Shareholders are screwed
According to the rules of loan to own.....
Typical steps in a loan to own transaction
While there may be any number of variations, depending on the final nature of the transaction and the commercial agreement reached between the parties, generally the steps to put together a pitch for a loan to own transaction in relation to a private company are:
Confidentiality: Enter into confidentiality agreements. Typically the bank or secured creditor selling the debt will provide a standard draft for the buyer to accept. Broadly a buyer should consider the scope of the confidential information, its rights to share that information with advisers and that there are no unusual or onerous terms such as indemnities, non-compete/solicit clauses or other restrictive terms in favour of the bank.
Due diligence: Bound by confidentiality obligations, the buyer may then conduct some basic legal, accounting and financial due diligence in relation to the loan agreement, security documentation and other material agreements of the target. It is worth considering at this stage whether it will be necessary to obtain consents from counterparties to any material agreements in respect of change of control as a result of the proposed transaction. Similarly, if receivers or other controllers have been appointed, a buyer should consider how those parties should be dealt with for the purposes of the transaction.
Shareholder agreement/consent: In parallel to the due diligence, a buyer might commence negotiations with the existing shareholders to ensure their agreement/consent to any such transaction will be forthcoming and given on acceptable terms. This agreement will require significant attention and negotiation to ensure a successful outcome of the transaction. Once an agreement is struck, a buyer might also prepare a draft form of shareholder agreement or share sale agreement to take effect on completion of the transaction. Whether there is a shareholder agreement or a share sale agreement will depend on whether the existing shareholders will be a part of the target company going forward.
Documentation: If the due diligence is acceptable and a deal is struck with the bank/secured creditor and existing shareholders, then the parties will prepare the documentation for the transfer/novation of loan and security documentation. Typically the transfer documentation will be relatively straight forward and operate in accordance with the principle that "a trade is a trade". That is, if the transfer would fail for any reason, for example failure to obtain a third party consent, the parties must find a way of settling the transfer (eg. sub-participation or cash settlement).
Settle the trade and swap the debt for equity: The transfer document should be conditional on the debt for equity swap or sale documentation. A debt for equity swap may include provisions for a debt forgiveness, release of existing securities/guarantees and issue of new equity to lender, whereas a sale agreement may be a simple sale and purchase agreement with usual provisions.