USA Law and Practice Contributed by: Stelios G Saffos, Dan Seale, Peter Sluka and Alfred Xue, Latham & Watkins LLP
5.10 Appointment of Collateral Agent In financings provided by multiple lenders in the Unit - ed States, such lenders typically appoint a collateral agent under the credit agreement to hold security inter - est in collateral granted by debtors on behalf of such lenders. There is no US law requirement that security interest be granted directly to each lender individually, nor is there any requirement that the collateral agent be licensed or regulated in the taking or holding of collateral. If a loan is assigned by a lender (assignor) to a new lender (assignee), typically pursuant to an assumption and assumption agreement attached as an exhibit to the credit agreement, the assignee will purchase and assume all of the assignor’s rights and obligations under the credit documents, including all rights of the assignor as a secured party in the col - lateral. No additional steps to re-grant or re-perfect liens would be needed. 6. Enforcement 6.1 Enforcement of Collateral by Non-Bank Secured Lenders Remedies are available for lenders with a valid security interest immediately upon the occurrence of a default or an event of default on the secured obligations, sub - ject to any contractual agreements to the contrary and application of the “automatic stay” in the event that the grantor is subject to a bankruptcy proceeding. The definitive documentation under private credit trans - actions usually rigorously defines what constitutes a “default” or “event of default” (or like term) after which the secured party may exercise remedies against the collateral. Although creditors that are secured parties generally have the option of judicial enforcement, out- of-court “self-help” options are available under the UCC, which are cheaper, faster, and therefore much more common than resorting to judicial remedies. Among other self-help remedies, a secured party may commence collection activities with respect to depos - it accounts, receivables or other rights to payment, repossess and/or sell collateral, and exercise rights of set-off. Any exercise of remedies or enforcement by a secured party is required to not result in a breach of the peace and in general must be commercially reasonable. The UCC also requires various notices in connection with the exercise of certain remedies
such as sales of collateral or retention of collateral in full satisfaction of the debt, but market practice has also imposed various contractual limits (usually con - tained in the applicable collateral agreement) on the enforcement of security without additional notices or grace periods. Private credit transactions commonly include an equi - ty pledge of the borrower and its subsidiaries, and if an out-of-court foreclosure sale is contemplated, a sale of some or all of the equity of the company group is an attractive option. Prior to or in connec - tion with such enforcement, the secured party may wish to exercise voting or other rights inuring to the holders of such equity interests, including replacing the board of directors or other governing body of the borrower, but any such voting or proxy rights must be specifically negotiated in the security agreement and may be subject to limitations under the borrower’s organisational documents. Even so, secured lenders may not have an opportu - nity to exercise self-help remedies before the debtor seeks the protection of the US Bankruptcy Code. Alternatively, lenders and a debtor may reach a con - sensual out-of-court agreement whereby the debt - or will peacefully transfer collateral to the lender in exchange for consideration such as releases and/or residual equity, etc. 6.2 Foreign Law and Jurisdiction The United States comprises multiple states’ jurisdic - tions, and any agreement must specify the state law that will govern (as opposed to federal law). Typically, the law of the state of New York is chosen as the gov - erning law for sophisticated debt financing transac - tions in the United States, particularly for acquisition financings. This is the most common governing law for private debt unitranche deals, broadly syndicated deals and capital markets transactions, including bond financings. It is also common for New York law to govern acquisition financings of non-US acquisi - tions. While the laws of California and Illinois were historically used for lower-middle-market transac - tions, the overwhelming majority of sophisticated debt documents are governed by New York law in current practice.
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