Restructuring Agreement

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Restructuring Agreement

Brief Introduction About Restructuring Agreement

Restructuring is a common corporate practice. It refers to changes made within a company that affects its approach to the business. It is carried out to help the company run easily. Some areas that are usually restructured are the company’s capital, its ownership and control, and management. This is brought about with the help of restructuring agreements. These aim at the particular type of restructuring that is being carried out.

What Is a Restructuring Agreement?

It is an agreement between the company and other financial institutions that it has previously entered into contracts with. Under the agreement, the parties agree to rearrange the company’s assets or debts in a manner that will allow it to function smoothly. It brings about a change in other previous contracts of the company.

For example, the lenders of the company restructure its debts and place certain conditions on it. It must fulfill these conditions if it wants to receive continued financial support from the lenders. These terms and conditions are mentioned in the agreement. It is a legally binding contract between the parties. It allows for continued support to the company so that it can carry on with its business.

Purpose of a Restructuring Agreement

It is an important instrument that allows the company to carry on its business operations. It is usually undertaken when the company is facing financial troubles. It changes the existing legal contracts of the company by including terms to that effect. The company, along with the relevant stakeholders, gets together to restructure its assets or debts under the agreement. This allows it to start afresh. On the other hand, it provides security to the lenders by keeping their best interests at the center. Thus, it works for both parties.

In the United States of America, most companies reorganize their debts and assets under Chapter 11 of the Bankruptcy Code. Hence, the agreement must abide by its provisions. Additionally, it must also comply with the applicable state laws.

Key Terms of a Restructuring Agreement

A sample letter of restructure typically includes the following important terms:

  • Names of the parties and the date of the agreement
  • Definitions of the terms used in the agreement
  • Asset or loan being restructured
  • Manner of restructuring
  • Effect on other existing agreements
  • Obligations of the parties
  • Representations and warranties by the parties
  • Conditions precedent
  • Confidentiality of information
  • Termination of the agreement
  • Notice requirement
  • Governing law
  • Signature of the parties
  • Consent of the stakeholders
  • Approval of the creditors in case of Chapter 11 bankruptcy
  • Approval from the shareholders conducted in extraordinary general meetings
  • Approval from a majority of the board of directors
  • Approval from the relevant Federal authorities
  • Acknowledgment that the company shall not be restructured for a certain time period after this restructuring

How to Draft a Restructuring Agreement?

This agreement is a lengthy and complicated document. The drafting process can be very long. But all the terms have to be drafted carefully and must comply with all applicable state and federal laws. The following points can be considered when drafting it:

  • Before beginning with the process, have a few initial meetings with important stakeholders. The purpose is to discuss the conditions with the borrower and lenders and reach a consensus. It should be used to seek clarifications and exchange information.
  • The borrower or the leading lender can draft the agreement. It must take suggestions from all stakeholders.
  • Complete names of the parties should be stated. Usually, this agreement consists of more than two parties. Their names and registered business address should be mentioned so that they are easily identified.
  • The subject matter of restructuring must be explained. In the case of restructured loans, the amount of loan, interest rate, and the due date must be mentioned in the loan restructuring agreement.
  • The manner of restructuring should be drafted precisely. This includes the changes being made to the current position, the revised timelines, payment schedules, tax obligations of the parties and their effect on any previously existing contract between the borrower and lenders.
  • In such agreements, representations and warranties are important. These are statements by the parties about their credentials and serve as assurances of their bona fides.
  • When writing conditions precedent, care should be taken to keep them as clear as possible. These conditions have to be met before asking the other party to fulfill its obligations. Hence, it is important that all parties understand what is expected of them.

Benefits of a Restructuring Agreement

Having this agreement serves a company with the following benefits:

  • It can consolidate its debts and assets and manage its finances in a better way.
  • It can agree to a new set of terms and continue its business.
  • A carefully drafted agreement protects both lenders and borrowers. The former are assured of getting their money back. The latter is given more favorable conditions to receive finances and carry on its business.

Types of Restructuring Agreements

  • Debt restructuring agreements: Under this Debt restructuring agreement, the lenders agree to restructure the debts of the borrower in such a way that it allows the borrower to pay off the debts. Common practices include lowering the rate of interest or increasing the time period for repaying the debt or combining both of them.
  • Asset restructuring agreements: This agreement is used to alter the ownership and assets of a company to improve its efficiency. It may involve selling or buying of a company’s assets and is often a part of the larger restructuring plan.
  • Restructuring support agreement: Restructuring support agreement is also known as a plan support agreement. It is an agreement between the borrower and certain lenders and is entered either before or after the borrower files for bankruptcy under Chapter 11. The parties agree to support the plan filed under bankruptcy Chapter 11(1) subject to the terms of the agreement.

What Happens in Case of Violation?

If a party violates any condition of the agreement, the other party can file a claim for relief in the local court of the state. The ‘governing law’ clause (2) mentions which state’s law will be used to interpret the agreement. That state will have jurisdiction over the claims.

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Restructuring Agreement

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