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Introduction

An extensive list of representations is included in Clause 24, each to be given by each Obligor. They cover a variety of legal and factual issues. If any of these representations is untrue on the date upon which it is expressed to be given, then subject to any agreed grace period, the misrepresentation will be an Event of Default (see Clause 28.4 (Misrepresentation)).

Lenders seek representations in order to address particular risks in relation to the transaction. Not all of the representations presented in the Leveraged Facilities Agreement will be relevant for every transaction and further representations (or carve-outs or additions to representations) specific to the transaction in question may be required. Materiality qualifications and other limitations are commonly agreed, for example in terms of which entities the representations apply to and by reference to the knowledge of the representor. The LMA emphasises in its User Guide to the Leveraged Facilities Agreement that Clause 24 is just a starting point for negotiation.

Borrower Notes

Scope of Representations

The representations in Clause 24 vary in terms of whether the Obligor is expressed to give the representation in relation to just itself, or in relation to itself and each of its Subsidiaries or in relation to itself and all other members of the Group. The scope of each representation is considered in the commentary on individual provisions below.

Borrowers will need to agree with the Lenders the extent to which particular Obligors can give representations with application beyond themselves and, in some circumstances, their Subsidiaries. Whilst it may be reasonable for Obligors to give some representations in relation to themselves and their Subsidiaries (on the basis that they should have relevant knowledge of their own Group), some Obligors may not feel it is reasonable that they are required to give representations in relation to the activities of each member of the Group. Obligors may also seek to limit the scope of the representations or particular representations in other ways, for example, where representations extend to Subsidiaries or other members of the Group, Obligors might seek to limit their application to those entities which are Material Companies (see Clause 1.1 (Definitions)). The extent to which this is appropriate and reasonable will depend on

the circumstances including the extent of due diligence, the applicability of qualifications by reference to knowledge and the size of the Group. In relation to warranties given by the Parent and the Company concerning the Target Group, see further “Application of Representations to Target Group”below.

Parties should bear in mind the scope of the cross-guarantees being given by Obligors when considering the extent to which representations should be given in relation to parties other than the representor. Pursuant to the Leveraged Facilities Agreement as drafted, each Guarantor guarantees the obligations of each other Obligor (see Clause 23 (Guarantee and Indemnity)).

This means that even if a particular Obligor does not give a representation in relation to certain members of the Group, if another Obligor does so, the Guarantor will be standing behind the representation of that other Obligor in the event that the Lenders become entitled to enforce the Facilities. This is a further reason for an Obligor which is a Guarantor to argue that it should not be required to give representations concerning members of the Group of which it has no knowledge and might not reasonably be expected to have or to obtain knowledge.

Application of Representations to Target Group

As noted at Clause 1.1 (Definitions) in relation to the definitions of “Group” and “Subsidiary”,

Borrowers will usually seek to amend the Leveraged Facilities Agreement to provide expressly that where representations are given prior to the Closing Date (or sometimes, the first Utilisation Date), the Target Group shall not be considered to be part of the Group or to be a Subsidiary of the Company. The Leveraged Facilities Agreement does not reflect market practice in this respect. See further comments on paragraph (b) of Clause 24.1 (General) below.

From the Obligors’ perspective, one might argue (in particular in a public bid situation where due diligence is limited), that it is equally difficult for the Parent and the Company to give representations relating to the Target Group on the Closing Date or first Utilisation Date, on the basis that it will take some time for them to get to know their new Subsidiaries. Market practice, however, is generally to require that the representations are given on such date on the

assumption that Completion has occurred, and the Obligors’ concern is instead usually addressed in two ways:

• First, by paying close attention to those representations which are given by an Obligor in relation to parties other than itself, discussed above in general terms and below in the context of individual representations.

• Secondly, by providing for a “Clean-Up Period”, a grace period post-Completion to deal

with certain misrepresentations and Defaults relating to the Target Group (which is reflected in the Leveraged Facilities Agreement, see Clause 28.21 (Clean-Up Period)). The

existence of a Clean-Up Period is an acknowledgement of the more limited extent to which Obligors can be expected to have knowledge of the Target Group in the immediate aftermath of Completion.

If the financing is offered on a certain funds basis, the scope of any representations which can operate as a drawstop during the Certain Funds Period will be limited (see Clause 4.5 (Utilisations during the Certain Funds Period) above). However, the ability to have funds

advanced may not be terribly helpful to the Borrower if the misrepresentation cannot be cured by the end of the Certain Funds Period, leaving the Borrower then faced (subject to the Clean- Up Period protection) with an Event of Default.

Qualifications by reference to materiality

The Leveraged Facilities Agreement contemplates that some of the representations are qualified by reference to materiality and most Borrowers will negotiate further qualifications. When negotiating these types of qualification, Obligors should consider whether the qualifications in question are sufficiently certain. Will they be able to satisfy themselves as to whether the representation is true or not?

The term “material” and the defined term “Material Adverse Effect” are both used in Clause 24

of the Leveraged Facilities Agreement. In addition, in certain cases, monetary thresholds for materiality are contemplated (see e.g. paragraph (a) of Clause 24.17 (Taxation)). The definition

of “Material Adverse Effect” is usually negotiated in some detail, see Clause 1.1 (Definitions)

above. Whilst the operation of any qualification must be considered in context, Borrowers may prefer to use this term rather than a mixture of terminology as there is a view that its detail provides greater certainty in construing the qualified representations.

Where the Leveraged Facilities Agreement includes a “Material Adverse Effect” qualification, it

is usually phrased in terms of a matter which “has or is reasonably likely to have” a Material Adverse Effect. Some lawyers believe that the fact that a matter might be said to have a reasonable likelihood of having a “Material Adverse Effect” should not be enough to give rise

to a misrepresentation, and seek to amend such references to matters which “have or will have” or (the less certain) “have or is reasonably expected to have”, a Material Adverse Effect.

Qualifications by reference to knowledge

Borrowers will usually seek to agree qualifications to the representations, or at least certain of them, by reference to the knowledge or awareness of the Parent, the Company and/or the relevant Obligor. The Leveraged Facilities Agreement contemplates that a very limited number

of representations might be qualified by reference to knowledge to some extent.

Where a representation is qualified by reference to the knowledge or awareness of a corporate entity, the obvious question is with whose knowledge the company will be fixed for such purposes (and, in practical terms, who must be involved in determining whether particular representations can be given). In very broad terms, a court in this context is likely to consider who is authorised to represent the company and/or whose “mind and will” directs the company. It should be assumed that the knowledge of the directors of the Obligor giving any representation is relevant for these purposes. However, in relation to particular issues, it may be prudent for other key senior personnel to be involved, for example, the Obligor’s in-house lawyers in relation to litigation issues or its asset management team in relation to property issues if those persons have responsibility for the management of and/or control the company’s actions in relation to particular areas of its operations. Additionally, matters within the knowledge of the company’s advisers, for example, its lawyers and accountants may well be considered to be relevant by a court.

However, even in the absence of any positive obligation to make enquiries, it may be the case that a court will construe a reference to a corporation’s knowledge by reference to an objective standard. Again, very broadly speaking, there is case law to the effect that references to the awareness of a company might result in that company being imputed with knowledge of the contents of relevant documentation in its possession. The precise limits of any such qualification cannot easily be defined (although clearly the inclusion of an awareness qualification is better than an unqualified representation).

Obligors may prefer, therefore, that references to an Obligor’s awareness or knowledge are expressed to be limited to matters within its “actual” knowledge or awareness. There is some judicial authority to the effect that a reference to “actual knowledge” is a more limited concept, and might not, for example, include matters within the knowledge of a company’s advisers that might otherwise be imputed to the company. Even better from the Obligor’s point of view, is to define references to an Obligor’s awareness or knowledge as matters within the actual knowledge of specified named individuals. This technique is commonly used in relation to representations given in share or business purchase agreements and might be considered by strong Borrowers.

Lenders may be unwilling to accept that ignorance of particular facts in respect of which an Obligor could have educated itself should operate to avoid a misrepresentation. Hence, they may seek to make clear that an objective standard applies, for example, a knowledge qualification expressed along the lines of “so far as [the relevant Obligor] is aware having made due and careful enquiry”. What constitutes “due and careful enquiry” may depend on the circumstances and what information might be available to the relevant Obligor at the relevant time. For example, in the context of a private acquisition, the Investors, the Parent and Company will conduct as extensive a due diligence exercise as is possible, but there may be practical limitations on the amount of information they are able to obtain and/or digest in the available time frame.

Qualifications by reference to matters disclosed

In addition to operating as a mechanism for defaulting the Facilities, the representations function as a checklist to flush out matters of concern to the Lenders which, in the context of an

acquisition financing, requires the Obligors to focus on the results of the due diligence. As discussed above in the introductory commentary to Section 8 (see “The Reports and the Acquisition Agreement” and “Allocation of risk in the Facilities Agreement”), the Lenders will

usually be closely involved in the due diligence and any material risks arising will be specifically addressed.

Accordingly, the Parent and the Company will usually try to argue that the representations should be given expressly subject to any matters disclosed in the Reports (or otherwise specifically disclosed to the Lenders) and qualifications based on specific matters disclosed are commonly included in Clause 24 by reference to the affected representation. Some Borrowers may seek to qualify the representations generally by reference to matters disclosed to the Lenders in the Reports or otherwise, but a clause by clause approach to exceptions is probably more common. Borrowers may also achieve the right to make further written disclosures to the Agent which will operate to qualify the representations when they are repeated after the date of the Agreement.

When are the representations given?

The times at which the representations are made are set out in Clause 24.32 (Times when representations made). Subject to certain exceptions which are discussed at Clause 24.32

below, the Leveraged Facilities Agreement contemplates that the representations will be given by the Obligors on the signing date and the Closing Date which reflects usual market practice. Certain representations, “Repeating Representations”, are expressed to be repeated on the

date of each Utilisation Request, on each Utilisation Date and on the first day of each Interest Period by reference to the facts and circumstances existing on that date. The scope of the “Repeating Representations” will require attention as the requirements of the Leveraged

Facilities Agreement are wider than the position many Borrowers achieve. It is not appropriate that all of the representations are repeated, in particular where the Group’s ongoing obligations in relation to a particular issue are the subject of a covenant or an Event of Default or where the representation relates to circumstances existing at Closing. An indication is given in relation to each representation below as to whether it is usually or should properly be a Repeating Representation. See also Clause 24.32 (Times when representations made).

Note that most of the representations (not just the Repeating Representations) are deemed to be made by each Additional Obligor on the date upon which it becomes an Obligor (see Clause 24.32 (Times when representations made). As mentioned above (see “Qualifications by reference to knowledge”), when negotiating the Facility Agreement, the Parent and the

Company will have to bear in mind the likely concerns and the extent of the knowledge of those members of the Target Group which are intended to accede to the Facility Agreement as Obligors and ensure that those representations which they will be deemed to give are appropriately tailored. The Leveraged Facilities Agreement contains more onerous requirements in this regard than are commonly negotiated in practice, see further comments in relation to paragraph (e) of Clause 24.32 (Times when representations made) below.

Duplicative requirements

A number of representations included in the Leveraged Facilities Agreement duplicate matters covered by other parts of the document, in particular the undertakings and Events of Default. In

some areas, the representations also overlap.

In theory, Borrowers should be able successfully to delete duplicative requirements as they make the Agreement unnecessarily complex. However, Lenders may resist, often arguing that the absence of representations in relation to a particular issue which are expected by the market may prejudice syndication. Additionally, as mentioned above, representations may be included to elicit information and to provide specific comfort on key risk factors for Lenders.

Whilst it is in neither party’s interest to waste too much time debating whether a requirement is duplicative, there is a conceptual point that both parties should bear in mind. A representation is given at a particular point in time. A misrepresentation will be an Event of Default. A grace period is usually agreed to enable the Borrower to cure any Default resulting from a misrepresentation before it becomes an Event of Default. If a Repeating Representation covers the same ground as a covenant or an Event of Default, a separate Default will be triggered resulting from the same circumstances which, subject to any agreed grace period for cure, will be an Event of Default. It is conceptually easier to remedy a breach of covenant or the existence of a specific set of circumstances than it is a misrepresentation (the representation has been made and was incorrect).

Clause 24.1: General

Clause 24.1(a) provides that the representations in Clause 24 are to be given by each Obligor. Clause 24.1(b) provides that where representations are made at any time prior to the Closing Date, it is assumed (optionally) that Completion has occurred and that the Parent has the knowledge of Senior Management (to be defined). The effect of Clause 24.1(b) is that for the purposes of the representations which are expressed to apply to members of the Group or Subsidiaries, members of the Target Group will be caught even prior to the date upon which they become members of the Group.

Borrower Notes

It is usual for all original Obligors to give the representations, although as noted above (see “Scope of Representations”), Additional Obligors should not be required to make all of the representations. This issue is usually addressed via the repetition mechanism, see Clause 24.32 (Times when representations made) below. The extent to which an Obligor gives representations in relation to parties other than itself will need to be considered in relation to each representation.

Clause 24.1(b) is a controversial provision. It is commonly omitted and replaced with a provision to the effect that the Target will not be considered as part of the Group prior to the Closing Date. Some Borrowers go further and seek to provide expressly that the Parent and the Company will not be imputed with the knowledge and belief of Target Group management prior to the Closing Date. Weaker Borrowers might achieve the less satisfactory position that prior to Closing, the Target Group shall be treated as the Group, but the representations are deemed to be qualified by reference to the actual knowledge of the relevant Obligor at the relevant time. See further “Application of Representations to Target Group” and “Qualifications by reference to

knowledge” above.

Clause 24.2: Status

This is a customary representation which confirms the legal status and capacity of the Obligors and their Subsidiaries and their power to own their assets and carry on business. It is given by each Obligor in relation to itself and each of its Subsidiaries. This representation is a Repeating Representation (which is usually the agreed position).

Borrower Notes

Some stronger Borrowers might seek to limit this representation to Material Companies or (in relation to paragraph (b)), by reference to their ability to own their assets and carry on business in all material respects.

If the Group includes entities other than limited liability companies, for example, limited partnerships, this representation will require appropriate amendment to reflect their legal status.