ties Inc. (collectively “JPM”). While the
credit agreement prohibited JPM from
assigning the loan without Empresas’
consent, the credit agreement did not
require JPM to obtain Empresas’ consent
to sell participations in the loan.
When the loan closed in 2008, JPM intended to sell down its position but did
not do so due to the deteriorating condition of the credit markets at that time.
JPM resumed its syndication efforts in
early 2009 and, although it engaged in
discussions with various banks, JPM
did not view the terms offered by these
banks as favorable. As a result, JPM again
discontinued its syndication efforts and
instead focused its attention on selling
its entire position in the loan.
By March of 2009, JPM was fully engaged
in discussions with Banco Inbursa, S. A.
(“Inbursa”) and, in May 2009, JPM reached a
verbal agreement to assign 90% of the loan
to Inbursa. JPM then notified Empresas
of the proposed assignment and formally
requested Empresas’ consent. However,
Inbursa was controlled by Carlos Slim Helu,
who also held a controlling interest in
Telmex, a primary competitor of Empresas.
Not wanting one of its major competitors
to become its lender and possibly gain
access to confidential information about
its business, Empresas notified JPM that it
would not consent to the assignment.
As the credit agreement did not require
JPM to obtain Empresas’ consent before
selling a participation in the loan, JPM
changed the transaction from an assignment to Inbursa of 90% of the loan to a
sale to Inbursa of a participation interest
in 90% of the loan. Although Empresas
notified JPM that a participation to Inbursa
would be equally as detrimental to Empresas as an assignment to Inbursa, JPM went
forward with the transaction anyway and,
in July 2009, executed a participation agreement with Inbursa.
Shortly after learning that Inbursa and
JPM executed the participation agree-
ment, Empresas filed suit against JPM in
the United States District Court for the
Southern District of New York, seeking a
preliminary injunction to prevent JPM from
participating 90% of its loan to Inbursa.
JPM argued that the participation agreement was technically consistent with
the credit agreement since the credit
agreement did not give Empresas veto
rights with respect to participations.
JPM also argued that the participation
agreement was not a disguised assignment as Inbursa did not have voting
rights with respect to modifications of
the credit agreement.
Although acknowledging that the credit
agreement did not require JPM to obtain
Empresas’ consent to sales of participations in the loan, the Court found that
the “unusual” provisions included in the
participation agreement were designed
to give Inbursa, a competitor of Empresas,
exactly what the assignment veto was
designed to prevent, namely access to confidential information about Empresas. The
Court went on to say that JPM, by utilizing
the participation agreement to undercut
what it knew the assignment veto was
designed to prevent, breached the implied
covenant of good faith and fair dealing
under the credit agreement. As such, the
Court entered a preliminary injunction
prohibiting JPMorgan from consummating
the participation agreement.
The Empresas Cablevision decision
serves as reminder that courts may
review the substance of a transaction
regardless of its form. It is not uncommon
for a borrower to negotiate for the right
to veto proposed assignments of a loan
in order to prevent its competitors from
gaining access to confidential information about its business. As the decision
illustrates, a lender who uses a participation agreement to accomplish what
such an assignment veto is designed to
prevent does so at its own risk. TSL
Contributed by Jill A.G. Zellmer, senior
managing director and general counsel, GE
Capital, chairperson of the CFA Advocacy
Committee, member of the CFA Executive
Jonathan N. Helfat, partner, Otterbourg
Steindler Houston & Rosen, PC, and Richard
M. Kohn, partner, Goldberg Kohn, are CFA