The process of restructuring a loan facility opens the door to significant litigation and regulatory exposure for lenders.
Typically, once a borrower defaults on its loan facility, a restructuring unfolds on two tracks. The borrower and agent for the loan syndicate work to renegotiate terms of the underlying loan. At the same time, the agent for the loan syndicate and its counsel, on the one hand, and members of the loan syndicate, on the other hand, hold separate discussions that focus not only on confidential information provided by the borrower about its business and financial operations, but also on the lender group's legal options including litigation, foreclosure and bankruptcy. Given the sensitive nature of these lender group discussions — and the potential for regulatory liability — these communications must be carefully managed.
Conventional wisdom holds that discussions between members of the loan syndicate are protected from disclosure by the "common interest" privilege, a legal doctrine based on the attorney-client privilege that protects communications when there is an "ongoing common enterprise." In essence, the common-interest privilege expands the attorney-client privilege to protect communications with nonclients who have an expectation of confidentiality because they share common problems or issues in pending or threatened civil litigation, so long as the nature of their legal interests is identical.
A recent case, HSH Nordbank AG New York Branch v. Swerdlow, illustrates the importance of managing risks inherent in these multiparty negotiations. The court ruled that discussions between loan syndicate members were protected by the common-interest privilege, even when counsel for the agent bank communicated directly with nonparty lenders and not through their legal counsel. In reaching that conclusion, the court emphasized the following factors: First, the loan agreement identified the agent bank as the only party capable of enforcing rights upon a default and contemplated that agent's counsel would represent the interests of all various lenders. Second, the lender group entered into a written common-interest agreement, which supported the expectation that its communications would be confidential. Third, the lenders' communications focused on their legal rights, although there was overlapping discussion concerning the lenders' business interests.
In evaluating their ability to successfully invoke the common-interest privilege, lenders should consider whether there is a disparity in interests among members of the loan syndicate; determine the degree to which the information the group receives can be shared by members later added to the common-interest group, and whether this creates any potential conflicts; understand what effect the agreement will have on future investment or divestment of interests in the borrower, and determine if it is consistent with the lender's investment objectives; and decide on a clear termination point for obligations under the agreement.
In practice, most lenders and their counsel prefer to have an oral common-interest understanding to preserve the broadest flexibility and expectations of confidentiality, although lenders should weigh this flexibility against the clarity of a written agreement.
The confidential information provided to the lenders by the borrower also creates the potential for substantial regulatory exposure, and, in fact, is a dangerous double-edged sword. On the one hand, to perform diligence and evaluate the borrower's creditworthiness, lenders need access to nonpublic information about the borrower. This same information, if not properly managed, might also serve as the foundation for charges of insider trading or fraud. In managing such confidential information, lenders should understand the limitations and consequences created by all confidentiality arrangements in place with the borrower; provide direction to counsel about what information they want the attorney to obtain on their behalf; reconsider compliance procedures to guard against insider-trading exposure; and ensure an effective process is in place for all group conversations.