WHEN A MISSING PARENTHESIS CAN COST A LENDER; M&A UPDATE: FTC’S REVISED HART-SCOTT-RODINO FILING THRESHOLDS
A. WHEN A MISSING PARENTHESIS CAN COST A LENDER
In WBCMT 2007 C33 OFFICE 9720, L.L.C. v. NNN Realty Advisors, Inc., 844 F.3d 473 (5th Cir. 2016), a lender made a secured real estate loan to several entities who owned the real estate as tenants in common. When one of the borrowing entities, owning 3.3% of the property, filed for bankruptcy, the lender accelerated the loan and demanded full repayment from a guarantor, NNN Realty. At issue was the guaranty’s description of the “Borrower,” which contained a list of entities and concluded as follows:
each a Delaware limited liability company (as defined in the Security Instrument), the “Borrower”)….
As can be seen from above, either an extra parenthesis is mistakenly included, or one is missing resulting in an ambiguity as to what is being referenced by “as defined in the Security Instrument.”
The lender argued that the guaranty was clearly triggered upon the property or any part thereof becoming the subject of a bankruptcy proceeding “of Borrower.” The defendant/guarantor argued that the guaranty was not triggered because it defined the “Borrower” as all of the borrowing entities collectively and not individually. That was so because the guaranty listed the various entities as X, Y, and Z, “each a Delaware [LLC] (as defined in the Security Instrument), the “Borrower”).
Relying on the word “and,” the district court ruled for the defendant holding that the defined term “Borrower” includes all of the borrowing entities collectively. Since only one borrower filed for bankruptcy, the guaranty was not triggered.
The U.S. Court of Appeals for the Fifth Circuit reversed, siding with the lender. First, the Fifth Circuit explained the weight put on the word “and” was unjustified. The term “Borrower” was defined in the guaranty in the context of referencing the loan made by the lender to these entities. In that context using “and/or” instead of “and” would have been plain wrong, since the loan was made to all of them. Second, the definition of “Borrower” in the guaranty makes specific reference to the Security Instrument and that “the Security Instrument twice defines ‘Borrower’ as the borrowing entities ‘individually or collectively as the context may require.’” 844 F.3d at 481.
In sum, while the lender ultimately prevailed in this case, had the Fifth Circuit adopted the guarantor’s definition of “Borrower,” the lender would have been precluded from enforcing the guaranty until such time as all seventeen entities composing the borrower were in bankruptcy.
B. M&A UPDATE: FTC’S REVISED HART-SCOTT-RODINO FILING THRESHOLDS
The Federal Trade Commission (“FTC”) announced revised thresholds used for pre-acquisition filings under the Hart-Scott-Rodino Antitrust Improvements Act (“HSR”). These take effect on February 27, 2017. Under the new thresholds, the parties to a merger, consolidation or acquisition of voting securities or substantial assets will in most cases need to file pre-acquisition notifications with the FTC and the Department of Justice and observe the HSR waiting periods before closing if the transaction meets one or more tests which look at both the size of the transaction and the sizes of the persons in the transaction.
Size of Transaction: This test is both a floor below which no filing is required, and a threshold for automatic filing regardless of the size of the persons discussed below. No filings are required for transactions under $80.8 million this year notwithstanding the size of the persons. If the value of the securities or assets exceeds $323 million, then the persons must report the transaction notwithstanding the size of the persons.
Size of Person: If the value of the securities and assets held as a result of the transaction is between $80.8 million and $323 million, the transaction must be reported in most cases if either the acquired or acquiring party has annual net sales or total assets of at least $16.2 million and the other party to the transaction has at least $161.5 million in annual sales or total assets.
For the purposes of applying the above thresholds, “person” means the ultimate parent entity of the party engaged in the transaction. Note that certain exemptions may apply depending on the nature of the transaction and the nature and location of the assets and entities involved. Consequently, additional analysis is often required before making a final determination regarding the need for a HSR filing. Counsel is recommended, as noncompliance with HSR leads to significant penalties. We can assist with this analysis.
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