Justin Forlenza Speaks on Open Market Purchases
The market has seized on deficient (or simply insufficiently-protective) credit agreement language to engage in these kinds of transactions. Although the 2017 NYDJ uptier transaction is more widely known, BioScrip utilized a more Serta-style uptier approach as early as 2017 ( with relatively little fanfare, as it entered into a $25 million priming credit facility via an amendment to its credit agreement; even earlier private examples are certainly possible).1 This approach was then infrequently utilized until the COVID market dislocation in 2020, when we saw the well-known trifecta of uptier transactions (Serta, TriMark, and Boardriders).
There are a few interesting issues here. First, as a documentation matter, the question is how “open†does a repurchase have to be to qualify as an “open market purchase†under a typical credit agreement?
There is a stark contrast between the “open market purchase†interpretations offered by Judge Jones and Judge Failla. Judge Jones found that the phrase was unambiguous, as a matter of law, and therefore permitted the uptier Serta transaction. He stated that these are “sophisticated parties†who chose specific words, and it was clear to him that the uptier process fit within the phrase as it was “intended by the agreements….†that the term would cover this kind of transaction.2
Judge Failla, in contrast, was much more skeptical, and she ruled that the phrase “open market purchase†was ambiguous. She relied on the common understanding of the term “open market,†both per the Black’s Law Dictionary definition and a 2009 Weil (counsel for Serta) market alert, indicating that there must be an actual “market†for any such transactions. This is similar to the approach taken by Judge Masley in the Boardriders litigation, who (in interpreting New York State contract law) ruled that the phrase was “undefined … and reasonably susceptible of more than one interpretation….†So these are two judges in favor of ambiguity and one against; this does not provide market participants with much certainty on this point.
Market responses have been mixed. The prevalence of “Serta blockers†(which require heightened consent for subordination amendments) has significantly increased in the post-Serta period, but around 67% of loans in the CS Leveraged Loan Index still allow majority consent for uptier amendments as of Q1 2023. Lender incentives may cut both ways; some lenders have pushed for Serta blockers, but others may want to preserve majority priming voting schemes for optionality. Conversely, some post-Serta sponsor deals now expressly allow “privately negotiated†purchases to comprise open market purchases.
In my view, it is impossible to draft to close all the potential holes in a credit agreement. Clever lawyers and finance professionals will always be scouring the 200+ page agreements in order to find potential ways to preserve value for equity holders. As such, although Serta blockers are helpful, they are certainly not comprehensive. This is probably why we’ve seen an uptick in lender cooperation agreements, which essentially allow >50% of lenders to pre-agree not to engage in an uptier transaction. It is also difficult to see what the bounds of an “open market transaction†would actually be based on the Bankruptcy Court’s interpretation. Expert declarations provided in the Serta litigation also indicate that the common understanding of the phrase in this context is to dealer intermediated purchase transactions.3 As well, good faith and fair dealing claims are still pending, and so there may be additional judicial oversight applied to uptiers under that doctrine.
Ultimately, the economic utility of uptier transactions is unclear, as Serta and others have still ended in bankruptcy. As of today, there is no certainty, though the Serta and other litigations have clearly not dissuaded companies from attempting uptier transactions if they are (arguably) permissible under the debt documents.
1 See the January 9, 2017 8-K here.
2 These are paraphrasings of his statements taken from the audio file of the related hearing.
3 See the declarations of Professor Vincent Buccola and Marti P. Murray that were filed in the Serta adversary proceeding.
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