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Conditionality in Acquisition Financing Commitment Papers

August 04, 2016 (27 min read)

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

Closing on Terms of the Purchase Agreement (Amendments)

Because the buyer typically chooses specific lenders with the understanding that their commitment letter will be subject to minimal conditionality, lenders should not be surprised by both the buyer’s and seller’s insistence on commitment letters with minimal closing conditions. Given this limited conditionality in the commitment letter, lenders should be satisfied with all aspects of the deal prior to signing because they will not have much flexibility to avoid funding their commitments once the commitment letter and acquisition agreement are signed.

  • The deal structure and how the deal will close
  • The form and amount of the purchase price
  • Any post-closing cash payments to the seller contemplated by the purchase agreement
  • What recourse, if any, the buyer has against the seller in the event of the seller’s breach of its representations and warranties in the purchase agreement
  • What closing conditions allow the buyer to refuse to close under the acquisition agreement (these are the conditions the lenders will want either directly or indirectly incorporated into the conditions in the commitment letter).

Consequently, market participants usually accept that the acquisition must be consummated in accordance with either an executed purchase agreement approved by the lenders or the terms of a specific draft of such purchase agreement (the commitment letter usually includes a very specific reference to the time and date of such draft) as a closing condition to the commitment letter.

For purposes of defining the pre-approved purchase agreement, the parties often include all material schedules and exhibits, to the extent available at the time of the approval. In most cases, such a closing condition will permit amendments, modifications, or waivers to the agreed form of purchase agreement without the consent of the lenders so long as such amendments, modifications, or waivers are not materially adverse to the lenders. In addition, such a closing condition typically goes on to specify that certain specified changes will be, or will not be, deemed adverse (or materially adverse).

For example, this provision may specify that any change to the definition of material adverse change in the purchase agreement will be per se materially adverse. Conversely, such provisions may specify that (1) any increase in the purchase price of the acquisition is not deemed materially adverse to the lenders if such increase is funded solely through an additional equity contribution (rather than requiring either an increase in the amount of debt advanced by the lenders or the identification of some other source of debt financing to make up any shortfall) and (2) any decrease in the purchase price of the acquisition is not deemed materially adverse to the extent that it is either less than a specified percentage (often 10%) of the original purchase price or, if greater than such specified percentage, such decrease results in a pro rata reduction of the size of the facility or facilities to be provided by the lenders and the amount of equity contribution required. See Section 1 of the form Exhibit D to Commitment Letter — Conditions Annex.

Business and Legal Due Diligence

Just as a seller usually will not tolerate a condition in the purchase agreement that the buyer complete and be satisfied with its due diligence, neither the seller nor the buyer will accept a condition in the commitment letter that the lenders complete and be satisfied with their due diligence. The lenders, then, need to complete their due diligence prior to the execution of the commitment letter, which poses a significant challenge if they are only engaged by the buyer shortly before the contemplated signing of the transaction. In most cases, the financing sources will be able to piggyback (at least to some extent) off of the diligence done by the buyer and its advisors, subject to reaching agreement on a customary non-reliance letter with respect to any due diligence summaries or other materials prepared by buyer and its advisors.

Often, the first draft (or the first few drafts) of the financing commitment letter references a business and legal diligence condition to the financing, with a footnote that the lender anticipates removal of the condition prior to the signing of the commitment letter.

Absence of Material Adverse Change

Business MAC

A customary closing condition in the purchase agreement that must be satisfied before the buyer is obligated to consummate the acquisition is that the seller has not suffered a material adverse change, or MAC, since an agreed date. This date is often the date of the last audited financial statements of the seller, although sometimes there is a separate condition that requires no MAC since the date of the agreement. Because the parties in an acquisition aim to align the closing conditions in the purchase agreement as closely to the closing conditions in the commitment letter as possible, the commitment letter should also have a closing condition that the seller has not suffered a material adverse change since an agreed date, with the definition of material adverse change being substantively identical to the definition of material adverse change in the purchase agreement.

In acquisitions of companies by private equity firms, conforming the MAC in the financing commitment papers to the MAC in the purchase agreement is usually relatively straightforward. In both cases, the MAC is tested relative to the acquired business, since the private equity firm usually uses a new holding company to make the acquisition. In strategic acquisitions, however, a MAC condition applicable only to the target company may give limited protection to the lenders. This is because a target company MAC condition does not address a material adverse change in the business of the strategic buyer between signing and closing or in the prospects of the combined business.

From the perspective of the lenders, there are different ways to obtain some protection from such contingencies. For instance, the commitment letter could contain a separate MAC condition with respect to the business of the strategic buyer. The commitment letter could also construct a MAC condition based on the combined results of the strategic buyer and the seller notwithstanding that such a combined company will not exist until closing. Such a combined company MAC condition would at least, in theory, allow for a material adverse change of the strategic buyer’s business to be offset by the strength of the seller’s business. However, because the purchase agreement does not include a comparable condition to closing, the inclusion of any such buyer or combined company MAC condition in the commitment letter would introduce a disconnect in conditionality between the two documents. Both the buyer and the seller would likely strenuously object to such conflicting conditionality.

Regardless of the contours of the MAC, lenders can take some comfort from the solvency representation, which is usually one of the SunGard representations that is, effectively, a condition to closing and is usually determined on a combined basis. That said, there may be a significant difference between deterioration in the business sufficient to trigger a MAC and deterioration that makes the combined company insolvent. For a strategic buyer, this is a significant enough point that when choosing lenders, it makes sense to clarify whether such lenders require any such buyer or combined MAC condition, as the insistence on such condition could play a material role in whether or not the seller agrees to engage with the strategic buyer in the first place.

The general structure of a MAC definition in a purchase agreement states that a MAC is any event or occurrence that results in a material adverse change to the business, financial condition, or results of operations of the seller, and then proceeds to list a litany of events that are expressly not considered to be a MAC. These carve-outs are the subject of much scrutiny and negotiation, but typically exclude:

  • General political, economic, or industry events, other than those events that disproportionately impact the seller as compared to other industry participants
  • Any adverse impacts resulting from the announcement of the transaction
  • Any adverse impacts resulting from actions required by the purchase agreement or requested by the buyer

The lenders will also closely examine, and may comment on, the carve-outs to the MAC definition in the purchase agreement given that such MAC definition, and any such carve-outs thereto, is often imported wholesale into the MAC condition in the commitment letter. For a sample Business MAC provision, see Section 4 of the form Exhibit D to Commitment Letter – Conditions Annex.

Market MAC

A market MAC is a closing condition sometimes requested by lenders that the financing be conditioned upon no material adverse change in the financial, banking, or capital markets that could impair the syndication of any of the financing provided by the lenders. Such a closing condition was rarely, if ever, accepted prior to the financial crisis, but given that banks suffered significant losses during the financial crisis because they were unable to syndicate acquisition financings, there was a brief period as the financial markets were emerging from the downturn when it seemed that lenders might insist on the inclusion of market MAC conditions in commitment letters. However, market MAC financing conditions as of the date of this practice note remain uncommon in both large corporate and middle market transactions.

SunGard Provisions

Representations and Warranties

In virtually all acquisitions, the seller and its affiliates are required to make certain representations to the buyer about their corporate status, the enforceability of the transaction documentation, their corporate structure, financial condition and business, compliance with law, and many other matters. Similarly, in virtually all financings, the borrower and its affiliates are required to make comparable representations and warranties to their lenders. In financings, these representations and warranties are always made as a condition to the initial funding under a credit facility, and in the case of revolving and delayed draw facilities, are usually required to be made (brought down) as a condition to later extensions of credit. The representations and warranties for both acquisitions and financings are always tailored to the borrower’s business. For example, a gaming company is likely to be required to make representations and warranties about its compliance with relevant gaming laws. A company with an extensive intellectual property portfolio is likely to be required to make particularly detailed representations about its material intellectual property.

Accordingly, an acquisition purchase agreement will typically contain a number of representations and warranties from the seller and its affiliates, and the accuracy (or in some cases accuracy in material respects) of these representations will be a condition to the seller’s obligation to close. Similarly, the financing commitments for a leveraged acquisition will include customary representations and warranties.

An issue, however, that the seller, buyer, and lenders need to address is that the representations and warranties made by the seller and its affiliates in the purchase agreement are never identical to the representations and warranties required by the lenders. This disconnect in conditionality is always true when a strategic buyer is involved, because the lenders require the buyer to make representations about itself as well as the acquisition target (and the buyer of course only requires representations about the target). More fundamentally, there are issues that the lenders care about (enforceability of the financing documentation; disclosure of required third party and governmental consents to the financing) that simply are not covered by the seller acquisition agreement representations. Finally, and more subtly, there are differences in emphasis—although both the buyer and its lenders want the representations of the seller to cover existing liens, for example, it is likely that the disclosures on this issue required by the lenders will be much more detailed and granular than those required by the buyer.

SunGard (also loosely described as certain funds) provisions are intended to align the conditionality of the commitment papers as closely as possible to the acquisition agreement. The name SunGard comes from a 2005 deal that was one of the first U.S. deals incorporating these provisions. The certain funds concept, however, has long been prevalent in European transactions and is in fact mandated under law for public company deals in the UK.

As applied to representations and warranties, the SunGard structure is one under which the only representations and warranties that are required to be accurate (or, in some formulations, made) at closing are (1) those representations in the purchase agreement relating to the target that are material to the interests of the lenders and would permit the purchaser to terminate the acquisition agreement if they were untrue and (2) certain basic representations relating to the buyer as set forth in the financing documents, including:

  • Corporate power and authority
  • Enforceability of the loan documents
  • Solvency of the combined company (on a consolidated basis)
  • Margin regulations
  • Investment Company Act
  • The validity, priority, and perfection of security interests (but only those security interests that can be perfected by the filing of UCC-1 financing statements and in some cases the delivery to the lender of specified possessory collateral)
  • In many recent transactions, compliance (or use of proceeds being in compliance) with the USA Patriot Act, OFAC, and anticorruption laws

The exact content and extent of these basic representations (socalled SunGard or specified representations) varies a bit from deal to deal depending on the nature of the business being acquired and the bargaining leverage of the parties. Particularly in middle market deals, lenders may request, with varying degrees of success, that other representations (such as no material governmental or contractual consents or no material litigation) be included as specified representations. The basic concept of SunGard, however, is present now in virtually all commitment papers for public acquisition financings and many middle market and even lower middle market acquisition financings. Indeed, over the course of the last couple of years, private equity sponsors and borrowers have been successful in including provisions in incremental facilities basically pre-approving SunGard conditionality for future incremental commitments that may be used to finance add on acquisitions.

Note that under the SunGard approach, the financing documents still contain many other representations and warranties, and it is possible that in the event of a breach of one of the other representations, the newly combined company will be in immediate default or, at a minimum, will be unable to draw additional funds under a delayed draw or revolving facility. In this way, the SunGard approach balances the various interests of the seller, buyer, and lenders. The seller and buyer can be assured that only the most fundamental representations, if breached, will result in a failure of the financing, while the lenders can have some assurance that they will not be without a remedy in the event of a material breach of one of the other representations or warranties. For a sample SunGard provision, see Sample Provisions: SunGard Conditions (Commitment Letter).

Collateral and Guarantees

In many non-acquisition financings, the borrower must have any required guarantees and collateral in place (and, in the case of collateral, validly perfected) as a condition to closing. One aspect of SunGard in acquisition financings is to limit these requirements. A typical structure is one under which the seller must make required UCC filings and give the lender or agent possession of certain specified (sometimes particularly material) investment property as conditions to closing, but where other perfection actions are permitted to be finalized on a post-closing basis. Intellectual property filings may also be a condition to closing if intellectual property assets are particularly important to the business. It is quite common to see, for example, a significant post-closing period (90 or 120 days) permitted for perfection of security interests in real property as well as for delivery of investment property consisting of equity interests in foreign subsidiaries. Some recent deals also permit required insurance under the loan documents to be obtained on a post-closing basis.

Receipt of Equity Contribution

As discussed above, it is common in private equity acquisitions for a specified portion of the acquisition financing to be provided in the form of an equity contribution. A typical range of such an equity contribution is currently approximately 20% to 35% of the pro forma capitalization of the borrower on the closing date. It is customary, then, for commitment papers for an acquisition financing used to fund a private equity acquisition to include a condition requiring receipt of the equity contribution. If any part of the equity portion of the consideration is in the form of preferred stock or other debt-like instruments, then the lenders will likely require satisfaction with the terms and conditions of such instruments as well. See Section 6 of the form Exhibit D to Commitment Letter – Conditions Annex.


Solvency of the combined company is a customary condition to the closing of the acquisition financing. Typically, the condition is documented at a minimum through the inclusion of the solvency representation in the financing documents as one of the SunGard representations. Since there is usually no comparable solvency condition benefitting the buyer in the acquisition agreement, this is one area where the conditionality of the acquisition agreement and the acquisition financing often differ.

The definition of solvency for purposes of this condition is typically defined by reference to the requirements for solvency under fraudulent transfer law and includes elements of both equitable and balance sheet solvency tests. For more information, see Solvency Certificates. The solvency condition in acquisition financings typically only includes a test for the combined company on a consolidated basis (sometimes including any holding company guarantor), but typically not for each subsidiary or even each subsidiary guarantor on a stand-alone basis. Because many corporate enterprises include hundreds of subsidiaries, conducting the solvency analysis on the basis of individual legal entities may be impractical. Also, even for a corporate group that is very strong financially as a whole, there may be individual subsidiaries that would fail some aspect of the solvency test.

Solvency is such a critical issue for the lenders that, in addition to the solvency representation, the financing commitment papers may include a separate condition that a senior financial officer of the buyer or seller—or even an independent financial firm—deliver a solvency certificate as a condition to closing. The parties will often agree to the form of solvency certificate and attach it to the commitment letter in an effort to avoid later disputes about the exact certifications to be made.

For samples of forms of solvency certificate attached to public filings in connection with recent announced transactions, see Current Report on Form 8-K filed February 2, 2016 (Staples, Inc. – SPLS – Exhibit 10.5 Second Amended and Restated Commitment Letter, dated as of February 2, 2016, by and among Staples, Inc., Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Barclays Bank PLC, available at edgar/data/791519/000110465916093302/a16-3365_1ex10d5. htm); Current Report on Form 8-K filed August 24, 2015 (Southern Co. – SO – Exhibit 10.1 Citigroup Global Markets Inc. Commitment Letter dated August 23, 2015, available at https://www.sec. gov/Archives/edgar/data/92122/000009212215000077/ falconk2x10.htm). For an example of a solvency certificate, see the form Solvency Certificate (Credit Agreement).

Financial Metrics—Leverage Ratio

The inclusion of any additional financial metrics as commitment letter closing conditions is not tolerated in many segments of the market. However, in the lower end of the middle market and below, lenders may insist on and be successful in obtaining one or more closing conditions dependent on financial metrics. When included, these financial metrics most commonly take the form of either a maximum leverage ratio or a required minimum amount of trailing twelve month EBITDA, as discussed in more detail below.

A leverage ratio condition measures the ratio of (1) the outstanding debt of the credit parties on the closing date on a pro forma basis for the financing to be consummated to (2) trailing 12-month EBITDA, as calculated using specified financial statements, which would likely be either the most recently delivered monthly or quarterly financial statements. Given the importance of the leverage ratio calculation, the parties will likely agree to include the definition of EBITDA and all the components of such definition (e.g., consolidated net income and consolidated interest expense) in the body of the commitment letter so there is no disagreement over what is included or excluded for purposes of calculating EBITDA. In some instances, EBITDA may also be defined by reference to a specific financial model provided by the buyer to the lenders. In any event, the buyer should build in as much of a cushion as possible so that only a significant and unexpected drop in projected EBITDA would cause the leverage ratio condition to fail.

An EBITDA closing condition requires a certain minimum amount of EBITDA for a specified trailing 12-month period prior to closing; such period is typically the 12 months as of the last monthly financial statements delivered to the lenders. Similar to deals with a leverage ratio closing condition, it would be prudent for the parties to clearly define EBITDA and the components of such definition for deals with an EBITDA closing condition as well. Also, the buyer should try to build in as much of a cushion as possible so that it can be confident that the closing condition will be satisfied. For example, if the buyer anticipates that trailing four quarter EBITDA at closing will be X, it should try to set the closing condition at 90% or 80% of X.

A closing leverage ratio may provide more flexibility to the buyer than an EBITDA financing condition because if there is an unexpected downturn in EBITDA, the buyer at least has the ability to fund some or more of the acquisition price with an equity contribution, which would decrease the amount of debt for purposes of calculating the leverage ratio. Unlike the leverage ratio, once the definition of EBITDA is agreed, the calculation is what it is, and the buyer will have limited ability to influence whether or not the condition is met.

Required Consents


Contractual consents are typically not included as a closing condition in a commitment letter. If a material contract requires consent to consummate the acquisition, the buyer should insist on including a closing condition requiring the seller to obtain such consent in the purchase agreement. If this closing condition is included in the purchase agreement, the lenders may indirectly benefit by claiming that the waiver of such a condition is a modification of the purchase agreement requiring their consent. Any consents that might be required solely as a result of the financing rather than the acquisition itself, such as a landlord access agreement or a subordination, non-disturbance or attornment agreement, are usually the borrower’s post-closing obligations rather than closing conditions to the financing.


Commitment letters for larger deals and larger middle market deals generally do not contain a condition for required governmental consents. If antitrust approval is required for the deal, or if there are any other material consents required to close the acquisition, obtaining such approval or consents prior to closing is typically an obligation of the buyer and the seller. Because a waiver of such condition in the purchase agreement would most certainly be adverse (or materially adverse if that is the agreed standard) to the lenders, they would be protected by the condition that the acquisition be consummated on the terms of the purchase agreement without any modification adverse to the lenders. Relying on the purchase agreement closing condition, however, does not protect the lenders in the event there is a material governmental consent required for the financing, as opposed to the acquisition.

In the lower middle market, however, lenders are sometimes able to include a closing condition that any material governmental consent required to execute and deliver the loan documents and consummate the financing on the closing date have been obtained. As a practical matter, unless the borrower is in a highly regulated industry such as gaming or water supply, it is unlikely that there will be any material governmental consent required to close the financing that is not also a condition to the closing of the acquisition. But if there is, the inclusion of such a condition passes that risk on to the buyer.

Obtaining Credit Ratings

While obtaining credit ratings may be necessary in order for the lenders to syndicate their loans, obtaining credit ratings is not a standard funding condition in a commitment letter. In general, the buyer and seller will resist any closing condition requiring reliance upon a third party whose actions and timing cannot be controlled, such as a ratings agency. Note that where credit ratings conditions do appear, such as in lower middle market financings, they typically do not take the form of obtaining any particular credit rating. In other words, they are solely procedural rather than substantive, as the obtaining of a particular credit rating would be a substantive criteria akin to a specified financial metric.

Documentation Condition

The execution and delivery of loan documentation with terms and conditions consistent with the commitment letter and attached term sheet is a customary closing condition. However, in Amcan Holdings, Inc. v. Canadian Imperial Bank of Commerce, 70 A.D.3d 423 (N.Y. App. Div. 2010), the Appellate Division of the New York Supreme Court held that an executed term sheet that contained (1) language that the credit facilities specified therein would only be established upon completion of definitive loan documentation and (2) a closing condition requiring the execution and delivery of definitive documentation that embodied the terms and conditions set forth in the term sheet, evidenced an intent of the parties that the term sheet was an agreement to agree rather than a binding agreement. Consequently, given that the execution and delivery of definitive loan documentation is typically a condition precedent, the buyer may request the inclusion of language in the commitment letter that makes it clear that lenders and buyer intend for the commitment letter to be a binding agreement notwithstanding such condition precedent. See Section 14 of the form Commitment Letter (Fully Underwritten Commitment). This is typically referred to as the Amcan provision.

The parties may seek to reduce the conditionality embedded in the documentation condition by referring to applicable precedent documentation and/or documentation principles. For example, the parties may indicate that the documentation for the financing will be based upon a particular credit agreement (often, the borrower’s current credit facility) or a particular market precedent. Alternatively, the documentation principles may refer more loosely to private equity sponsor precedent or even market precedent for a particular private equity sponsor. At times, regardless of the starting place, the documentation principles may be qualified by such factors as market conditions and the borrower’s operational or strategic requirements. For further details on documentation principles, see Documentation Principles and Sample Provisions: Documentation Principles (Commitment Papers).

Timing Condition and Marketing Period Condition

Drop Dead Dates

Acquisition agreements typically have an outside drop dead date. If the acquisition has not closed by that date, then the acquisition agreement terminates. Accordingly, buyers try to ensure that the termination of their debt financing commitments extend at least as long as the acquisition agreement drop dead date. Sellers also have the same interest. This can be a challenge if the acquisition has antitrust or other issues that can cause the time period between signing and closing to be lengthy. Lenders may be unwilling to extend their commitments for a commensurate period of time, at least not without the imposition of so-called ticking fees that may increase on a quarterly or even monthly basis. For a sample ticking fee provision, see Section 1.d of the form Fee Letter and related drafting notes. See also Negotiating an Extension of the Closing Date.

Marketing Periods

Both acquisition agreements and financing commitment papers often include a marketing period concept in addition to the outside drop dead date for closing. The marketing period provision essentially says that regardless of the drop dead date, the lenders get an agreed period of time prior to closing of the financing to syndicate all or part of the financing. Of course, like the other conditions in the acquisition financing, the buyer and seller will be very focused on making sure that the two marketing periods are consistent. Topics of discussion among the buyer, seller, and lender parties may include the following:

  • What event starts the marketing period? Typically, the provision of required information for the syndication starts the marketing period. But what constitutes such required information can be a matter of debate. At a minimum, required information includes specified financial information. In some deals, however, the marketing period does not start until a bank book (confidential information memorandum) or other offering document, or specified parts thereof, is delivered to the lenders.
  • What happens if there is a dispute over the commencement of the marketing period? Most financing commitments and purchase agreements now include detailed procedural provisions giving the applicable parties the right to give notice when they believe they have satisfied the requirements for starting the marketing period, as well as giving the counterparties the right to object.
  • How long is the marketing period (and what, if any, are the blackout dates)? Most deals provide for a period of between 15 to 20 days (or business days), subject to tolling or extension for agreed blackout days during holiday periods (such as late August and late December) when financial market participants are likely to be on vacation.

Additional Conditions

In addition to the conditions discussed in this section, commitment letters contain additional closing conditions that are generally uncontroversial.

  • The lenders usually require the delivery of certain financial statements, such as the financial statements of the seller as they become available, and pro forma financial statements giving effect to the acquisition, including the funding of the acquisition. Some of these financial statements, such as quarterly interim financials and annual audited financials for a public company, are included in the required information that starts the marketing period. The buyer should make sure that the acquisition agreement contains a covenant requiring the seller to deliver those financial statements required by the commitment letter, although it is up to the buyer to produce any required pro forma financial statements.
  • The borrower must also deliver customary closing documentation, such as legal opinions, certificates, and resolutions.
  • Other common conditions include the borrower’s obligation to deliver certain information requested within an agreed time frame before closing to comply with any applicable know your customer and anti-money laundering rules and regulations, including the USA PATRIOT Act, as well as the borrower’s obligation to pay any fees of the lead lenders invoiced within an agreed time frame before closing.

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