In a new article on the Reuters website, Metro Detroit patent attorney Tyson Benson responds to a recent ruling in which Neiman Marcus was able to dodge a finding of fraudulent activity related to the transfer of a subsidiary company to its parent company. The transfer essentially made it harder for a Neiman Marcus lender to recover losses if they should occur.
The lending market is currently very borrower-friendly, allowing borrowers to obtain favorable loan term language and documentation in exchange for more favorable terms for the lender. In Neiman Marcus’s case, their loan language stated individual lenders could not take legal action against the company without a consensus from the majority of lenders. Neiman Marcus used that advantage to move the profitable e-commerce retailer MyTheresa, and the associated collateral and intellectual property, under its parent company and further away from the lenders.
One lender, Marble Ridge, filed suit in reaction. The case was dismissed over a lack of standing as they did not have the proper majority consensus required in the loan documentation.
Lenders who have signed similar agreements may find themselves in similarly awkward positions in the near future. As Benson describes it, “Once the horse is out of the barn and a mile down the road, lenders are stuck with trying to get an agreement based on something that is not quite the collateral you thought you were getting.”
Seeing how well it worked for Neiman Marcus, other large corporations are eager to work similar provisions into their loan documents. PetSmart recently made a deal with its lenders to transfer part of its Chewy.com business to the parent company level and another part to an unrestricted subsidiary, for example. Some lenders were not pleased with the transfer, however, and are expected to bite back at PetSmart.
For now, lenders who are negotiating the terms of loans would be wise to clearly state how and when assets can be moved to subsidaries. The transfer of these assets, which often come with tremendous value in the form of registered trademarks and brand equity, can leave lenders with less collateral and fewer options to have debts repaid.