Eurozone Crisis. Some suggested Dos and Don ts. slaughter and may

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1 Eurozone Crisis Some suggested Dos and Don ts may 2012 slaughter and may

2 Eurozone Crisis some suggested Dos and Don ts In light of the continuing uncertainty about the resolution of the eurozone crisis, we have put together a nonexhaustive list of practical Dos and Don ts for our clients to consider. The legal issues are explored in greater depth in our contingency planning briefing and previous publications. 1 Slaughter and May s eurozone crisis and sovereign debt team consists of a group of practitioners across different practice areas. The team is considering the issues as part of a network of lawyers from the leading independent firms in major jurisdictions. As mentioned in our contingency planning briefing, there is no one size fits all approach to contingency planning. The precise scope will depend on the type of business and the relevant group s exposure to high risk jurisdictions and/ or counterparties. It should be proportionate and focussed on material risks and pressure points. Our list of suggested Dos and Don ts should be considered with this mind. If you would like to discuss the issues raised in this briefing paper, please contact one of the following or your usual Slaughter and May contact: Charles Randell E charles.randell@slaughterandmay.com Ian Johnson E ian.johnson@slaughterandmay.com Sanjev Warna-kula-suriya E sanjevwks@slaughterandmay.com Andrew McClean E andrew.mcclean@slaughterandmay.com Jan Putnis E jan.putnis@slaughterandmay.com Elizabeth Barrett E elizabeth.barrett@slaughterandmay.com Tolek Petch E tolek.petch@ slaughterandmay.com Kathrine Meloni E kathrine.meloni@slaughterandmay.com 1 See for links to our previous briefings. SLAUGHTER AND MAY 01

3 Do General 1. Maintain focus on subsidiaries, JVs, branches and/or assets (including receivables) in higher risk jurisdictions, and continue to assess which member states are high risk. 2. Consider counterparty risk with a focus on counterparties that are based in, or have exposure to, higher risk jurisdictions. For example, counterparties may include: banks and other financial institutions; suppliers; customers; and JV partners. 3. Ensure that decisions are taken with reference to legal and regulatory duties (and with the benefit of legal and financial advice if applicable). Keep records of discussions; ensure that significant decisions are documented at appropriate levels within the group. 4. Continue to assess whether disclosures in public documents (e.g. financial reports) should be updated to reflect developments in eurozone risks (such as country and/or currency risks) and ensure that eurozone issues become a rolling board agenda item (and update Chairman s and Governance, Finance and Risk and Audit committees). 5. Consider whether material contracts (e.g. material financing contracts and outsourcing contracts, etc.) are likely to be susceptible to redenomination or vulnerable to the impact of capital and exchange controls and whether amendment to any such contracts is desirable/feasible. Focus on: governing law and jurisdiction clauses (e.g. outside of the high risk jurisdiction or the eurozone; exclusive or non-exclusive jurisdiction clause?); definitions of euro ; place of payment/performance; 02 SLAUGHTER AND MAY

4 place of residence/incorporation of counterparty; location of counterparty s assets and location and quality of collateral (e.g. letters of credit/securities or other assets); and counterparty s exposures/pressure points (e.g. financial institutions or other counterparties with material exposures to higher risk jurisdictions). 6. Consider whether dry-runs (based on specific scenarios with appropriate assumptions) would be helpful in order to assess notional exposure, termination rights (ability to terminate and timing), suspension rights, setoff rights and ability to recover collateral, etc. For example: unilateral exit from the eurozone by, say, Greece; 7 or 10 day bank holiday imposed by, say, Greece; Greece purports to redenominate all euro-denominated obligations of sovereigns/financial institutions/ corporates into new currency; and imposition of capital and exchange controls. 7. Consider insurance arrangements including existing insurance cover, counterparties, scope of cover and whether any new insurance products might be appropriate. Cash and investments 8. Check location of cash, counterparty risk and resilience of investment and custodian arrangements (in particular, legal risks relating to cash and securities). Lehman and MF Global have highlighted that legal documentation and/or implementation is often inadequate, and interpretation of client money rules in the English courts has created additional risks. For example: Cash: bank account in high risk jurisdiction or vulnerable counterparty? N.B. custodians usually hold cash as banker, with concomitant credit exposure. Securities: is it possible to demonstrate a proprietary claim? Focus on (i) intention of parties; (ii) whether property is to be kept separate from custodian s property; and (iii) whether property has been co-mingled. Bespoke custody arrangements: requires cost/benefit analysis. Consider (i) status of custodian (jurisdiction of incorporation; branch or subsidiary?); (ii) separate cash and securities accounts; (iii) use of sub-custodians; (iv) record keeping and reporting; and (v) whether custodians should be required to sweep cash balances to banks outside vulnerable eurozone countries on a frequent basis. SLAUGHTER AND MAY 03

5 Asset management 9. Ensure relevant business units are aware of legal risks relating to investments. For example: Government bonds: debt issued under law of higher risk jurisdictions will be more susceptible to writedown and/or introduction of collective action clauses. English law governed government debt (e.g. new bonds issued by Greece) is more difficult to restructure as negotiations with bondholders are likely to be required. Corporate bonds: a large number of eurobonds are issued under English law. However, if the corporate is based in another jurisdiction (e.g. Spain or Italy), eurobonds may be governed by the laws of the jurisdiction of the issuer. In addition to governing law and jurisdiction clauses, euro definitions and place of payment obligations, investors in corporate bonds are paying more attention to the jurisdiction of incorporation of the issuer/guarantors (particularly, if such issuers are based in higher risk jurisdictions). Bank debt: a member state could pass legislation or use existing legislation to write down bank debt (e.g. bonds/notes issued by eurozone banks) or switch off events of default/termination events. Directive 2001/24/EC ( CIWUD ) could also potentially be used to amend terms of foreign law governed bank debt or switch off events of default/termination events. CIWUD requires such measures to be recognised in other EU member states (including the UK). Financing arrangements 10. Check terms of material financing arrangements and consider whether amendments are desirable/ feasible (particularly if there is scope for a quick fix to improve the position, e.g. amendments to standard form documentation, amendments to internal policies/guidance and/or contract renewals). For example: Debt issuance/mtn programmes: monitor and, if required, update eurozone risk factors and related disclosures in offering documentation. The trend is towards more detailed disclosure. Committed bank facilities: for example, consider: bank counterparty risk; defaulting lender provisions; and ability to remove/replace agent. Repurchase agreements: check approach to standard GMRA documentation (if applicable) and consider whether to carry out a health check on material agreements. For example, consider: upgrading old master agreements (e.g. GMRA 1995); 04 SLAUGHTER AND MAY

6 including exclusive jurisdiction clauses (GMRA 1995 and GMRA 2000 contain non-exclusive jurisdiction clauses whereas GMRA 2011 contains an exclusive jurisdiction clause); continuity provisions, express termination provisions or other bespoke provisions; and nature of underlying securities/collateral. Derivatives: check approach to standard ISDA documentation and consider whether to carry out a health check on material agreements. Similar considerations to those outlined in relation to the GMRA documentation are likely to be relevant. In addition, consider: whether governed by 1992 or 2002 ISDA Master Agreement (e.g. illegality analysis easier under 2002 version); definitions of euro (these are likely to vary, depending on the transaction type and the ISDA definitions that are referred to in the confirmation); elections made regarding assignment and Offices/Multibranch Parties; the fact that the basic form of the 1992 ISDA Master Agreement does not include an impossibility or force majeure event (although such a termination event may have been incorporated through the schedule); impact of capital and exchange controls on ability to exercise self-help remedies; and adequacy of credit support/collateral. 11. Consider whether intra-group funding arrangements (e.g. inter-company loans and guarantees) have been documented and whether it would be preferable to amend them to help to reduce re-denomination risk. M&A and new transactions 12. Consider opportunities as well as risks. 13. Consider more targeted due diligence if an acquisition is contemplated. For example: establish whether the target group has material exposure to high risk jurisdictions; identify material contracts and assets which might be affected; and focus on issues relating to country risk (e.g. if the target has exposure to high risk jurisdictions), refinancing risk (e.g. if the target s financing arrangements may be vulnerable) and/or currency risk (e.g. if contracts are more susceptible to re-denomination in a euro exit scenario). SLAUGHTER AND MAY 05

7 14. Consider more bespoke provisions to address completion risk and valuation risk. For example: scope of MAC and force majeure provisions; use of deferred consideration, escrow arrangements and/or earn-out provisions; and use of credit support (e.g. letters of credit or bank guarantees). 06 SLAUGHTER AND MAY

8 Don t 1. Wait until it is too late the earlier you create a contingency plan, the longer you have to re-evaluate and test it in light of changing circumstances and the quicker it can be implemented. 2. Embark on contingency planning without understanding the legal risks (e.g. legal risks and implications of member state default, redenomination and capital and exchange controls) or undertake a legal due diligence exercise without considering how it fits in with the wider workstream and pressure points. 3. Waste time on scenarios which are less relevant to your business or which are considered unlikely unless the effect of the risk eventuating is considered material. 4. Ignore the regulatory overlay if your business is regulated. In particular: do not ignore anything that your regulators have said you must do about eurozone contingency planning; consider what you may need to disclose to your regulators about your eurozone contingency planning and do not assume that regulators will understand your corporate governance arrangements without further explanation; do not ignore the more technical features of compliance, such as regulatory capital and liquidity requirements, where these apply; do not disregard obligations to customers under any regulatory regime that applies and ensure that you also understand and act on contractual obligations to customers; do not allow staff to devise their own responses to regulators and customers enquiries about your readiness for a eurozone crisis without providing internal guidance on what they can and should say; if you are regulated in multiple jurisdictions, do not neglect to co-ordinate your engagement with regulators to ensure that each regulator understands your responses to eurozone problems and consistent information is provided to regulators; and do not forget to involve legal and compliance professionals within your organisation in decisions with legal or regulatory implications. If in doubt, involve them: their knowledge and experience may assist decisionmaking under pressure. SLAUGHTER AND MAY 07

9 5. Assume that the group s corporate governance framework and delegated authorities are fit for purpose. For example, consider whether any changes are appropriate in order to facilitate decision-making in a crisis (e.g. to allow the rapid movement of deposits or the amendment/termination of material contracts). 6. Forget to consider operations, infrastructure and systems. For example, consider whether any further contingency planning is necessary, e.g. impact on payment and settlement systems, IT systems and infrastructure. 7. Forget communications. This should include internal and external communications. For example, communications between group companies, customers, suppliers, employees and other stakeholders. A robust communication plan should be tested and should incorporate arrangements that allow key executives to contact each other and commence meetings or calls at very short notice in response to rapidly developing events. 8. Assume that enforcement will be straightforward if you obtain a judgment from an English court (e.g. consider (i) the approach of the court in the exiting member state; (ii) the identity of your counterparty (e.g. sovereign immunity issues?); (iii) the location of assets and collateral; and (iv) the potential impact of new legislation and capital and exchange controls). For material contracts with a connection to a high risk jurisdiction, it would be prudent to consider enforcement strategy and options as part of your contingency plan. 9. React too soon: establish your position on the basis of your contingency plan, risk assessment and objectives. Continue to monitor the market and your peers. 10. Assume that your contingency plan will remain the same: the situation should be closely monitored and the plan updated and stress-tested from time to time. 08 SLAUGHTER AND MAY

10 Related Publications Copenhagen and beyond progress in the Eurozone April 2012 Eurozone 2012 from crisis comes opportunity? March 2012 The Eurozone Crisis an indicative approach to contingency planning December 2011 Euro break-up/fragmentation impact on financing documentation December 2011 Eurozone Crisis, what do clients need to know? October 2011 These publications are all available at the following address: SLAUGHTER AND MAY 09

11 London Brussels Hong Kong Beijing One Bunhill Row Square de Meeûs 40 47th Floor, Jardine House 2903/2905 China World Office 2 London EC1Y 8YY 1000 Brussels One Connaught Place No.1 Jianguomenwai Avenue United Kingdom Belgium Central Beijing Hong Kong People s Republic of China T +44 (0) T +32 (0) T T F +44 (0) F +32 (0) F F Slaughter and May 2012 This material is for general information only and is not intended to provide legal advice. For further information, please speak to your usual Slaughter and May contact. isj21.indd512

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