Provisions disenfranchising lenders of record who hold net short positions – most commonly through the acquisition of credit default swap protection on the relevant borrower’s debt – have recently started to emerge in several U.S. credit agreements. This development is presumably a defensive response of borrowers to increased net short hedge fund investor activism in light of the widely publicized dispute between Windstream Holdings, Inc. and Aurelius Capital Management, LP. Borrowers do not want investors who hold large net short positions to exercise, or refrain from exercising, any voting rights that they may have as lenders – including in relation to a highly technical default that is unrelated to the creditworthiness of the borrower – with the goal of realizing profits on their net short positions. There is every reason to believe that this trend will continue as this new drafting technology becomes widely disseminated. In a guest article, Jerome Ranawake and Brian Rance, partners at Freshfields Bruckhaus Deringer, analyze disenfranchisement provisions, the impact they can have on lenders with net short provisions and ways these provisions may impact a hedge fund’s trading strategy. The article also contains a sample disenfranchisement provision for review. For additional commentary from another Freshfields partner, see “ECHR Decision Imposes New Criteria for Email Monitoring Practices on Fund Managers With European Operations
” (Sep. 28, 2017). For more on credit agreements, see “What the LSTA’s Revised Delayed Compensation Requirements Mean for Loans Trading on Par/Near Par Documents
” (Oct. 27, 2016).