Lock-up devices in recapitalisation proposals — lessons from Billabong

By Alberto Colla

The Takeovers Panel’s recent decision in Billabong is the first time it has had to consider the appropriateness of ‘lock-up’ devices put forward by a lender in a recapitalisation proposal for a financially distressed company. Lock-up devices in this context mean contractual loan terms that penalise the borrower if, for example, it repays the loan early or if there is a change in control of the borrower before a certain date. These penalties are intended to give the lender a level of ‘deal certainty’ that it will realise the full intended commercial benefit for which it is entering into the refinancing.

The recent contest for control of Billabong between two distressed debt investors illustrates that, in structuring a recapitalisation proposal, a lender is allowed to include deal protections in its favour but these must not ‘lock up’ the borrower to such an extent that other parties are deterred from submitting a competing refinancing or control proposal for the borrower.

In uncertain and challenging economic times, companies face a greater risk of financial distress. Hedge funds, private equity and large institutional investors are often attracted to investing in financially distressed companies. Their investment can take many forms but one that is becoming increasingly popular is a ‘loan to own’ (or control) recapitalisation…

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