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Tax Event

A “Tax Event” occurs if either party to a GMRA (known as the “notifying party”) notifies the other that, in its reasonable opinion:

  1. any action taken by a taxing authority or court of competent jurisdiction; or
  2. any change in law/regulation (or the interpretation of any law/regulation)

has or will have a material adverse effect on that party in the context of a Transaction.

The notifying party must, if requested to do so by the other party, provide an opinion of a suitably qualified advisor that a Tax Event has indeed occurred and does adversely impact the notifying party.  So, we can see that the clause builds in a degree of protection for the ‘other party’ – the ‘notifying party’ doesn’t have free rein to simply make up the existence of a “Tax Event”.

The notifying party can terminate any impacted transactions.  The termination will take effect from a date specified within the notice sent by the notifying party (this date will become the revised “Repurchase Date”).  However, unless the parties agree otherwise, this date cannot be earlier than 30 days after the date of the notice itself.

However, there is one exception to this ability to terminate.  A party which receives a “Tax Event notice” from its counterparty may override that notice.  It does so by serving a counter-notice on the party which originally sent the “Tax Event notice”.  In these circumstances, the revised “Repurchase Date” that was specified in the “Tax Event notice” will not take effect.  Instead, the original “Repurchase Date” will continue to apply.  However, in sending the counter-notice, the sender of the notice is taken to have agreed to indemnify the party which originally sent the “Tax Event notice” against any “adverse effect” related to the Tax Event itself, so this does come with a degree of risk.

Where a Transaction is terminated due to the occurrence of a Tax Event, the party which gave the “Tax Event notice” must indemnify the other party against any “reasonable legal and other professional expenses” incurred by reason of such termination.  However, the protection afforded by this indemnity does not extend to cover consequential loss or damage.

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