Lending & Secured Finance 2024

Cahill Gordon & Reindel LLP


With a history of legal innovation dating back to the firm’s founding in 1919, Cahill Gordon & Reindel LLP is trusted by market-leading financial institutions, companies and their boards to manage significant litigation, regulatory matters and transactions. The firm is based in New York with offices in London and Washington, D.C.
High-yield bond issuers watched as access to the market improved significantly during the last year, with global issuances increasing by two-thirds in 2023 from 2022 in terms of volume...
UK Insolvency/Bankruptcy/Re-Structuring
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1. Introduction

High-yield bond issuers watched as access to the market improved significantly during the last year, with global issuances increasing by two-thirds in 2023 from 2022 in terms of volume and with the first quarter of 2024 expected to be the busiest since mid-2021. Nonetheless, the market in 2023 was still just a third of the size as that in 2021, and despite interest rate spreads that have materially tightened over risk free rates, the cost of refinancing can be significantly higher for those companies that incurred debt during the low-rate environment of 2021 and prior. These companies are now operating in the third year of a higher-rate environment, making management of cash flows and debt maturities more challenging. High-yield issuers facing refinancing walls or otherwise in need of capital restructuring may continue to find that exchange offers and other liability management transactions are an attractive alternative to new money issuances.

High-yield liability management transactions may include cash tender offers, debt or equity exchange offers, consent solicitations, open market purchases or various combinations of the foregoing. The goals of liability management transactions are varied and may include extending the maturity profile of a company's outstanding debt, reducing its overall leverage and/or enhancing credit support or strengthening the covenant protection provided to creditors in exchange for other benefits to the issuer.

There is considerable flexibility in how these transactions can be structured, but the process is not as straightforward as the typical process for amending a credit agreement. Unlike loans, high-yield bonds are considered debt securities in the U.S. and other jurisdictions and are therefore subject to a variety of legal and regulatory requirements that would not apply to analogous transactions involving loans.

This chapter describes the common types of high-yield liability management transactions encountered by high-yield practitioners and some considerations relevant to liability management exercises in the context of insolvency. As a general matter, the threshold securities law and regulatory considerations associated with these transactions often relate to U.S. law; therefore, the following discussion will principally focus on U.S. rules and regulations, with accompanying discussions regarding how non-U.S. participants may structure these transactions in an international setting.

2. Types of Liability Management Transactions

High-yield liability management transactions typically comprise one or more cash tender offers, consent solicitations and exchange offers or open market purchases.

Cash tender offers

Generally speaking, a cash tender offer is a widely distributed offer to acquire outstanding securities in exchange for cash consideration. In the context of high-yield liability management, these offers are usually made by the issuer, an affiliate within the issuer's corporate group or a third party that has committed to acquire the issuer's corporate group. One or more investment banks are typically engaged as dealer managers to coordinate communications with bondholders and solicit responses to the tender offer, and several other agents may be engaged to assist with other ministerial tasks related to execution.

A cash tender offer often commences with a notice announcing the offer, which is delivered through the clearing systems and often posted as a press release on the offeror's website. The offeror or its agent then distributes a tender offer memorandum or similar disclosure document to the offerees describing the terms and, if necessary, any material non-public information that the offeree must disclose before trading in its own securities. The tender offer is kept open for some specified period of time to allow offerees the opportunity to consider its terms and whether to tender their bonds. Immediately following the close of this period, the offeror distributes notice of the results of the tender offer, and settlement follows shortly thereafter.

A tender offer may or may not include all outstanding bonds held by any bondholder, be capped at a specified principal amount from each holder, be subject to a minimum acceptance threshold or be limited to specified categories of offerees or tranches of notes. Although the offer's scope and any related conditions or limitations are announced at the commencement of the tender offer, an offeror may decide to change the terms of the tender offer while it is held open. However, tender offers are subject to certain minimum offer periods under U.S. securities laws (see below), and limiting the scope of the tender offer or altering its terms once the offer has commenced may require the offer period to be extended and affect the availability of certain exemptions from U.S. tender offer rules.

In addition to the cash payment for the tendered bond, offerors may try to "lock-in" tenders before closing by agreeing to pay an additional "early bird" fee to those who tender prior to an earlier date selected by the offeror. The early tender premium incentivises holders to respond promptly and enables the offeror to limit market volatility and know the results of the offer in a shorter timeframe than the full period for which the offer is required to be open. Offerors may also incentivise acceptance by pairing the tender offer with a consent solicitation that modifies the terms of any bonds that remain outstanding, often in a manner that can be materially less desirable to any potential holdout bondholders (as discussed below).

Unless an exemption applies, U.S. law requires tender offers for debt securities to be conducted in compliance with Section 14(e) of the U.S. Securities Exchange Act of 1934 (the "Exchange Act") and Regulation 14E thereunder. In addition to a general antifraud prohibition and other rules related to the conduct of the tender offer, the Exchange Act rules include very specific timing requirements that are often problematic for offerors. In particular, Rule 14e-1 states that a tender offer must be held open for at least 20 consecutive business days, and it must remain open for at least 10 consecutive business days following any change in the size of the tender offer, consideration offered or solicitation fees provided to the dealer managers. Accordingly, in tender offers subject to this rule, there is no flexibility to modify the price or other elements of the consideration during the final 10 business days of the offer period without extending the open period for the offer. Additionally, Rule 14e-1 requires prompt payment of the consideration offered following the closing of the offering, which is generally satisfied if payment is made within three business days.

By 2015, market participants were increasingly of the view that requiring tender offers to remain open for 20 business days was not always necessary or desirable, and holders should be able to adequately evaluate relatively straightforward tender offers in a shorter timeframe. In January 2015, the U.S. Securities and Exchange Commission (the "SEC") approved a request for no action relief permitting five business day tender offers for certain securities (including most non-convertible high-yield bonds) under specified conditions. This development was welcomed by the market to help mitigate volatility risk. However, it is important to bear in mind that a tender offer with an abbreviated offer period must meet a variety of qualifying criteria, which should be analyzed with the benefit of counsel.1 Among the more notable limitations, this no-action relief is only available for tender offers for all of an outstanding series of bonds. In addition, a five business day tender offer may not be made in connection with a consent solicitation or financed with debt that is senior in right of payment or otherwise effectively senior to the debt solicited in the tender offer. Moreover, five business day tender offers must follow strict requirements concerning the conduct of the offering, and there is very limited flexibility to change the consideration or other material terms after the offer has commenced without extending the period for which the offer must remain open.2 Although the five business day tender offer exemption provides relief from certain of the timing requirements under U.S. tender offer rules, it provides no relief from the prompt payment requirement, and the relevant anti-fraud provisions remain applicable.

Certain international tender offers can avoid the time constraints and other elements of the U.S. tender rules to the extent they qualify for the Tier I or Tier II cross border tender offer exemptions. These exemptions are only available to "foreign private issuers" as defined in the U.S. Securities Act of 1933 (the "Securities Act") that are not "investment companies" within the meaning of the U.S. Investment Company Act of 1940. In addition, to qualify for the Tier I exemption, no more that 10% of the securities that are the subject of the tender offer may be beneficially owned by U.S. holders, and to qualify for the Tier II exemption, no more than 40% of such securities may be owned by such holders. The Tier I exemption provides broad relief from most of the U.S. tender offer rules except anti-fraud provisions, and the Tier II exemption provides relief from selected tender offer rules related to the conduct of the offering (but not the timing requirements or anti-fraud provisions).

Although many international high-yield tender offers could qualify for a Tier I or Tier II exemption, these exemptions are not often used in practice. The Tier I and Tier II rules prescribe a specific method of conducting a look-through analysis to determine whether the beneficial ownership test can be satisfied, and the perceived difficulty and cost of conducting this analysis often deters issuers from relying on these exemptions.

Of note, the requirements for tender offers in many other jurisdictions are not as rigid as those in the U.S. As discussed below in the context of Regulation S exchange offers, to the extent participation by U.S. bondholders is not necessary to achieve the desired outcome, many non-U.S. issuers structure tender offers to exclude the U.S. altogether to avoid the timing or other U.S. tender offer rule requirements.

Consent solicitations

Two forms of consent solicitations are commonly encountered in the high-yield market. One form involves an issuer seeking approval to amend the terms of a series of bonds in exchange for a fee or some other concession granted to bondholders. In the past, many high-yield indentures had restrictions on payments for consents which required any consent fee offered by the issuer to be paid to all consenting bondholders upon completion of a successful consent solicitation, but contractual constraints on the payment of consent fees have been removed or become more relaxed in recent years. Subject to compliance with applicable local law and listing rules, many indentures now allow issuers to pay consent fees to only those bondholders who provide their consent before the required threshold for amendment has been obtained.

A second common form of consent solicitation can be employed as a strategic tool; it is linked to a separate tender or exchange offer and requires bondholders to provide consent to amend the terms of the bond they are tendering as a condition of participating in the offer. Referred to as "exit consents", this form of consent solicitation often strips the outstanding bonds of many or all of their restrictive covenants and related events of default. Under many high-yield indentures, removing covenants and related events of default can be achieved with the consent of bondholders representing a majority of the outstanding principal amount of the bonds, although greater levels of consent would be required for modifications to basic economic terms and other "sacred rights".

Pairing exit consents with a tender or exchange offer incentivises acceptance by increasing the risk associated with declining the offer. If a an exit consent succeeds, declining bondholders will be left holding a security that is significantly less desirable (and as a result, less valuable) than the security they held at the time of the offer was made. Although controversial, exit consents have withstood legal challenges in key U.S. jurisdictions.3 So long as exit consents are solicited and provided in accordance with the terms of the relevant indenture and in compliance with applicable securities laws, practitioners generally take the view that they will be valid and effective under U.S. law.4

When constructing either form of consent solicitation, it is important to ensure that the proposed changes to the terms of the security are not so substantial as to constitute an offer of a new security under U.S. law. If so, the consent solicitation will be deemed an exchange offer, and the issuer would need to comply with all of the rules and regulations that govern such transactions, which importantly include a requirement to register the amended security or qualify for a suitable transaction exemption from the registration requirements of the Securities Act. Broadly speaking, practitioners take the view in most cases that this new security doctrine is only implicated when amendments modify the basic economic terms of a bond, which include modifications of principal, interest rates, maturity, interest payment dates, redemption premiums, place of payment, the currency in which payments are made and the right to institute suit for any payment default.5

Exchange offers

Generally speaking, an exchange offer is a tender offer in which a new security constitutes some or all of the consideration offered to tendering bondholders. As such, exchange offers not only require compliance with applicable tender offer rules, but involve a securities offering that is subject to Section 5 of the Securities Act. Accordingly, the offering must either be registered or it must qualify for a suitable registration exemption.

The typical exchange offer process for high-yield bonds has similarities to that of a cash tender offer with some key differences that mostly relate to the issuance of a new security. Although there are no underwriting functions per se, the role of a dealer manager in an exchange offer is more similar to the role an investment bank would typically play in a new issue offering in terms of its involvement with marketing materials and interactions with bondholders. In addition, the offering materials used for an exchange offer have elements that are more akin to those of a new money bond issuance, including a description of the new notes being offered in exchange for the outstanding notes and the business and risk disclosures that are customary in a prospectus or offering memorandum for a new money deal.

As is the case with cash tender offers, exchange offers may be capped at a specified principal amount, subject to a minimum acceptance threshold or limited to specified categories of offerees or tranches of notes. Issuers may also structure exchange offers to include an "early bird" fee and/or an exit consent solicitation. The consideration offered in an exchange offer may include cash in addition to debt and/or equity securities.

Unless an exemption from the U.S. tender offer rules applies, exchange offers are subject to the same constraints under these rules as cash tender offers. An exchange offer must also satisfy additional requirements to qualify for the five business day tender offer exemption. Most notably, the security offered as consideration in the exchange must be a "qualified debt security" as defined by the Five Business Day No-Action Letter, which means, among other things, it must be "identical in every material respect" to the securities that are subject to the exchange offer except with respect to its maturity, interest payment dates, record dates, redemption provisions and interest rate.

Transaction exemptions for exchange offers

As discussed, an exchange offer that is made in the U.S. or otherwise subject to U.S. securities law must be registered with the SEC unless a transaction exemption is available. Registration would allow the company to make its exchange offer to a broad segment of U.S. investors and issue freely tradeable securities as consideration in the exchange, however, the cost and timing implications of filing a registration statement and associated ongoing reporting requirements can make this an impractical option for high-yield issuers, in particular, for non-U.S. issuers that do not already have SEC registered securities outstanding.

Although most high-yield issuers opt to conduct exchange offers in reliance on an exemption from the registration requirements, some transaction exemptions that are customarily relied upon in initial high-yield offerings may not be available in the context of an exchange offer, and careful attention must be paid to structuring exchange offers so that they meet the requirements of the relevant transaction exemption without violating U.S. tender offer rules.

The transaction exemptions most commonly considered when structuring high-yield liability management transactions are discussed below along with some related structuring considerations.

Transaction exemptions under Section 3 of the Securities Act

Section 3(a)(9) of the Securities Act provides a transaction exemption for securities issued in the context of exchange offers. However, market participants often find that the criteria to qualify for a Section 3(a)(9) exemption do not lend themselves to exchanges in the high-yield market. Importantly, the assistance dealer managers and other financial advisors may provide to the issuer and the manner in which these advisors may be compensated are strictly limited in Section 3(a)(9) exchange offers. Dealer managers and other advisors are not generally permitted to solicit or negotiate on behalf of the issuer, which are often among the key services that issuers would look to investment banks to provide in these transactions. Additionally, no commission may be paid to advisors for soliciting participation in a Section 3(a)(9) exchange offer or otherwise in relation to the success of the exchange, although SEC guidance indicates that payments for assisting with structuring the exchange and distributing the offering materials and other ministerial actions are acceptable.

Section 3(a)(10) of the Securities Act provides a transaction exemption for securities issued in exchanges approved by a court. Although this exemption is rarely used in the U.S., it is available and has been relied upon in certain exchanges approved as part of insolvency proceedings conducted outside of the U.S.6

Securities issued in reliance on these transaction exemptions are not exempt from the requirements of the U.S. Trust Indenture Act of 1939 ("TIA"). Accordingly, the indentures for any securities issued in reliance on these exemptions would have to be qualified with the SEC in accordance with the TIA, and the restrictions related to trustees imposed under the TIA would apply.7 In particular, the TIA would prohibit most non-U.S. institutions from acting as trustees under these circumstances.8 In addition, the TIA conflicts of interest provisions often require a trustee to resign following a default if it acts as trustee under more than one of a company's indentures. International high-yield bond issuers often use a single trustee incorporated outside of the U.S. for all of their outstanding debt securities, and the vast majority of high-yield bonds are issued under exemptions from the requirements of the TIA.

Rule 802 exemption

As discussed above in connection with cash tender offers, the Tier I tender offer exemption may apply to many cross-border tender and exchange offers by foreign private issuers, and Rule 802 under the Securities Act provides a transaction exemption for securities issued in exchange offers made under circumstances that would satisfy the requirements for a Tier I tender offer. As is the case with the Tier I tender offer exemption, issuers relying on Rule 802 must furnish marketing materials to the SEC and file a form with the SEC that appoints an agent for service of process in the U.S., among other requirements.

Unlike securities issued in reliance on Sections 3(a)(9) or (10), securities issued pursuant to Rule 802 are exempt from the requirements of the TIA. However, the Rule 802 exchange offer exemption and Tier I tender offer exemption both prescribe the same method of conducting the look-through analysis to determine whether more than 10% of the securities to be tendered in the exchange offer are beneficially owned by U.S. holders, and as such, these exemptions are not often relied upon because of the perceived difficulty and cost of conducting this analysis.

Private exchange offers

Private exchange offers are the most common structure for international high-yield exchange offers that include the U.S. These exchange offers typically rely on the transaction exemption provided by Section 4(a)(2) of the Securities Act for the offer and sale of the security issued in the exchange.

In order to qualify for an exemption under Section 4(a)(2), the offering cannot be a "public offering" within the meaning of the Securities Act. Among other requirements, this means the issuer must avoid general solicitation and advertisement of the exchange offer and the exchange offer should only be extended to sophisticated investors.

The context of a high-yield exchange offer makes compliance with the requirements for a Section 4(a)(2) exemption less onerous than would be the case in other circumstances. SEC guidance suggests that solicitation of sophisticated investors with whom an issuer has a pre-existing substantive relationship would not constitute general solicitation or advertisement.9 In a high-yield exchange offer, the offerees are strictly limited to existing investors in the issuer's high-yield bonds, and the typical offering and transfer restrictions in high-yield indentures make acquisition of high-yield bonds by U.S. retail investors unlikely. Nevertheless, dealer managers in private exchange offers generally carry out the same procedures used to confirm that offerees are eligible to participate in the exchange offer as they would for a private placement of high-yield bonds in other contexts.

In practice, many private exchange offers are conducted as if they were being made pursuant to Rule 144A and/or Regulation S under the Securities Act. In these exchange offers, participants in the U.S. are typically limited to Qualified Institutional Buyers as defined in Rule 144A, while participants outside the U.S. are typically limited to non-U.S. investors in offshore transactions that would be compliant with a registration exemption relying on Regulation S.

For many companies, Section 4(a)(2) private exchange offers provide a practical means of extending an exchange offer to all or nearly all of a company's bondholders regardless of whether these bondholders are located in the U.S. or elsewhere. However, private exchanges must be conducted in compliance with the U.S. tender offer rules unless an exemption applies. Given the strict requirements for a security to qualify as a qualified debt security under the abbreviated tender offer exemption, private exchange offers are often conducted in compliance with the generally applicable U.S. tender offer rules, which require the offer to be held open for a minimum of 20 consecutive business days and limit pricing flexibility within the 10 consecutive business days before the closing of the offering.

Exchange offers excluding the U.S.

Given the constraints imposed by U.S. securities laws and the related costs of compliance, many non-U.S. issuers choose to exclude the U.S. from the scope of their exchange offers. The market has used this "Reg S only" approach to avoid the strict 20 business day minimum tender offer period under U.S. tender laws, and execute transactions more quickly.

The new securities issued in these "Reg S only" exchanges rely on the registration exemption provided by Regulation S of the Securities Act, which applies to certain offers and sales of securities conducted outside of the U.S. Provided the exchange offer does not target the U.S. or involve U.S. investors and the new securities issued in the exchange are offered and sold in compliance with Regulation S, the customary view among practitioners is that U.S. tender offer rules are unlikely to apply to such transactions notwithstanding the absence of an explicit safe harbor for tender offers under Regulation S.

International high-yield issuances are typically structured as two parallel transactions consisting of an offering in the U.S. in reliance on Rule 144A and a second offering outside of the U.S. in compliance with Regulation S. However, it is common in Europe and some other non-U.S. jurisdictions for the vast majority of sales to be made to non-U.S. accounts pursuant to the Regulation S exemption. As a result, a Reg S only exchange can be a highly effective way of structuring an exchange offer to reach most of the bondholders in an international context.

In order to qualify for exemption under Regulation S, the offer and sale of the relevant securities must be consummated by way of an "offshore transaction" and the participants in the distribution of the new securities may not engage in any "directed selling efforts" into the U.S. In most exchange offers involving solely Regulation S, only non-U.S. persons holding beneficial interests in Regulation S notes are invited to participate (regardless of whether these offering restrictions would be strictly required under Regulation S), and bondholders are required to certify that they are eligible participants before receiving the exchange offer memorandum.10 The exchange offer memoranda in these transactions also include customary Regulation S disclaimers and deemed representations, and no marketing activities related to the exchange offer are conducted in or directed toward the U.S.

There are several advantages to structuring an exchange offer as Reg S only. Since the strict timing requirements imposed by U.S. tender offer rules do not apply, companies have greater flexibility to take advantage of fleeting market opportunities and can manage exposure to market risk by limiting the amount of time an exchange offer remains open. In addition, prompt payment in accordance with U.S. tender offer rules is not required in a Reg S exchange, which can be helpful if the settlement of the exchange offer must be coordinated with the settlement of other liability management, financing or M&A transactions.

The primary disadvantage of a Reg S only exchange offer is that it can only be used to acquire notes issued pursuant to Regulation S and held by non-U.S. persons. If a company's aim is to replace an entire series of high-yield notes, any notes issued pursuant to Rule 144A, or Regulation S notes held by U.S. persons, will have to be redeemed or acquired in a separate transaction. In addition, a Reg S only exchange offer relies on falling outside of the jurisdictional scope of the U.S. tender offer rules for its exemption from these requirements, which may be difficult or impossible to achieve if one or more key participants are located in the U.S. or any substantial part of the offer must be conducted or negotiated in the U.S.

Open market purchases

As an alternative to a cash tender offer, an offeree may elect to acquire high-yield bonds through the secondary market. This is generally the preferred alternative where issuers want to opportunistically retire a smaller portion of the overall bond issuance without triggering the obligations associated with tender offer requirements.

Unlike the other types of liability management exercises, open market purchases of high-yield debt are not effected through the facilities of the relevant clearing system. Issuers (or investment banks acting as intermediaries) reach out to individual holders and bilaterally negotiate the terms of each trade.

Open market purchases require careful management, and exceeding applicable limitations in terms of timing and quantum of purchases can inadvertently expose the issuer to a requirement to be in compliance with tender offer rules. There is no precise definition of a tender offer under the U.S. securities laws, but there are certain guidelines to follow to avoid a "creeping tender offer" to which the U.S. tender offer rules would apply. U.S. courts apply various tests known as the "Wellman Factors" to determine whether a series of open market purchases constitutes a tender offer, but in general, the risk increases if the open market purchases are conducted in a way that resembles a tender offer or if a substantial percentage of the outstanding securities are acquired.11

In addition to concerns over creeping tender offers, issuers engaging in open market purchases should carefully consider the various disclosure obligations that may arise as a result of these transactions under both U.S. law and the applicable laws of other jurisdictions. Most notably, an issuer should carefully consider whether it possesses material non-public information that will have to be disclosed prior to consummating any purchase. Importantly, issuers subject to the European Union's Market Abuse Regulation must weigh the relevant disclosure requirements under that regulation against the goals it is trying to achieve with such open market purchases.

3. Insolvency Considerations

Exchange offers can be attractive to companies in distressed situations because they allow them to modify their debt structure without accessing the capital markets for new money. In addition to using liability management transactions as means of avoiding formal insolvency proceedings, companies under the threat of insolvency may execute an exchange offer in parallel with a bankruptcy proceeding or otherwise integrate an exchange offer into its reorganisational strategy to emerge from insolvency.

For example, a company may initiate an exchange offer with a high minimum acceptance threshold in parallel with a U.S. pre-packaged Chapter 11 plan (a "prepack") or a U.K. scheme of arrangement process. Either of these restructuring tools ordinarily allows key financial terms to be modified with a lesser level of bondholder consent than would be required under most indentures. By initiating these restructuring processes in conjunction with the parallel exchange offer, potential holdouts may be incentivised to accept the offer rather than risk an outcome that may be imposed upon them without their consent through a court-approved insolvency process. In the alternative, if the voluntary exchange offer fails notwithstanding the threat of restructuring, the prepack or scheme of arrangement may be approved and the exchange offer effectuated with the support of a court.

A full discussion of restructuring tools under insolvency regimes and their application to high-yield bonds is beyond the scope of this chapter. However, there are two key points that should be highlighted in the context of this discussion.

First, the registration requirements of the Securities Act will also apply to any offer and sale of securities effected through the use of insolvency-related restructuring tools unless the requirements for a registration exemption are satisfied. In addition to the Section 3(a)(10) transaction exemption discussed above, the U.S. bankruptcy code includes other transaction exemptions that may apply to securities issued in an exchange that is part of a prepack. In situations involving a non-U.S. restructuring where no registration exemption under U.S. securities laws can be found, issuers may in certain circumstances try to structure the creditor approval process so that the required threshold is achieved without involving U.S. holders in the first instance.

Separately, companies may need to reassess the duties owed to creditors when considering liability management transactions when they are in financial distress. Although many jurisdictions (including the U.S. states of New York and Delaware) do not recognise any non-contractual duties owed by companies to their creditors outside of special circumstances, insolvency is often one of the special circumstances in which such a duty may arise.12In some jurisdictions, this may occur once the company is bordering on insolvency but still technically solvent.13 Depending on the scope and nature of these duties in the relevant jurisdiction, liability management transactions that are ordinarily permissible may constitute a breach of directors' duties in an insolvent or nearly insolvent company.


1 "Abbreviated Tender or Exchange Offer for Non-Convertible Debt Securities", SEC no action letter, 23 January 2015 ("Five Business Day No-Action Letter").

2 The general requirement under the Five Business Day No Action Letter is that any change in the consideration being offered must be communicated at least five business days prior to the expiration of the offer. However, the Five Business Day No Action Letter permits cash consideration to be set based on a spread to a benchmark provided that the exact cash consideration is fixed prior to 2:00 p.m. on the last business day of the offer. In addition, in the case of a qualifying exchange offer, the interest rate for the offered securities may be initially expressed as a range of not more than 50 basis points at the commencement of the exchange offer provided that the final interest rate is announced on the business day prior to the close of the exchange offer. Any other material change to the terms of the offer must be announced at least three business days prior to the expiration of the offer. In all cases these announcements must comply with the strict requirements of the Five Business Day No Action Letter concerning the time by which they must be delivered and the manner in which the relevant information must be disseminated.

3 In general, U.S. courts have concluded that the rights and obligations owed to bondholders under an indenture are contractual in nature, and absent special circumstances, a company owes no additional duties to its creditors. Cf., Katz v. Oak Indust., Inc., 508 A.3d 873, 879 (Del. Ch. 1986); In the Matter of Lifschultz Fast Freight, 132 F.3d 339, 346 (7th Cir. 1997); Waxman v. Cliffs Natural Resources Inc., 222 F.Supp.3d 281, 295 (S.D.N.Y. 2016). Moreover, although majority shareholders generally owe a duty to act fairly and in good faith in dealings with minority shareholders in many U.S. jurisdictions, U.S. courts have declined to find that majority creditors owe any analogous duty to minority creditors.

4 There are two caveats to note regarding exit consents. First, most high-yield indentures are not required to be qualified under the U.S. Trust Indenture Act of 1939 (the "TIA"), but if the TIA applies, Section 316(b) of the TIA may impose additional constraints on amending certain terms in indentures without the consent of the affected bondholders. Second, although challenges to exit consents have been largely unsuccessful in U.S. courts, the validity of exit consents may be less certain in other jurisdictions, including England and Wales. See, Assenagon Asset Management S.A. and Irish Bank Resolution Corporation Limited (Formerly Anglo Irish Bank Corporation Limited) [2012] EWHC 2090 (Ch) (holding that exit consents that impose unfair or oppressive outcomes on non-consenting bondholders are invalid).

5 SEC v. Associated Gas & Elec., 99 F.2d 795 (2nd Cir. 1938); Ingenito v. Bermec Corporation, 376 F. Supp. 1154, 1178 (S.D.N.Y. 1974); see also Ford Lacy & David M. Dolan, Legal Aspects of Public Debt Restructurings: Exchange Offers, Consent Solicitations and Tender Offers, 4 DEPAUL Bus. L. J. 49, 61 (1991).

6 SEC Division of Corporation Finance: Revised Staff Legal Bulletin No. 3 (October 20, 1995) (referencing Lucas Industries plc (August 20, 1996); Symantec Corp. (November 22, 1995); Orbital Sciences Corp. (October 13, 1995); Minera Andes, Inc. (September 21, 1995); Cadillac Fairview, Inc. (May 26, 1995); LAC Minerals Ltd. (June 27, 1991); and The HongKong and Shanghai Banking Corporation Ltd. (January 23, 1991) as supportive of the interpretation that securities issued in exchanges approved by foreign courts qualified for exemption under 3(a)(10) if the other requirements for the exemption are satisfied).

7 Section 304(a)(4)(A) of the TIA exempts bonds offered in reliance on paragraphs 2 through 8, 11 and 13 of Section 3(a) of the Securities Act, but no exemption is available for bonds offered in reliance on Section 3(a)(9) or (10) of the Securities Act.

8 Section 310(a)(1) of the TIA requires trustees under qualified indentures to be organized and doing business in the United States absent an SEC rule or order allowing a foreign institutional trustee. However, according to SEC guidance, a U.S. subsidiary of a foreign trustee may serve as the trustee under an indenture qualified under the TIA.

9 SEC Compliance and Disclosure Interpretations – Securities Act Sections, 256.26 (November 13, 2020).

10 Of note, the degree to which the United States is excluded from a Reg S only exchange offer often goes beyond what is required for a customary offering of high-yield bonds pursuant to Regulation S. Although offers and sales to U.S. persons outside of the United States are permitted under Regulation S in some circumstances, inviting any U.S. persons to participate in an exchange offer creates a risk that the U.S. tender offer rules would apply.

11 Wellman v. Dickinson, 475 F. Supp. 783, 823–824 (S.D.N.Y. 1979) (providing eight characteristics that suggest a program of private purchases constitutes a creeping tender offer); Hanson Trust PLC v. SMC Corporation, 774 F. 2d 47 (2nd Cir. NY 1985) (finding that a series of open market and private purchases representing less than 25% of the total outstanding amount would not constitute a creeping tender offer).

12 See, e.g., Credit Agricole Indosuez v. Rossiyskiy Kredit Bank, 94 NY2d 541, 549 (NY Ct. App. 2000); Quadrant Structured Prod. Co. v. Vertin, 102 A.3d 155, 183 (Del. Ch. 2014).

13 BTI 2014 LLC v. Sequana S.A. [2022] UKSC 25 (confirming a duty to creditors arises under English law when a company is bordering on insolvency or an insolvent liquidation or insolvent administration is probable).

Originally published by International Comparative Legal Guides (ICLG).

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