Boardriders Minority Lenders Notch Initial Victory Disputing Top Tier Transactions – Insolvency / Bankruptcy

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On October 17, 2022, New York Supreme Court Justice Andrea Masley issued a decision and order denying all motions to dismiss claims filed by Boardriders, Oaktree Capital (a shareholder, term lender and “sponsor”) under the Credit Accord), and an ad hoc group of lenders (the “Participating Lenders”) who participated in an “uptiering” operation that included new silver investments and conversions of existing term loan debt into a new seed debt that would sit at the top of the company’s capital structure. This ruling is the latest in a series of rulings that have had to address the admissibility of upscaling transactions in loan/bond documentation, including Is used to, TriMark and
PTC Group, in the face of litigation brought by minority shareholders. As this case is only a decision at the motion to dismiss stage, it remains to be seen whether these claims will be argued to judgment or whether the case will be settled.

More specifically, in Boardriders, the participating lenders holding $286 million of $450 million in term loans issued under an April 2018 syndicated credit agreement (the “2018 Credit Agreement”), alongside Oaktree, which held an additional $35 million in 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 “Tranche A” super-senior loans granted by participating lenders and Oaktree; (ii) ~$80 million in Oaktree “tranche B-1” senior loans, split between new funds ($45 million) and working debt ($35 million); (iii) ~$286 million in aggregate “Tranche B-2” Senior Loans held by Participating Lenders and Oaktree; and (iv) a new $20 million super senior deferred draw term loan facility from Oaktree. In connection with these transactions: (a) Deutsche Bank resigned as Administrative Agent and Collateral Agent, replaced by Alter Domus; (b) the 2018 Credit Agreement was amended, with the negative and positive clauses deleted and the lender’s action clause amended to restrict performance and require cash security to initiate any action; and (c) the parties to the Loan have entered into a new credit agreement for the above-mentioned new super senior debt securities (the “Super Senior Term Credit Agreement”), together with a new intercreditor agreement entered into between Alter Domus and the Company, which has subordinated senior debt of nonparticipating term lenders to new super senior debt of participating lenders and Oaktree under the super senior term credit agreement.

Subsequently, an ad hoc group of nonparticipating term lenders challenged the transactions, filing a lawsuit in October 2020 in the New York Supreme Court arguing that the recapitalization, among other things, deprived nonparticipating lenders of their payment rights. prorated, was entered in secret and in bad faith, thereby violating the implied covenant of good faith and fair dealing, and was not a genuine “open market purchase”. This recent decision by Judge Masley leaves non-participating lenders with nearly all of their claims intact and is another chapter in the litigation of what some commentators have called “creditor versus creditor violence.”

Some key takeaways from the court’s decision:

  • The decision, at its core, deals with the “sacred rights” granted to debt holders requiring unanimous consent to modify, particularly with regard to pro-rata sharing and pro-rata payments, main subjects of challenge in transactions ” uptiering”. The court declined to limit itself to a narrow reading of the existing credit agreement and looked to the larger context of the agreement to determine whether these “sacred rights” had been violated. Since the amendments section of the 2018 credit agreement required the consent of the affected lender to vary the pro-rata sharing provisions contained in certain parts of the agreement, the court declined to read the absence of a Explicit “sacred right” prohibiting privilege subordination to determine whether a sacred right has been violated by authorizing uptiering transactions. This reasoning is somewhat at odds with earlier decisions, such as Is used towho took a more literal reading of whether a credit agreement permits lien subordination with the required lender’s consent.

  • The true “open market” nature of debt purchases from participating lenders was a key challenge. Defendants argued that the credit agreement permitted disproportionate purchases in the open market, including debt-for-debt swaps, as an exception to the pro-rata sharing requirement. Although they were referred to as “open market purchase agreements”, non-participating lenders argued that the purchases were no such thing, as they (i) were not at market value and carried out at par, despite a significant commercial discount; (ii) were not stand-alone transactions, but part of a larger scheme; and (iii) were debt-for-debt swaps, rather than cash. The court declined to grant a motion to dismiss on this issue. While the credit agreement did not explicitly state that purchases on the open market were to be pro rata, unlike the Dutch auctions, the court found it equally reasonable that the “open market” should have the ordinary and clear reading (c ie open to all), rather than interpreting the lack of such wording to mean that it could be done on a disproportionate basis.

  • No-action clauses, once again, played a pivotal role in an uptiering challenge case. The court found that the dissident lenders had standing to challenge the transactions, despite the amended wording of the 2018 credit agreement which would have required the authorization of the administrative agent and the posting of a cash bond to cover the fees and costs of any legal challenge. This stake is similar to stakes in other cases such as TriMark, which concluded that an amended no-action clause entered into as part of the disputed transaction did not prevent minority lenders from suing.

  • Similar to the most recent decision in Is used to, the court also declined to dismiss claims for breach of the implied covenant of good faith and fair dealing, despite the company’s assertion that the existence of a written contract precluded such claims. In doing so, the court reviewed the company’s lack of response to the dissenting lenders’ capital needs efforts, alongside the removal of the covenant and changes to the no-action clause, to conclude that the complaint sufficiently showed that the defendants had acted in concert, in secret. , and in bad faith to disadvantage non-participating lenders.

  • Claims for tortious interference can be difficult 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 shareholder who used his expertise and connections to help the business to grow. The court denied this claim, finding that the stockholder/lender should have committed fraudulent, malicious, or illegal acts to overcome the “economic interest” defense, and no evidence was adduced to that effect.

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

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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