Key Acquisition Agreement Financing Terms

By: Linda Curtis and Andrew Cheng, Gibson, Dunn & Crutcher LLP.

IN RECENT YEARS, THE NEGOTIATION OF AN ACQUISITION agreement and related acquisition financing commitment has become increasingly complicated, involving multiple parties. The buyer, of course, is always intimately involved in both negotiations, with one of its main goals to make the conditionality in its financing commitments as consistent as possible with the conditionality in the purchase agreement. Increasingly, however, the seller will review (and comment upon) the buyer’s financing commitment papers, and, conversely, the lenders will review (and comment upon) the acquisition agreement. All of this tends to happen quickly and in real time, particularly in transactions with multiple bids for a target company.

Buyer Representation Regarding Financing Commitment Papers

Since the financial crisis, it has become rare for an acquisition agreement to condition the buyer’s obligation to close on obtaining debt financing. Accordingly, the buyer is assuming significant risk if the financing were to fall through. That said, it would be an oversimplification to say that the buyer is the sole party assuming such risk. Buyers are often successful in negotiating a sharing of the risk with the seller, through (for example) limitations on specific performance remedies and/or damages for a financing failure (through reverse termination fees or otherwise). Since the seller may be significantly damaged by a failure to close a negotiated and publicly announced deal, it is customary to ask the buyer to make certain representations to the seller in the acquisition agreement relating to its financing commitment. For more information on reverse break-up fees and specific performance rights, see Negotiating Reverse Break-up Fees and Limited Specific Performance Rights and Break-Up Fees Provisions.

The buyer’s representations regarding its financing commitment in a purchase agreement typically include:

• A representation that the buyer has provided the seller with an accurate copy of its executed debt commitment letter and related fee letter (typically, in the case of the fee letter, redacted to omit certain particularly sensitive business terms, such as economic terms and often market flex provisions)
• A representation that there are no undisclosed side agreements that impact the conditionality of the financing
• A representation that as of the date of the acquisition agreement, there has been no event that would constitute a default under the financing commitment
• A representation that, assuming the full amount of the financing is funded at closing, the buyer will have sufficient funds to pay the acquisition consideration as well as any other amounts payable at closing (such as amounts required to repay outstanding debt)

Buyer Solvency Representation

In many deals, the buyer gives a representation to the seller regarding the solvency of the combined company on a pro forma basis for the acquisition and financing. For purposes of the buyer solvency representation, solvency is usually defined in a manner generally consistent with fraudulent transfer law. However, although fraudulent transfer law usually treats the solvency analysis on an entity by entity basis, the solvency representation from the buyer (like the one the buyer customarily gives the lenders) is calculated on a consolidated basis for the combined company. Because the solvency representation, like the other seller representations, is required to be true (or true subject to some type of a negotiated materiality qualification) at the closing of the acquisition, the solvency analysis for purposes of the buyer representation to the seller is a mixed question of the seller’s financial status immediately prior to closing and the effect of the buyer’s proposed financing. Accordingly, unlike in the case of the solvency representation given to the lenders, the buyer in its representation to the seller is usually permitted to make certain assumptions in making the representation. For example, the buyer may assume that:

• The seller’s representations in the purchase agreement (or some subset of them) are true
• The conditions to the buyer’s obligation to close (or some subset of them) are satisfied
• The seller has complied with its covenants in the purchase agreement (or some subset of them)
• In some recent deals, the target company on a consolidated basis is solvent immediately prior to the consummation of the acquisition. See, e.g., Section 5.11 of Agreement and Plan of Merger by and among Bear Parent Inc., Bear Merger Sub. Inc., and Belk, Inc. dated as of August 23, 2015 (filed as Exhibit 2.1 to the Current Report on Form 8-K filed by Belk, Inc. on August 26, 2015 and available at https://www.sec.gov/Archives/ edgar/data/1051771/000119312515303370/d35283dex21. htm) (buyer permitted to make an assumption in the solvency representation that “the Company on a consolidated basis is Solvent immediately prior to the Effective Time”).

Financing Cooperation Covenants

Acquisition agreements almost universally contain a mutual covenant to the effect that after signing, the parties will all make reasonable efforts to consummate the transaction. In the case of steps required to consummate the buyer’s acquisition financing, these reasonable efforts provisions have become very extensive and detailed for both buyer and seller, especially since the end of the 2008 financial crisis.

Financing Cooperation Covenant Applicable to Buyer

The financing covenant applicable to the buyer generally requires the buyer to use reasonable efforts or reasonable best efforts to consummate the financing contemplated by the commitment papers. In addition, the covenant requires the buyer to keep the seller reasonably informed about its progress in obtaining the financing and, more importantly, obligates the buyer to use reasonable efforts (or reasonable best efforts) to obtain alternative financing in the event that the committed financing becomes unavailable. The contours of the required alternative financing can be the subject of some discussion. From the seller’s perspective, the alternative financing cannot be limited to the exact terms of the committed financing—to so limit the covenant would render it of little use. From the buyer’s perspective, any enhanced lender terms for the alternative financing (and specifically including economic terms) cannot be unlimited. Typically, the parties use concepts of materiality, with specific reference to the market flex terms in the original commitment papers, to bridge the gap.

Financing Cooperation Covenant Applicable to Seller

In any leveraged acquisition financing, the lenders are relying upon the business being acquired at least in part (in a strategic acquisition) and perhaps even in whole (in a private equity acquisition) to provide the source of funds to pay them back. Accordingly, the seller’s covenant to the buyer in the acquisition agreement to cooperate with the buyer in obtaining its financing is of critical importance. In recent years, this covenant has become increasingly lengthy and detailed. A typical construction of the covenant includes the seller’s obligation to reasonably cooperate with the buyer in obtaining its financing, including using reasonable efforts or reasonable best efforts to, and to cause its representatives and advisors to:

• Attend lender syndication meetings and due diligence sessions
• Assist in preparing debt offering materials and obtaining credit ratings
• Assist in the preparation of definitive financing documents, including collateral and guarantee agreements
• Deliver customary financing closing documents, including payoff documentation for existing debt and know your customer information

Most importantly, this financing cooperation covenant typically contains an obligation for the seller to deliver any required information to start the marketing period set forth in the purchase agreement and commitment letter. See Conditionality in Acquisition Financing Commitment Papers — Timing Condition and Marketing Period Condition.

Typically, this financing cooperation covenant is limited to say that the cooperation being required will not unreasonably interfere with the seller’s business. In addition, the buyer often indemnifies the seller for any out-of-pocket expenses incurred in complying with the covenant. In many deals, the covenant is limited by a provision to the effect that in no event will the seller be required under the covenant to incur any liability that is not contingent upon the closing of the acquisition.

Xerox Provisions

Several buyers, in some cases with the encouragement of their lenders, attempted to back out of deals that were adversely impacted by the worldwide financial crisis that began in 2007, which led to sellers suing banks for not providing their committed financings. As a result, lenders insist on the inclusion of Xerox provisions in the purchase agreement (so-called because the first iteration of these provisions were required by lenders in the acquisition agreement for the acquisition of Affiliated Computer Services, Inc. by Xerox Corporation in 2010). The Xerox provisions usually, among other things, will include agreements by the seller that:

• The seller will not directly sue the lenders in the event the deal does not close.
• The lenders are third-party beneficiaries of any limitation on liability of the buyer set forth in the acquisition agreement as well as any related provisions.
• Notwithstanding the seller’s agreement to not sue the lenders, if for any reason a dispute arises between the seller and the lenders under the commitment letter, such dispute will be adjudicated in accordance with New York law and heard in New York courts, and the parties agree to a waiver of jury trial with respect to such disputes.

In addition, the lenders require that the parties to the acquisition agreement are expressly forbidden from amending the above provisions in a manner adverse to the lenders without the lenders’ prior written consent. See Conditionality in Acquisition Financing Commitment Papers — Closing on Terms of Purchase Agreement (Amendments). For a sample Xerox provision, see Sample Provisions: XEROX Provisions in Acquisition Financings.

Linda L. Curtis and Andrew Cheng are partners in the Global Finance practice group at Gibson, Dunn & Crutcher LLP, Los Angeles. Linda Curtis’s practice focuses on all aspects of corporate finance, with a specific focus in recent years on acquisition financings. Andrew Cheng focuses primarily on representing borrowers, private equity sponsors, and lenders in acquisition financings and other leveraged finance transactions, including syndicated senior secured credit agreements and Rule 144A high-yield offerings.

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