Glossary
Change of control clause
Change of control clause (clause de changement de contrôle)
A change of control clause gives lenders the right to be repaid when the borrower’s main shareholder loses control of the company.
Definition
The change of control clause protects a lender that granted its credit on the basis of the existing shareholder. The facility agreement defines the triggering event. Under French law, article L. 233-3 of the Commercial Code considers that a person controls a company when it holds a majority of the voting rights, and presumes such control above 40% of the voting rights if no other shareholder holds a larger stake. In European leveraged financings, the trigger used is the loss by the original investors of a majority of the borrower’s share capital. After an initial public offering, this threshold frequently falls to 35%, provided the original investors remain the largest shareholder. Traditional LMA style agreements require the immediate repayment of all lenders. More recent agreements give each lender an individual repayment option, so that lenders satisfied with the new shareholder stay in place. US agreements treat a change of control as an event of default. High yield bonds give holders the right to sell their securities at 101% of par. A portability clause neutralises the mandatory repayment when a leverage or rating test is met; it remains rare in loans. For the borrower, the clause weighs on the price of a future sale: without portability, the buyer plans the financing needed to repay every lender that exercises its option.
Worked example
An investment fund holds 70% of a services company financed by a €140m unitranche loan. It sells its stake to an industrial buyer. The agreement provides for an individual option: two of the three lenders, together holding €95m, request repayment. The buyer includes this €95m in its financing plan at the date of the sale.
Points to check
- The definition of control used in the agreement: capital threshold, voting rights, power of appointment
- The threshold applicable after an initial public offering
- Mandatory repayment of all lenders or an individual option for each lender
- The presence of a portability clause and its leverage test
- The period given to lenders to exercise their option
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