Private Placement Financial Covenants Reference Manual

Covenant 1.01	Change in Control (with provision for contemporaneous prepayment)
Covenant 1.02	Change in Control (without provision for contemporaneous prepayment)

Addendum 1.21	Percentage of shares
Addendum 1.22	Management and policies
Addendum 1.23	Majority of directors
Addendum 1.24	Continuity of staggered board

Addendum 1.31	Percentage of shares
Addendum 1.32	Percentage of voting stock; Exchange Act definitions
Addendum 1.33	Directors; property; Exchange Act definitions

Addendum 1.41

Individual ceases to hold office

Addendum 1.51

Fully diluted basis

Addendum 1.61	"Family"
Addendum 1.62	"Family Trusts"

Commentary: The approach to the "Change in Control" circumstance that is most commonly used in private placements is an arrangement in which each holder of a Note may decide, when confronted with the imminent or recently completed Change in Control event, to be prepaid in full or to continue with its investment. The first variation of the covenant presented here accomplishes that by mandating that the Company make an offer to prepay each Note when any one of the events listed in the definition of "Change in Control" occurs or the Company contemplates participating in action that will result in a Change in Control. The second variation requires that the offer only be made once the Change in Control has occurred.¹ While not presented here, the parties may consider alternative approaches, if anything is to be said about Change in Control at all. The events constituting a Change in Control could be included in the default clause as a Default or Event of Default. That has the effect of requiring a concert of action by the holders as distinguished from individual choices that may be permitted by the offer to prepay approach. Another approach would be to provide an increase in interest rate if the Change in Control event were followed within a certain time by a downgrade of some specified magnitude of the Company's senior debt by a recognized rating agency. The major choice, after deciding whether the covenant will be included in the transaction, is how to define "Change in Control." The definition usually lists several alternative events that are carefully drafted to fit the unique circumstances of the Company, its ownership structure and its control vulnerabilities. The Addenda presented in this chapter show several generic events often seen in "Change in Control" definitions, but this is an area in which customization is usually appropriate.

Covenant 1.01 (with provision for contemporaneous prepayment)

Change in Control.2 , 3      (a) Notice of Change in Control or Control Event. The Company will, within [ ___ ] Business Days after any Responsible Officer has knowledge of the occurrence of any Change in Control or Control Event, give written notice of such Change in Control or Control Event to each holder of Notes unless notice in respect of such Change in Control (or the Change in Control contemplated by such Control Event) shall have been given pursuant to subparagraph (b) of this Section [ ___ ]. If a Change in Control has occurred, such notice shall contain and constitute an offer to prepay4 Notes as described in subparagraph (c) of this Section [ ___ ] and shall be accompanied by the certificate described in subparagraph (g) of this Section [ ___ ].      (b) Condition to Company Action. The Company will not take any action that consummates or finalizes a Change in Control unless (i) at least [ ___ ] days prior to such action it shall have given to each holder of Notes written notice containing and constituting an offer to prepay Notes as described in subparagraph (c) of this Section [ ___ ], accompanied by the certificate described in subparagraph (g) of this Section [ ___ ], and (ii) contemporaneously with such action, it prepays all Notes required to be prepaid in accordance with this Section [ ___ ].      (c) Offer to Prepay Notes. The offer to prepay Notes contemplated by subparagraphs (a) and (b) of this Section [ ___ ] shall be an offer to prepay, in accordance with and subject to this Section [ ___ ], all, but not less than all, the Notes held by each holder (in this case only, "holder" in respect of any Note registered in the name of a nominee for a disclosed beneficial owner shall mean such beneficial owner) on a date specified in such offer (the "Proposed Prepayment Date"). If such Proposed Prepayment Date is in connection with an offer contemplated by subparagraph (a) of this Section [ ___ ], such date shall be not less than [ ___ ] days and not more than [ ___ ] days after the date of such offer (if the Proposed Prepayment Date shall not be specified in such offer, the Proposed Prepayment Date shall be the [ ___ ]th day after the date of such offer).      (d) Acceptance[; Rejection]. A holder of Notes may accept the offer to prepay made pursuant to this Section [ ___ ] by causing a notice of such acceptance to be delivered to the Company at least [ ___ ] days prior to the Proposed Prepayment Date.5 , 6 A failure by a holder of Notes to respond to an offer to prepay made pursuant to this Section [ ___ ] shall be deemed to constitute [an acceptance] [a rejection] of such offer by such holder.      (e) Prepayment. Prepayment of the Notes to be prepaid pursuant to this Section [ ___ ] shall be at 100% of the principal amount of such Notes, plus the [Make-Whole Amount determined] [premium specified in Section [ ___ ]] for the date of prepayment with respect to such principal amount,7 together with interest on such Notes accrued to the date of prepayment. On the Business Day preceding the date of prepayment, the Company shall deliver to each holder of Notes being prepaid a statement showing the [Make-Whole Amount] [amount of the premium] due in connection with such prepayment and setting forth the details of the computation of such amount. The prepayment shall be made on the Proposed Prepayment Date except as provided in subparagraph (f) of this Section [ ___ ].      (f) Deferral Pending Change in Control. The obligation of the Company to prepay Notes pursuant to the offers required by subparagraph (b) and accepted in accordance with subparagraph (d) of this Section [ ___ ] is subject to the occurrence of the Change in Control in respect of which such offers and acceptances shall have been made. In the event that such Change in Control does not occur on the Proposed Prepayment Date in respect thereof, the prepayment shall be deferred until and shall be made on the date on which such Change in Control occurs. The Company shall keep each holder of Notes reasonably and timely informed of (i) any such deferral of the date of prepayment, (ii) the date on which such Change in Control and the prepayment are expected to occur, and (iii) any determination by the Company that efforts to effect such Change in Control have ceased or been abandoned (in which case the offers and acceptances made pursuant to this Section [ ___ ] in respect of such Change in Control shall be deemed rescinded).      (g) Officer's Certificate. Each offer to prepay the Notes pursuant to this Section [ ___ ] shall be accompanied by a certificate, executed by a Senior Financial Officer of the Company and dated the date of such offer, specifying: (i) the Proposed Prepayment Date; (ii) that such offer is made pursuant to this Section [ ___ ]; (iii) the principal amount of each Note offered to be prepaid; (iv) the [estimated Make-Whole Amount] [amount of the premium specified in Section [ ___ ], if any,] due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation;8 (v) the interest that would be due on each Note offered to be prepaid, accrued to the Proposed Prepayment Date; (vi) that the conditions of this Section [ ___ ] have been fulfilled; and (vii) in reasonable detail, the nature and date or proposed date of the Change in Control.      (h) Effect on Required Payments. The amount of each payment of the principal of the Notes made pursuant to this Section [ ___ ] shall be applied against and reduce each of the then remaining principal payments due pursuant to Section [ ___ ]9 by a percentage equal to the aggregate principal amount of the Notes so paid divided by the aggregate principal amount of the Notes outstanding immediately prior to such payment.      (i) "Change in Control" Defined. "Change in Control" means any of the following events or circumstances: [insert one or more of Addenda 1.21 through 1.41 or specially drafted provisions, listing them in the alternative. Addenda 1.51 through 1.62 offer ideas for specifying equity calculations on a fully diluted basis and for including family members or trusts in the favored control group.]      (j) "Control Event" Defined. "Control Event" means:      (i) the execution by the Company or any of its Subsidiaries or Affiliates of any agreement or letter of intent with respect to any proposed transaction or event or series of transactions or events which, individually or in the aggregate, may reasonably be expected to result in a Change in Control,      (ii) the execution of any written agreement which, when fully performed by the parties thereto, would result in a Change in Control, or      (iii) the making of any written offer by any person (as such term is used in section 13(d) and section 14(d)(2) of the Exchange Act as in effect on the date of the Closing) or related persons constituting a group (as such term is used in Rule 13d-5 under the Exchange Act as in effect on the date of the Closing) to the holders of the common stock of the Company, which offer, if accepted by the requisite number of holders, would result in a Change in Control.

Covenant 1.02 (without provision for contemporaneous prepayment)

Change in Control.10      (a) Notice of Change in Control or Control Event. The Company will, within [ ___ ] Business Days after any Responsible Officer has knowledge of the occurrence of any Change in Control or Control Event, give written notice of such Change in Control or Control Event to each holder of Notes. In the case that a Change in Control has occurred, such notice shall contain and constitute an offer to prepay11 Notes as described in subparagraph (b) of this Section [ ___ ] and shall be accompanied by the certificate described in subparagraph (e) of this Section [ ___ ].      (b) Offer to Prepay Notes. The offer to prepay Notes contemplated by subparagraph (a) of this Section [ ___ ] shall be an offer to prepay, in accordance with and subject to this Section [ ___ ], all, but not less than all, the Notes held by each holder (in this case only, "holder" in respect of any Note registered in the name of a nominee for a disclosed beneficial owner shall mean such beneficial owner) on a date specified in such offer (the "Proposed Prepayment Date") that is not less than [ ___ ] days and not more than [ ___ ] days after the date of such offer (if the Proposed Prepayment Date shall not be specified in such offer, the Proposed Prepayment Date shall be the [ ___ ]th day after the date of such offer).      (c) Acceptance[; Rejection]. A holder of Notes may accept the offer to prepay made pursuant to this Section [ ___ ] by causing a notice of such acceptance to be delivered to the Company at least [ ___ ] days prior to the Proposed Prepayment Date.12 A failure by a holder of Notes to respond to an offer to prepay made pursuant to this Section [ ___ ] shall be deemed to constitute [an acceptance] [a rejection] of such offer by such holder.      (d) Prepayment. Prepayment of the Notes to be prepaid pursuant to this Section [ ___ ] shall be at 100% of the principal amount of such Notes, plus the [Make-Whole Amount determined] [premium specified in Section [ ___ ]] for the date of prepayment with respect to such principal amount,13 together with interest on such Notes accrued to the date of prepayment. On the Business Day preceding the date of prepayment, the Company shall deliver to each holder of Notes being prepaid a statement showing the [Make-Whole Amount] [amount of the premium] due in connection with such prepayment and setting forth the details of the computation of such amount. The prepayment shall be made on the Proposed Prepayment Date.      (e) Officer's Certificate. Each offer to prepay the Notes pursuant to this Section [ ___ ] shall be accompanied by a certificate, executed by a Senior Financial Officer of the Company and dated the date of such offer, specifying: (i) the Proposed Prepayment Date; (ii) that such offer is made pursuant to this Section [ ___ ]; (iii) the principal amount of each Note offered to be prepaid; (iv) the [estimated Make-Whole Amount] [amount of the premium specified in Section [ ___ ], if any,] due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation;14 (v) the interest that would be due on each Note offered to be prepaid, accrued to the Proposed Prepayment Date; (vi) that the conditions of this Section [ ___ ] have been fulfilled; and (vii) in reasonable detail, the nature and date of the Change in Control.      (f) Effect on Required Payments. The amount of each payment of the principal of the Notes made pursuant to this Section [ ___ ] shall be applied against and reduce each of the then remaining principal payments due pursuant to Section [ ___ ]15 by a percentage equal to the aggregate principal amount of the Notes so paid divided by the aggregate principal amount of the Notes outstanding immediately prior to such payment.      (g) "Change in Control" Defined. "Change in Control" means any of the following events or circumstances: [insert one or more of Addenda 1.21 through 1.41 or specially drafted provisions, listing them in the alternative. Addenda 1.51 through 1.62 offer ideas for specifying equity calculations on a fully diluted basis and for including family members or trusts in the favored control group.]      (h) "Control Event" Defined. "Control Event" means:      (i) the execution by the Company or any of its Subsidiaries or Affiliates of any agreement or letter of intent with respect to any proposed transaction or event or series of transactions or events which, individually or in the aggregate, may reasonably be expected to result in a Change in Control,      (ii) the execution of any written agreement which, when fully performed by the parties thereto, would result in a Change in Control, or      (iii) the making of any written offer by any person (as such term is used in section 13(d) and section 14(d)(2) of the Exchange Act as in effect on the date of the Closing) or related persons constituting a group (as such term is used in Rule 13d-5 under the Exchange Act as in effect on the date of the Closing) to the holders of the common stock of the Company, which offer, if accepted by the requisite number of holders, would result in a Change in Control.

Addendum 1.21 (percentage of shares)

the failure of [ ___ ] to hold in the aggregate at least [ ___ ]% of the shares of the Company's [voting] [common] stock outstanding.

Addendum 1.22 (management and policies)

the failure of [ ___ ] [the Persons who own voting [common] stock of the Company on the date hereof] to be entitled, directly or indirectly, whether through ownership of stock, contract or otherwise, to direct or cause the direction of the management and policies of the Company.

Addendum 1.23 (majority of directors)

the failure of [ ___ ] to be entitled, directly or indirectly, whether through ownership of stock, contract or otherwise, to elect a majority of the board of directors of the Company.

Addendum 1.24 (continuity of staggered board)

individuals who, at the beginning of any period of [24] consecutive months, constitute the Company's board of directors (together with any new director whose election by the Company's board of directors or whose nomination for election by the Company's stockholders was approved by a vote of at least [two-thirds] of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason (other than death or disability) to constitute a majority of the Company's board of directors then in office.

Addendum 1.31 (percentage of shares)

if any Person or Persons acting in concert (other than [ ___ ]), together with Affiliates thereof, shall in the aggregate, directly or indirectly, control or own (beneficially or otherwise) more than [ ___ ]% (by number of shares) of the issued and outstanding [voting] stock of the Company.

Addendum 1.32 (percentage of voting stock; Exchange Act definitions)

if any person (as such term is used in section 13(d) and section 14(d)(2) of the Exchange Act as in effect on the date of the Closing) or related persons constituting a group (as such term is used in Rule 13d-5 under the Exchange Act), other than [ ___ ], become the "beneficial owners" (as such term is used in Rule 13d-3 under the Exchange Act as in effect on the date of the Closing), directly or indirectly, of more than [ ___ ]% of the total voting power of all classes then outstanding of the Company's voting stock.

Addendum 1.33 (directors; property; Exchange Act definitions)

the acquisition after the date [hereof] [of the Closing] by any person (as such term is used in section 13(d) and section 14(d)(2) of the Exchange Act as in effect on the date of the Closing) or related persons constituting a group (as such term is used in Rule 13d-5 under the Exchange Act as in effect on the date of the Closing) of (i) the power to elect, appoint or cause the election or appointment of at least a majority of the members of the board of directors of the Company, through beneficial ownership of the capital stock of the Company or otherwise, or (ii) all or substantially all of the properties and assets of the Company.

Addendum 1.41 (individual ceases to hold office)

[ ___ ] ceases to be the [chief executive officer] of the Company (i) for any reason other than [his/her] death or disability, or (ii) due to [his/her] death or disability, and a successor satisfactory to the Required Holders does not assume [his/her] responsibilities and position within [ ___ ] days of such cessation.

Addendum 1.51 (fully diluted basis)

All calculations contemplated in this Section [ ___ ] involving the capital stock of any Person, shall be made with the assumption that all convertible Securities of such Person then outstanding and all convertible Securities issuable upon the exercise of any warrants, options and other rights outstanding at such time were converted at such time and that all options, warrants and similar rights to acquire shares of capital stock of such Person were exercised at such time.

Addendum 1.61 ("Family")

"Family" means, in respect of any individual, [the heirs, legatees,] descendants and blood relatives to the [third] degree of consanguinity of such individual.

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