USA Law and Practice Contributed by: Nicholas A Dorsey, Ryan J Patrone, Kelly M Smercina and Margaret R M Rallings, Cravath, Swaine & Moore LLP
5.4 Restrictions on Upstream Security The USA does not have general restrictions on the provision of upstream security; see 5.6 Other Restrictions for information on fraudulent con- veyance. 5.5 Financial Assistance The USA does not have general “financial assis - tance” tests that must be satisfied before a security can be granted; see 5.6 Other Restric- tions for information on fraudulent conveyance. The USA does not have general “corporate ben- efit” tests that must be satisfied before a secu- rity can be granted. In the USA, the focus is on the potential for fraudulent conveyance. There are two types of fraudulent conveyance that are potentially relevant to acquisition finance: actual fraud and constructive fraud. 5.6 Other Restrictions Fraudulent Conveyance Actual fraud can occur when there is actual intent to defraud a creditor. Constructive fraud can occur when: • “reasonably equivalent value” is not received by the borrower, issuer or guarantor, as appli- cable; and • such entity: (a) was insolvent at the time of the grant of security interest or guarantee (or is ren- dered insolvent as a result thereof); (b) was left with unreasonably small capital; or (c) intended or expected to incur debts beyond its ability to repay. Contribution and indemnification language can help address fraudulent conveyance considera- tions related to guarantees. When a guarantor makes a payment on behalf of the borrower,
the guarantor is subrogated to the rights of the lender against the borrower, and the borrower can separately agree to indemnify the guaran- tor. If the guarantor makes a payment on behalf of the borrower and is not in turn indemnified by the borrower, the other guarantors will agree to contribute their pro rata share based on their respective net worth. 5.7 General Principles of Enforcement Credit agreements and indentures will provide the lenders or bondholders, as applicable, with the ability to accelerate the indebtedness and commence enforcement following and during the continuance of an event of default. The abil- ity to actually enforce may be constrained by an intercreditor agreement, as discussed in 4.1 Typical Elements . In addition, when a borrower files for bankruptcy under the US federal bank- ruptcy code, an automatic stay will be imposed that prohibits pre-petition creditors from enforc- ing any security interests or collecting on pre- petition claims. A guarantee provides a direct legal claim against the guarantor, which can address structural sub- ordination that would otherwise exist in a given corporate structure. A guarantee may enhance the credit of the debt instrument, and may help protect lenders or bondholders in the event that the borrower or issuer itself has a valid legal defence to performing its obligations. For US finance structures that include guarantees, the guarantee is typically provided in the form of a downstream guarantee by a holding company parent of the borrower/issuer and/or upstream guarantees by the material subsidiaries of the borrower/issuer. 6. Guarantees 6.1 Types of Guarantees
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