Merger Without Assumption - ISDA Provision
2002 ISDA Master Agreement
Section 5(a)(viii) in full
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As the comparison illustrates (see panel below right), ISDA’s crack drafting squad™ giveth and ISDA’s crack drafting squad™ taketh away. As it neatly excises one square of flannel here, it inserts another one, further itemising ways in which a company might reorganise itself, there. In practical terms — ones that might make a difference were they to be considered by the Queen’s Bench Division, that is — no real change between 1992 ISDA and 2002 ISDA.
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 the lofty standardsof ISDA’s crack drafting squad™ — should tell you something. Generations of corporate lawyers have forged whole careers — some never leaving the confines of their law practices for forty or more years — out of the manifold ways one can put companies together and take them apart again.
Your correspondent is not one of those people and has little more to say about mergers, except that what happens to live contracts at the time of such chicanery will depend a lot on just how the companies and their assets are being joined together 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 - 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.
But in some cases, Transactions might not carry across. Perhaps the resulting entity has no power to transact swaps. Perhaps it is in a jurisdiction in which they — or ISDA’s sainted close-out netting provisions, about which so many tears and so much blood is annually spilled — cannot be enforced. Perhaps the new entity just refuses to honour them.
Merger Without Assumption addresses all of these contingencies.
This is the clause that would have been covered by 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 otherwise they are not binding on it); or any Credit Support Document stops working as a result of the merger.
And “all or substantially all” means what exactly?
There’s not a lot of case law on it. Some say 90%. Some say 75%. Some people — your correspondent included — say “shoot me”.
But, interestingly, Merger Without Assumption doesn’t seem to bite where one entity transferred all of its assets, half-half, into two distinct entities. I dunno — could it happen? Search me. You’ll have to go and find one of those corporate lawyers I was talking about before to find that out. They love that kind of stuff.