ERISA Provisions in Credit Agreements: Borrowers versus Lenders | Practical Law

ERISA Provisions in Credit Agreements: Borrowers versus Lenders | Practical Law

An explanation of potential negotiating positions on ERISA provisions in credit and financing agreements from both the borrower and lender perspectives.

ERISA Provisions in Credit Agreements: Borrowers versus Lenders

Practical Law Legal Update 8-544-6898 (Approx. 3 pages)

ERISA Provisions in Credit Agreements: Borrowers versus Lenders

by Practical Law Employee Benefits & Executive Compensation
Published on 08 Oct 2013USA (National/Federal)
An explanation of potential negotiating positions on ERISA provisions in credit and financing agreements from both the borrower and lender perspectives.
ERISA provisions in credit and other financing agreements are often not as extensive as those found in purchase and merger agreements, where they serve to alert and protect buyers against costly compliance problems. While the provisions in credit agreements also can be used during negotiations to identify potential liabilities of the borrower, the primary focus is typically on defined benefit plan funding and termination liabilities, especially to the extent that they can give rise to liens or other rights that could impair the lender's rights. Potential liabilities under defined contribution and welfare benefit plans are generally covered collectively (if at all) in credit agreements by a generic plan compliance representation from the borrowing parties.
However, because of the potential liabilities that can arise from non-compliant insured welfare plans under the Patient Protection and Affordable Care Act, lenders are focusing more closely on the representations and covenants concerning other employee benefit plans. Understanding the issues that lenders focus on allows borrowers to better analyze the matters that they need to address.
If a borrower is sufficiently creditworthy and money is readily available for lending, lenders may be more generous. Borrowers may be able to negotiate more favorable provisions for matters arising under ERISA in their credit and financing agreements, including those relating to:
  • Definitions.
  • Representations and warranties.
  • Affirmative covenants.
For example, where the borrower and its affiliates do not maintain a defined benefit plan or do not have an obligation to contribute to a multiemployer plan, many borrowers try to negotiate away the provisions dealing with defined benefit plans or multiemployer plans by representing that neither the borrower nor any ERISA affiliate maintains these types of plans. However, due to an acquisition or adoption of a collective bargaining agreement after the execution of the loan, the borrower or its affiliates may find themselves:
  • Sponsoring a defined benefit plan.
  • Obligated to contribute to a multiemployer plan.
If either of these situations occurs, the lender may be without recourse if it failed to include a full set of representations, notices and events of default. Therefore, lenders prefer to include all provisions, even though some may be irrelevant at the time of the loan's execution (see Standard Clauses, ERISA Provisions for Credit and Financing Agreements (Lender-friendly)).
An alternative often favored by borrowers is for the borrower to make the "no plan" representation, with the borrower required to give the lender notice if it becomes:
  • Obligated to contribute to a defined benefit plan.
  • Subject to any liabilities with respect to a multiemployer plan.
An option more acceptable to lenders, but less preferable to borrowers, is to treat these as automatic events of default.
In general, borrowers usually find it difficult to get lenders to agree to very limited ERISA provisions without some modification. Practical Law's Standard Clauses, ERISA Provisions for Credit and Financing Agreements (Borrower-friendly) set out borrower-friendly, limited ERISA provisions that can form a creditworthy borrower's starting point for negotiations.
For a summary of the ERISA issues involved when negotiating credit and financing agreements, including plan funding and termination liability, controlled group liability and reportable events, see Practical Law's Practice Note, Guide to ERISA Provisions in Credit and Financing Agreements.