Designated Event - ISDA Provision

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2002 ISDA Master Agreement
A Jolly Contrarian owner’s manual

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Events of Default: 5(a)(i) Failure to Pay or Deliver5(a)(ii) Breach of Agreement5(a)(iii) Credit Support Default5(a)(iv) Misrepresentation5(a)(v) Default Under Specified Transaction5(a)(vi) Cross Default5(a)(vii) Bankruptcy5(a)(viii) Merger without Assumption
Termination Events: 5(b)(i) Illegality5(b)(ii) Force Majeure Event5(b)(iii) Tax Event5(b)(iv) Tax Event Upon Merger5(b)(v) Credit Event Upon Merger5(b)(vi) Additional Termination Event

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Definition of Designated Event in a Nutshell
Use at your own risk, campers!

A “Designated Event” means that the relevant entity:―

(1) merges with, or transfers substantially all of its assets into, or reorganises itself as another entity;
(2) comes under the effective voting control of another entity; or
(3) makes a substantial change in its capital structure by issuing or guaranteeing debt, equities or analogous interests, or securities convertible into them;

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Full text of Definition of Designated Event

A “Designated Event” with respect to X means that:―

(1) X consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets (or any substantial part of the assets comprising the business conducted by X as of the date of this ISDA Master Agreement) to, or reorganises, reincorporates or reconstitutes into or as, another entity;
(2) any person, related group of persons or entity acquires directly or indirectly the beneficial ownership of (A) equity securities having the power to elect a majority of the board of directors (or its equivalent) of X or (B) any other ownership interest enabling it to exercise control of X; or
(3) X effects any substantial change in its capital structure by means of the issuance, incurrence or guarantee of debt or the issuance of (A) preferred stock or other securities convertible into or exchangeable for debt or preferred stock or (B) in the case of entities other than corporations, any other form of ownership interest; or

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Related agreements and comparisons

Related Agreements
Click here for the text of Section Designated Event in the 1992 ISDA
Comparisons
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Content and comparisons

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Summary

Designated Event is part of the definition of Credit Event Upon Merger in the 2002 ISDA, and doesn't have an equivalent in the 1992 ISDA. These are mainly those merger type activities that no-one has ever managed to conveniently label[1] including consolidation, amalgamation, merger, whole-business transfers, reorganisation, reincorporation or reconstitution, or taking control of the company, or changing its capital structure — including creating indebtedness...

Say what?

But issuing indebtedness though?

Question is how significant a debt issuance would it have to be to be a material change in the company’s capital structure?

Some learned commentators feel this is rather harsh, especially if you’re in the finance game, where raising indebtedness is part of what you do. Arguably, a bank deposit is a form of indebtedness. Loosely, so is any negative credit exposure. Likewise, the stricture applies to all Credit Support Providers and Specified Entities, so woe betide if one of those is a financial institution too.

The pragmatist might well say, “yeah, that’s how it reads, but no one would ever take the point right?” While it’s bracing to hear such an expression of trust and confidence in the bona fides of one’s fellow merchant in the markets, just “trusting one other” is not really the vibe of the international derivatives documentation community, and in any case if no one needs this clause, why write it in?
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General discussion

All or substantially all is a modifier calculated to snooker that smart Alec who, for example, sells his entire business barring a single chair, to avoid breaching a covenant preventing him from disposing of “all of the business”. This is not the behaviour of a good egg and the better question to ask yourself is why you did business with him in the first place.

In any case, your qualifier leads only to a different kind of uncertainty: what counts as “substantial”? Discussions on the in-any-case tedious topic of Credit Event Upon Merger and Merger Without Assumption tend quickly to go this way. The countless learned articles and client briefing notes on the topic (let me Google that for you) will tell you that the benefit of this kind of drafting accrues mainly to those in the legal profession, but even then only through their very fear and loathing of the notion.
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See also

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References

  1. And no, “Designated Event” does not count as a convenient descriptive label.