the UVTA in December 2019 and, while the adoption of the UVTA substantially changed New York’s fraudulent transfer laws (which had been based on the Uniform Fraudulent Conveyance Act), the law in New York now varies only slightly from the law adopted in most other states.
Law stated date
Please state the date on which the law stated here is accurate.
19 February 2021
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