AN EVALUATION OF LOANS SYNDICATION AS AN ALTERNATIVE BUSINESS FINANCING STRATEGY IN NIGERIA

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 Definition and Purpose of the Letter of Intent

The letter of intent in syndicated financing is the “first serious paperwork generated in the loan approval process … prepared by the loan officer … to commit the lender to a lending facility.’ 22 The concept letter of intent is thereby employed in this paper to define the document used in syndicated loans, which reflect preliminary understandings that wil be further documented in a credit contract. However, in credit transactions, this document has different names, such as: mandate letter, commitment letter, term sheet, financing proposal, and credit offer. In general, whichever denomination is chosen, the instrument is the same. The letter of intent contains a summary of the financial and legal terms and conditions for credit. This financing proposal, when agreed upon, will be expressed and detailed in a loan agreement.23 A letter of Intent may begin as follows(see Schedule I): Ladies and Gentleman: We are pleased to confirm our willingness to use our reasonable best efforts in accordance with our customary practice on your behalf to form a syndicate of lenders to make funds available to you under a revolving credit agreement containing the terms and conditions outlined below, among others. We-would be prepared, as a member of the syndicate, to make a loan commitment of $50,000,000.

it also sets forth a general idea of the financial and legal terms and conditions. By expressing the intention “to make funds… under a revolving credit agreemen, the paragraph proposes a general idea of the financial structure. Also, an important legal condition is established by indicating a willingness to provide financing on the basis of “reasonable best efforts” Below, we will analyze the importance of this last phrase. Schedule I shows a term sheet where both “terms and conditions” and the “purpose” of the credit are listed. Regularly, the term sheet of a syndicated loan would enumerate the following:

(i) major issues related to the financial conditions of the credit, such as amount, name of the borrower(s), creditor(s) and agent(s), maturity, availability, interest, fees, and other expenses;

(ii) major legal terms and conditions, such as a summary of covenants, tax payment conditions, governing law, jurisdiction, and currency option; and

(iii) the purpose of the credit (e.g to finance working capital). 24 As mentioned above, the specification of these terms and conditions will be further incorporated into the Loan Agreement. After the terms and conditions are presented, a request from the lender or arranger to the borrower is made in order for the borrower to express acceptance of such terms and conditions. In our Schedule I example, the last paragraph reads:

If these terms and conditions are acceptable to you, please so indicate by executing and returning to us the enclosed copy of this letter. The commitment set forth herein will expire on March 8, 1991, unless we have received your acceptance on or before that date.

Legal Nature

 In English and American law, freedom of agreement prevails. Prima fade letters of intent in syndicated finance are, for the courts of these countries, not contracts if parties clearly express their intention of not having a binding agreement. In this respect, letters of intent represent, on one hand, a mere proposal from the lender or arranger to arrange financing and, on the other hand, a preliminary acceptance from the borrower of certain legal and financial terms and conditions in order for the arranger to raise the expected funds in the financial market. In general terms, letters of intent constitute a “mere negotiation in contemplation of a contract coming into existence at some future date.”45 However, as will be explained below, in syndicated loans, letters of intent are intended to be binding at least in relation to two issues. First, they contain a commitment from the borrower to pay costs and expenses to the lender or arranger in regard to the arrangement of the credit. Second, they include a best endeavours obligation by the lender or arranger to collect money required by the borrower. From a legal perspective, letters of intent are ambiguous and obscure documents. They lie in an “undear gray zone”46 Many times lawyers do not even participate in drafting these documents. Bankers believe that lawyers begin to participate from the loan agreement and beyond. *Actually, letters of intent come into the picture for commercial reasons and they are not intended to be enforceable documents.

A. THE SUBJECT TO CONTRACT PROVISION

According to the English courts, in order for a letter of intent not to be a contract, an express intention by the parties (“consensus at idem”) must be included in the wording of the document 61 In English law, the phrase “subject to contract,’ (See Schedule III) is sufficient to reflect that the document is a pre-contractual agreement rather than a contract itself. There are other possible formulas, such as “subject to formal agreement” 62 “subject to suitable agreements to being arranged’; 63 and “subject to a proper contract’ 64 In our sample letter of intent in Schedule I the following clause is used: “The financing contemplated in this letter is conditioned upon the preparation, execution and delivery of legal documentation in form and substance satisfactory to us and our counsel…”. Also, in Schedule II, which is a transaction governed by New York law, the second paragraph reads “XYZ’s commitment is subject to the negotiation, execution and delivery of mutually acceptable definitive loan documentation .. ‘. The language of these two examples seems to be common to American lawyers. Unlike the English courts, where objective interpretation of the wording of the document is essential, the intention of the parties is rather decisive for American courts.

B. THE SURROUNDING CIRCUMSTANCES

 In accordance with the above, “gentleman’s agreements;’ or even informal business agreements among family members80 would be regarded as legally binding and enforceable contracts if no indication to the contrary is made by including the “magic phrase”, subject to contract’ Nevertheless, this is not necessarily an absolute truth. There is an exceptional English case, Alpenstow Ltd v. Regalian Properties Ltd,8 1 where the phrase “subject to contract” was not considered sufficient to identify the document as non-binding. In this case, an agreement for a real estate transaction was identified as binding even though the clause “subject to contract” was included.82 In this case, Nourse J, referring to the above quoted statement of Sangant L.J in Chillingworth v. Esche 83 held: “[i]n my judgment this is a case where there is a very strong and exceptional context which must induce the court not to give the words ‘subject to contract’ their dear prima facie meaning, and I so hold”8 4. This decision suggests that, although for English courts, the phrase “subject to contract” will in principle prevent agreements from being legally binding, there is a possibility that exceptional circumstances might make courts treat subject-to-contract-lettersof-intent as legally binding agreements.

C. INTENDED BINDING OBLIGATIONS DERIVING FROM THE LETTER OF INTENT.

1. Obligations of the Borrower. Even though in most cases letters of intent are intended not to be firm commitments, mandate letters in syndicated loans are actually written in a certain way that constitute binding agreements with respect to certain issues. The borrower, when signing and delivering the mandate, is obliged from this moment to pay fees and expenses to the lender for the arrangement of the loan. This obligation of the borrower continues regardless of whether the credit is finally granted or not. In Schedule I, the clause titled “Expenses” shows that the borrower, upon signing the offer and returning it to the lender, agrees to pay expenses and fees “incurred in the negotiation, preparation and execution” of the loan. Moreover, the clause points out that “these expenses are reimbursable promptly on demand after execution of the loan documentation or if the documentation is not executed by April 30, 1991 after that date.” Even if the loan is not formalized, the expenses and fees would still be owed to the lender. Schedule II is even more specific about this matter. By making the borrower return a different letter (the “mandate”), the lender requires the borrower through this mandate letter (see Schedule II, Exhibit A) to expressly include that he “agrees to pay Arranger, XYZ and the Lenders’ reasonable out of-pocket costs and expenses… regardless of whether any loan documents are agreed to and signed by the lenders and the Borrower and regardless of whether any loans are actually made.” 2. Obligations of the Lender. Another binding commitment is the obligation of the lender or arranger to use his best endeavours or best efforts94 in order to finalize the financing arrangement as offered to the borrower. Moreover, at least for American courts, there is an implied obligation of good faith to finalize agreements referred to in letters of intent. These obligations are abstract obligations that are difficult to enforce inasmuch as they reflect uncertain and unspecific legal concepts. For example, a best endeavours clause provides for an abstract provision without specific measure or standard. Its determination will depend on a subjective interpretation by the courts. D. BEsT ENDEAVOURS OR BEST EFFORTS. With respect to the borrower’s obligation to pay fees and expenses, there does not seem to be any doubt that there is an obligation to pay for the financial service the lender is providing. In relation to the best endeavours obligation, it appears to be difficult for the plaintiff to prove a breach of such an obligation inasmuch as there is no specific standard at which to look. 95 In an English case, Bower v. Bantam Inv. Ltd.,9 6 an injunction was refused because there was no specific obligation to use best endeavours to develop a marina project Goff J said “I ask myself, could anything be less specific or more uncertain? There is absolutely no criterion by which best endeavours and practicability are to be judged.”97 In a few words, the judge argued that best endeavours duties cannot be obligations because they do not represent something specific to do or fulfill.

VI. Conclusion. We have observed in this essay that, legally speaking, letters of intent are abstract documents which are made in order to regulate the pre-contractual scenario of a business transaction. In English and American law, the intention of the parties is the main issue to define the legal nature of agreements. Generally speaking, letters of intent are not intended to be binding agreements. For either English or American courts, the language of the document will be the key factor in defining the intention of the parties. However, the surrounding circumstances are also taken into consideration, even more so in the case of American law, where judges have been less attached to the wording and have rather stepped a little aside from the the written agreement to look for the objective intention of the parties. In syndicated loans, letters of intent set up the terms and conditions of the credit while establish at the same time an obligation from the borrower to pay certain fees. On the other hand, letters of intent express an obligation upon the arranger to exercise its “best endeavours” to finalize the financing. Borrowers should be aware of the legal nature of the document they are willing to sign. Regularly, lenders will say that letters of intent contain a unilateral obligation from the borrower to carry the costs and expenses of the preliminary process, even if positive progress is not achieved by the lender. The latter, however, would not be willing to commit itself more than in a “best endeavours” basis. Borrowers must understand that the “best endeavours” obligation of the lender is an unspecific term which is intended to leave the determination of the standard of efforts to the lender’s own means. However, even on a best efforts basis, arrangers assume a significant risk when issuing funding commitment letters.