Ontract Drafting and Negotiation Exercise

Contract Drafting and Negotiation Exercise

Michelle Peters is the President and CEO of Sunny Solutions, Inc., a Delaware corporation located in Arizona. Sunny Solutions manufactures solar panels for residential structures. Sunny Solutions recently negotiated an agreement with Del Webb homes. Pursuant to that agreement, every new Del Webb home constructed in Phoenix will have solar cells developed by Sunny Solutions located on its roof. In order to fulfill its obligations under the agreement with Del Webb, Sunny Solutions must obtain financing from a bank. Thus, Michelle Peters, in her role as President and CEO of Sunny Solutions, is looking to borrow money from Community Savings and Loan Bank to finance the expansion of her company. Specifically, Michelle is looking to take out a loan with two components: (1) a revolving line of credit and (2) a term loan.

Bob Smith is a Vice-President in charge of new loans at Community Savings and Loan Bank, a small Arizona-chartered bank that makes loans to a variety of businesses. While the Bank did not suffer major exposure to mortgage-backed securities, its loan portfolio did not escaped the decline in the housing market unscathed. Consequently, the Bank is interested in lending money to quality companies involved in manufacturing, technology and nearly anything other than real estate. Thus, Bob Smith, in his role as a Vice-President of Community Savings and Loan Bank, is interested in lending funds to Sunny Solutions. The Bank is happy to accommodate a loan that includes both a revolving line of credit and a term loan.

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One-half of the class will play the part of the Borrower, Michelle (or Michael, as gender dictates), and the other half will play the part of the Bank, Bob Smith (or Roberta, as gender dictates). Each side will receive a separate set of concerns their side has regarding the negotiation.

Your assignment is to:

(1) Negotiate the specific provisions listed below with your partner. You must come to an agreement on a deal in accordance with the Borrower Concerns and Bank Concerns provided to you as either Michelle/Michael (the Borrower) or as Bob/Roberta (the Bank). You are free to negotiate in any manner you may mutually agree, including face-to-face, over the phone, by videoconference, or through email. The provisions that you must negotiate with your partner are:

a? A§2.1.1 Revolving Advances, A§ 2.1.2 Term Loan and the definitions of Revolving Line,Revolving Line Maturity Date,Term Loan Amountand Term Loan Maturity Date. These provisions govern both the amount of funds to be lent and the length of repayment for both the Revolving Line and the Term Loan.
1 For those who may never have dealt with such loans, a revolving line of credit is a lending facility pursuant to which the lender permits the borrower to keep open a certain amount of credit for the borrowers use over a certain period of time. For example, a $5 million, 3 year revolving line of credit would permit the borrower to borrow $2 million, pay off $1 million, then borrow $3 million, then borrow $1 million more; the key to such a loan is that the total amount of outstanding credit extended may never exceed $5 million at one time and the full amount of borrowed funds plus interest must be repaid on the 3 year maturity date. A term loan is the standard type of loan one ordinarily thinks of when one contemplates a loan: a loan for a fixed amount of money that accrues interest during a set period of time and must be paid back over that set period of time pursuant to a specific repayment schedule.

a? A§ 2.4 Fees. This provision governs the fees that the Borrower must pay up front to the Lender in order to close the loan; these fees are in addition to the interest that will accrue on the loan.

a? A§ 8.2(b) Covenant Default. This provision governs the consequences of the Borrowers failure to comply with the provisions of Sections 6 and 7 of the loan. It requires the negotiation of (1) an initial period during which the Borrower may correct a covenant default (called a Cure period”), and (2) a second, longer period that the Borrower may use to cure a default, provided that the Borrower has begun to fix the covenant default within the initial, shorter cure period.

(2) Revise the Loan and Security Agreement to reflect your negotiated deal. Once you have completed your negotiation of the provisions above, you must then mark-up the Loan and Security Agreement to document the agreement you have reached with your partner. You must provide me with your own revised version of the Loan and Security Agreement, drafted to reflect the deal the Borrower and Bank have reached. You may not collaborate with your partner regarding how to document the Dealyou have reached. You must send me your revised draft in a Word document. You may do your revisions either with or without track changes.

(3) Revise the following provisions in the manner indicated below:

a? If you are the Bank: A§ 5.11 Employees. This provision is currently very Borrower-friendly. Revise this provision to make it as favorable to the Bank as possible. (If you are the Borrower, you need not revise this provision and may leave it as is.)

a? If you are the Borrower: A§ 5.4 Litigation. This provision is currently very Bank-friendly. Revise this provision to make it as favorable to the Borrower as possible. (If you are the Bank, you need not revise this provision and may leave it as is.)

(4) Finalize the Loan and Security Agreement. In addition to completing/revising the provisions listed above, you must also make the following changes to the Loan and Security Agreement:

a? Complete all bracketed sections; you should fill in each provision that is enclosed in [brackets], regardless of whether it is in one of the sections listed above. You need not negotiate these provisions with your partner. Instead, you should feel free to make up any information (e.g. names, dates, and amounts) needed to complete a bracketed section and to make it favorable to your side.
a? Put (1) your name, (2) your partners name, and (3) your respective roles (as Borrower or Bank) at the top on the first page of your revised Loan and Security Agreement.

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Once you have completed the steps above, sumbit your revised Loan and Security Agreement to the instructor.