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Covenants 101: Controlling the Vote With Anti-Cooperation Agreement Language

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Legal Research: Sylvana Lee, Julian Bulaon

Liability management exercises, or LMEs, come in many flavors but can generally be separated into one of two top-level categories: (1) the “deal-away” and (2) the “consensual” LME. The “deal-away” is the deal you do with a third party, “away” from your existing lenders (e.g., a third party drop-down financing). The “consensual” LME, by contrast, is the deal struck with existing lenders, typically those holding at least a majority in one or more tranches of the outstanding debt.

Looking at the past 24 months of U.S. activity – against the backdrop of relatively muted European LME activity – one thing stands out: The consensual deal dominates. The consensual LME is generally regarded as the preferred option for borrowers due to its breadth. While a deal-away offers quick liquidity without existing lender consent, a consensual LME raises new money, extends maturities and captures discounts. With the requisite majorities, it can also amend existing debt documents to allow a broader range of transaction structures.

The deal-away, by contrast, appears less frequently among the list of LMEs completed in recent years, but the threat of it is a fixture at the bargaining table, often serving as the base case or stalking-horse proposal against which existing lenders must compete. Still, “99 % of the time, the deal goes back to existing lenders,” Gibson Dunn’s Scott Greenberg noted in a recent interview with Bloomberg.

The near inevitability of the “consensual” deal effectively puts borrowers and lenders in a race to control the vote, specifically the majority or “Required Lender” vote needed to amend the loan documents. Because the makeup of that majority can determine the outcome, borrowers, sponsors and lender factions all try to shape its membership. Incumbent lenders can band together to block or force negotiations on consent-based transactions, but their power as a group is hardly invulnerable, as many modern credit agreements grant borrowers latitude to dilute, deny or even divide the voting power of Required Lender groups.

In this special Covenants 101 series, we explore the evolution of the various tools that borrowers and sponsors can use to “control the vote” in anticipation of or even during an LME.

In this first installment, we discuss the emerging concept of “anti-cooperation” provisions in U.S. and European loan documents, an aggressive term that – though it has yet to clear the market – reflects the latest attempt by borrowers and sponsors to control the voting power of lender groups.
 

Key Takeaways
 

  • Cooperation agreements enable lenders to gain control by coordinating voting as a collective lender group. In order to negate their impact, sponsors and borrowers are introducing anti-cooperation language to block coordinated lender actions, enabling them to structure LMEs with preferred lenders while sidelining any dissenting minorities.
     
  • Proposed anti-cooperation language seen in the market includes one or a combination of the following provisions: (i) undertaking that prohibits the entry into cooperation agreements; (ii) disenfranchisement of the vote of Co-op Lenders; (iii) transfer restrictions to Co-op Lenders; (iv) Co-op Lender replacement provisions; and/or (v) invalidating cooperation agreements by way of the entire agreement clause.
     
  • Anti-cooperation provisions have yet to clear the market at the time of writing, but sponsors and borrowers are highly likely to continue to attempt these provisions.

 

Anti-Cooperation Language: Borrowers, Sponsors Seek to Divide and Conquer

A creditor versus debtor tug of war has ensued since the landmark J.Crew asset drop-down, a transaction that redefined the boundaries of liability management and sparked renewed scrutiny of covenant protections. On one side, the borrowers and sponsors seek to exploit flexibilities in facilities agreements to pursue innovative LMEs, and on the other, lenders react by pushing for “blockers” into documents to close off any loopholes that enable these LMEs. This constant push and pull has led to an expanding checklist of contractual safeguards or “blockers,” from J.Crew to Serta, Chewy to Pluralsight and Envision to At Home, to name a few – each designed to anticipate and block the evolving tactics used in LMEs. Some lenders have gone as far as introducing omni-blockers – so far seen in U.S. credit documentation only – which attempts to generally prohibit all manner of tested LMEs in one clause.

Although blockers can offer some protection against LMEs, its inclusion and level of protection remains subject to heavy negotiation. As a result, lenders are increasingly turning to a more assertive tool to prevent lender-on-lender conflicts in a consensual LME scenario: the cooperation agreement.

Cooperation agreements are used by lenders ahead of a restructuring to enable them to coordinate their actions as a group and present a unified front in negotiations with the borrower, thereby strengthening their collective bargaining power. Although each agreement is tailored to the specific circumstances, a central provision typically ensures that a defined supermajority of lenders party to the cooperation agreement, or Co-op Lenders, can enforce a settlement or action, with no option for dissenting lenders to opt out. The aim of cooperation agreements is to minimize hostility and coercion among the lenders and maximize the chance of controlling the vote in securing the best possible outcome for the whole lender group.

Sponsors and borrowers are pushing back against the use of cooperation agreements in order to leverage majority/minority lender dynamics in achieving the most favorable deal and to preserve their ability to pursue LMEs with their preferred lender group. This has given rise to the emergence of “anti-cooperation” provisions on both sides of the Atlantic.
 

There’s No ‘I’ in Team, but There Is in ‘Anti’

The concept of cooperation agreements is not new, though they gained traction in 2024, which drew increased focus on their potential to mitigate the impact of consensual LMEs. In response, various sponsors and law firms are attempting to introduce anti-cooperation agreement language into loan documents. Within this context, we explore examples of the language that has emerged so far. It is worth noting that, at the time of writing, no anti-cooperation agreement provisions have cleared the market in Europe or North America.
 

Invalidating Cooperation Agreements

The first type of anti-cooperation language to emerge is one that seeks to void any cooperation agreements entered into by the lenders:
 

Section [x] Counterparts; Integration; Effectiveness. This Agreement and the other Loan Documents, and any separate letter agreements with respect to fees payable to the Administrative Agent, constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof and other matters referenced herein or therein, and all other agreements, understandings and proposals, whether written or oral, which alter or have the effect of altering the provisions in this Agreement and/or the other Loan Documents, including, without limitation, any cooperation agreement, coordination agreement or other similar voting agreement with respect to the Borrowers’ indebtedness, securities or equity interests (any such agreement, understanding or proposal, a “Cooperation Agreement”), unless the express written consent of the Borrower is obtained with respect thereto. Any such Cooperation Agreement that does not comply with this Section [x] shall be void ab initio.
Interestingly, the language is inserted into the boilerplate “entire agreement” clause, which typically asserts that the finance documents represent the complete agreement between the parties, superseding any prior discussions, statements or agreements. There are two key reasons why this language seems illogical, raising questions as to its validity:
 
  1. Cooperation agreements do not affect the terms of the loan or the loan documentation as between the lenders and the borrowers; further, only the lenders are party to such agreements. It is, therefore, questionable how a borrower could invalidate an agreement to which they are not a party to, simply by relying on such a clause in the facilities agreement.
     
  2. The purpose of an entire agreement clause is to confirm that the written contract encompasses all terms agreed upon, irrespective of any prior statements or agreements. Given that cooperation agreements may likely be signed after the date of the facilities agreement, it would appear misplaced to try to exclude cooperation agreements within this provision.
     
The inclusion of the anti-cooperation language in the entire agreement clause also raises questions as to whether this is a deliberate attempt to disguise anti-cooperation language within a clause that typically attracts less scrutiny or attention.
Prohibiting Entry Into Cooperation Agreements
The second type of anti-cooperation language includes terms that prohibit or discourage the entry into cooperation agreements through a combination of provisions:
 
1. An undertaking from lenders that they will not enter in co-operation agreements:
 
Section [x] Counterparts; Integration; Effectiveness. … Each Lender hereby represents, agrees and warrants that it has not and, during the term of this Credit Agreement, will not enter into any cooperation agreement, support agreement, lock-up agreement, coordination agreement or other similar voting agreement with respect to the Borrower’s indebtedness, securities or equity interests (any such agreement, a “Cooperation Agreement”).
 
Remarkably, the undertaking has also been seen to be drafted into the entire agreement clause.
 
 2. A prohibition on the transfer to a Co-op Lender (by extending the definition of “Disqualified Lender” under U.S. credit documents or “Defaulting Lender” under European documents) coupled with a yank-the-bank right. Note that the concept of “Defaulting Lender” in European facilities agreements is more akin to the “Disqualified Lender” concept in U.S. credit agreements and should not be confused with the use of the “Defaulting Lender” term in the United States. For the purposes of this article, we will use the term “Disqualified Lender” to collectively refer to the “Disqualified Lender” concept under U.S. loans and the “Defaulting Lender” concept under European loans.
The effect of inclusion of a Co-op Lender as a Disqualified Lender is twofold: (1) a lender is prohibited from transferring its commitments to a Disqualified Lender; and (2) if a lender becomes a Disqualified Lender itself or purports to make a transfer to a Disqualified Lender in breach of (1), the borrower has the right to replace such a lender. This yank-the-bank right may be further strengthened by allowing borrowers to replace a lender at below-par value.
 
“Disqualified Lender” means . . .(d) any Lender who is party to a Cooperation Agreement;

Replacement of Disqualified Lenders.

(i) To the extent that any assignment or participation is made or purported to be made to a Disqualified Lender … or if any Lender or Participant becomes a Disqualified Lender …, in each case, without limiting any other provision of the Loan Documents,

(A) upon the request of the Borrower, such Disqualified Lender shall be required immediately (and in any event within […] Business Days) to assign all or any portion of the Loans and Commitments then owned by such Disqualified Lender (or held as a participation) to another Lender (other than a Defaulting Lender or another Disqualified Lender), Eligible Assignee or the Borrower, and

(B) the Borrower shall have the right to prepay all or any portion of the Loans and Commitments then owned by such Disqualified Lender (or held as a participation), and if applicable, terminate the Commitments of such Disqualified Lender, in whole or in part.

(ii) Any such assignment or prepayment shall be made in exchange for an amount equal to the lesser of (A) the face principal amount of the Loans so assigned and (B) the amount that such Disqualified Lender paid to acquire such Commitments and/or Loans…
 

 
Disenfranchisement From Voting
A third example of anti-cooperation language seeks to disenfranchise the vote of lenders who enter into cooperation agreements.

In European documents, this is achieved by expanding the definition of “Defaulting Lender” to include lenders or their affiliates who enter a cooperation agreement (or similar) without borrower consent. Defaulting Lenders in European documents are typically always disenfranchised from voting.

The equivalent of the above is achieved in U.S. credit documentation by including lenders that enter into cooperation agreements in the definition of “Disqualified Lender” as above.
 

(i) Disqualified Lenders
 
No […] Disqualified Lender shall have any right to approve or disapprove any amendment, waiver or consent hereunder (and any amendment, waiver or consent which by its terms requires the consent of all Lenders, the Required Lenders, the Required Facility Lenders or each affected Lender may be effected with the consent of the applicable Lenders other than […] Disqualified Lender)…
 
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Although none of the anti-cooperation provisions discussed have successfully cleared the market, the involvement of at least six sponsors and four law firms in recent transactions that attempted to include such language suggests growing interest. Given this momentum, we expect that further attempts are highly likely.

In summary, cooperation agreements and, by extension, anti-cooperation provisions, are most impactful in the context of consensual LMEs. The aim of cooperation agreements is not to prohibit consensual deals but to establish who is in the driver’s seat in an LME scenario. From borrowers’ perspectives, preventing cooperation agreements shifts control back into their hands, enabling them to structure a consensual LME with a preferred group of lenders offering the most favorable deal, while sidelining dissenting minorities. Proposed anti-cooperation language seen in the market accomplishes this by prohibiting the entry into cooperation agreements altogether, or by neutralizing their impact by way of disenfranchising the vote of or by replacing any Co-op Lender, effectively defanging such agreements.