Merger Without Assumption - ISDA Provision

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ISDA Anatomy™


In a Nutshell Section 5(a)(viii):

5(a)(viii) Merger Without Assumption. The party (or a Credit Support Provider) merges with or transfers or all or substantially all its assets to another entity and:―
(1) the resulting entity does not assume all the original party’s obligations under this Agreement (or Credit Support Document); or
(2) the Credit Support Document does cover the resulting party’s obligations under this Agreement.

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2002 ISDA full text of Section 5(a)(viii):

5(a)(viii) Merger Without Assumption. The party or any Credit Support Provider of such party consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, or reorganises, reincorporates or reconstitutes into or as, another entity and, at the time of such consolidation, amalgamation, merger, transfer, reorganisation, reincorporation or reconstitution:―
5(a)(viii)(1) the resulting, surviving or transferee entity fails to assume all the obligations of such party or such Credit Support Provider under this Agreement or any Credit Support Document to which it or its predecessor was a party; or
5(a)(viii)(2) the benefits of any Credit Support Document fail to extend (without the consent of the other party) to the performance by such resulting, surviving or transferee entity of its obligations under this Agreement.

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Click here for the text of Section 5(a)(viii) in the 1992 ISDA

Index: Click to expand:Navigation
See ISDA Comparison for a comparison between the 1992 ISDA and the 2002 ISDA.
The Varieties of ISDA Experience
Subject 2002 (wikitext) 1992 (wikitext) 1987 (wikitext)
Preamble Pre Pre Pre
Interpretation 1 1 1
Obligns/Payment 2 2 2
Representations 3 3 3
Agreements 4 4 4
EODs & Term Events 5 Events of Default: FTPDBreachCSDMisrepDUSTCross DefaultBankruptcyMWA Termination Events: IllegalityFMTax EventTEUMCEUMATE 5 Events of Default: FTPDBreachCSDMisrepDUSTCross DefaultBankruptcyMWA Termination Events: IllegalityTax EventTEUMCEUMATE 5 Events of Default: FTPDBreachCSDMisrepDUSSCross DefaultBankruptcyMWA Termination Events: IllegalityTax EventTEUMCEUM
Early Termination 6 Early Termination: ET right on EODET right on TEEffect of DesignationCalculations; Payment DatePayments on ETSet-off 6 Early Termination: ET right on EODET right on TEEffect of DesignationCalculationsPayments on ETSet-off 6 Early Termination: ET right on EODET right on TEEffect of DesignationCalculationsPayments on ET
Transfer 7 7 7
Contractual Currency 8 8 8
Miscellaneous 9 9 9
Offices; Multibranch Parties 10 10 10
Expenses 11 11 11
Notices 12 12 12
Governing Law 13 13 13
Definitions 14 14 14
Schedule Schedule Schedule Schedule
Termination Provisions Part 1 Part 1 Part 1
Tax Representations Part 2 Part 2 Part 2
Documents for Delivery Part 3 Part 3 Part 3
Miscellaneous Part 4 Part 4 Part 4
Other Provisions Part 5 Part 5 Part 5
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When a firm merges into, or is taken over by, another, some magical — or unexpected — things can happen. Not for nothing does the ISDA Master Agreement labour over the very description: that this might be a “consolidation, amalgamation, merger, transfer, reorganisation, reincorporation or reconstitution” — prolix even by ISDA’s lofty standards — should tell you something. Generations of lawyers have forged whole careers out of the manifold ways one can put companies together and take them apart again. Your correspondent is not one of them, and has little more to say about it, except that what happens to live contracts at the time of such chicanery will depend a lot on just how the companies or their assets are being joined or torn assunder.

If the ISDA Master Agreement and its extant Transactions carry across — which in a plain merger, they ought to — all well and good [1]

But in some cases the Transactions might not carry across. Perhaps the resulting entity has no power to transact swaps. Perhaps it is in a jurisdiction in which that cannot be enforced. Perhaps it just refuses to honour them. Merger Without Assumption addresses that contingency. This is the clause that would have been covered Section 5(a(ii)(2) repudiation, had the resulting entity accepted the contract at all in the first place. It can be triggered if:

  • The resulting party repudiates any outstanding Transactions under the ISDA Master Agreement; or
  • (in the case of a transfer of assets) a small rump of Transactions are left in the original entity, and not transferred at to the new entity. Now you would think this ought to be covered by Credit Event Upon Merger, wouldn't you, because if there were no deterioration in credit and the transferring entity was still around and hadn’t winked out of existence then,

And “all or substantially all” means?

There's not a lot of case law on it. Some say 90%. Some say 75%. Some people — your correspondent included — say “shoot me”.

See also

References

  1. Though watch out for traps: what if both merging companies have ISDAs with the same counterparty, but on markedly different terms? Which prevails? Do they both? Which one do you use for new Transactions? This you will have to hammer out across the negotiating table.