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Navigating the Complexities of Financing Related Provisions in Acquisition Agreements

Mergers and acquisitions are complex transactions that require careful consideration of numerous legal and financial issues. One critical aspect of these deals is the financing related provisions in the acquisition agreement. These provisions are designed to ensure that the buyer has sufficient funds to consummate the transaction and that the seller is protected in the event that the financing falls through.

The seller's primary concern is ensuring that the buyer's debt financing will be available at closing, or if not, that there will be adequate remedies in place. The buyer, on the other hand, needs to be comfortable that it will receive the necessary cooperation from the seller or target company to secure the financing. Meanwhile, the lenders want to avoid exposure to claims from parties with whom they have no contractual privity.

To address these concerns, the acquisition agreement typically includes several key financing related provisions:

Representations and Warranties

The buyer will make certain representations and warranties regarding the financing, such as confirming that it has delivered copies of the commitment letters, that the commitment letters are in effect and enforceable, and that there are no undisclosed side letters that could affect the quantum, timing, or conditionality of the financing. The seller will rely on these representations to gain comfort that the financing will be available at closing.

The buyer may also make a solvency representation, stating that following the consummation of the acquisition and related financing, the surviving company will be solvent. This representation is primarily intended to protect against challenges to the transaction by other creditors of the target company and to address any potential fraudulent transfer issues.

Conditionality

It is critical that there is no daylight between the conditions in the acquisition agreement and the conditions in the commitment papers for the financing. The buyer never wants to be in a situation where it is obligated to close the acquisition but has not satisfied the conditions under the financing.

To avoid this, the acquisition agreement will often include a "no MAE" (material adverse effect) condition that mirrors the language in the debt commitment papers. Other conditions, such as the delivery of required financial information or the expiration of a marketing period, must also align between the acquisition agreement and the financing documents.

Timing Considerations

The acquisition agreement will typically include certain timing constructs to ensure that there is a timing match between the debt financing and the acquisition closing. For example, there may be a "marketing period" during which the lenders are afforded a certain number of consecutive business days to syndicate the debt. The acquisition cannot close until this marketing period has ended.

Alternatively, there may be an "inside date" provision stating that the acquisition cannot close until a specified number of days have passed, in order to give the finance lawyers sufficient time to paper the debt financing.

The "drop dead date" or "termination date" for the acquisition agreement must also be carefully coordinated with the outside date for the financing commitment to avoid a scenario where the acquisition agreement is still in effect but the financing commitment has expired.

Target Debt

The treatment of the target company's existing debt is another important consideration in the financing related provisions. The acquisition agreement will typically include a definition of "indebtedness" which will be used to determine the amount of debt that must be paid off or refinanced at closing.

The seller will be required to assist with obtaining payoff letters and lien releases for the existing debt. The specific steps and timing for this process, such as delivering conditional notices of redemption for outstanding notes, should be clearly outlined in the acquisition agreement to avoid any last-minute surprises.

Seller's Financing Cooperation Covenant

The seller's financing cooperation covenant is one of the most heavily negotiated financing related provisions in the acquisition agreement. This covenant obligates the seller to assist the buyer in obtaining and consummating the debt financing for the transaction.

The scope of the seller's cooperation will depend on the nature of the financing and may include:

- Delivering historical financial statements and other required financial information

- Assisting with the preparation of pro forma financial statements (but the buyer retains ultimate responsibility)

- Participating in lender meetings, road shows, rating agency presentations, and due diligence sessions

- Providing information for the preparation of marketing materials such as the confidential information memorandum or offering memorandum

- Assisting with the negotiation and execution of the definitive financing documents

- Obtaining payoff letters and lien releases for existing debt

While the seller is generally willing to cooperate, it will also seek to limit its obligations and potential liability under this covenant. The agreement should include qualifiers stating that the seller is not required to take any action that would unreasonably interfere with its business, breach any confidentiality obligations, or expose it to any personal liability. The buyer should also agree to indemnify and reimburse the seller for any costs or liabilities incurred in connection with the financing cooperation.

Buyer's Financing Covenant

The buyer's financing covenant obligates the buyer to take all actions necessary to obtain and consummate the debt financing, including using reasonable best efforts to satisfy the conditions in the commitment letters, enforce its rights against the lenders, and seek alternative financing if necessary.

This covenant will also typically prohibit the buyer from amending the commitment letters in a manner that would adversely affect the seller, such as by reducing the amount of the financing, expanding the conditionality, or otherwise delaying or preventing the closing of the acquisition.

Xerox Provisions

Finally, the acquisition agreement will almost always include a set of "Xerox provisions" which are designed to protect the interests of the lenders. These provisions are named after their original appearance in the 2008 merger agreement between Affiliated Computer Services and Xerox Corporation, following the infamous Clear Channel and Huntsman litigations.

The key components of the Xerox provisions are:

- No recourse against the financing sources by the seller (but preserving the buyer's right to enforce the commitment letters)

- Limitation on the financing sources' liability to the reverse breakup fee, if applicable

- New York governing law and exclusive jurisdiction for any disputes relating to the financing

- Waiver of jury trial for financing-related disputes

- Prohibition on amending the Xerox provisions without the financing sources' consent

- Financing sources as express third-party beneficiaries of the Xerox provisions

While these provisions are now considered relatively standard, it is important for both buyers and sellers to understand their implications and ensure that they are appropriately tailored to the specific transaction.

Conclusion

Financing related provisions are a critical component of any acquisition agreement, requiring careful attention and skilled drafting to properly align the interests of the buyer, seller, and financing sources. By understanding the key considerations and best practices outlined in this article, parties engaging in M&A can navigate these complex provisions more effectively and successfully close their transactions.