20.5 Debt 567- The acquirer should ensure that it does not promise to buy the target before it is
certain that banks will provide the necessary funding. - The acquirer should try to limit the cumulation of legal risk caused by the exis-
tence of two contractual relationships: vendor v buyer and buyer v the banks. In
particular, the acquirer should try to ensure that breach of the terms of the ac-
quisition agreement by the vendor will not trigger an event of default by the
debtor under the loan facility agreement. The cumulation of legal risk increases
if the specifications of the target (warranties) belong to the representations,
warranties and covenants of both the vendor (under the acquisition agreement)
and the debtor (under the loan facility agreement). - Furthermore, the acquirer should ensure that the legal frameworks for both
transactions enable it to refinance the transaction after the acquirer has com-
pleted the acquisition.
The contract process in a leveraged buy-out. The contract process depends on the
perspective (the perspective of the acquirer/borrower v the perspective of the
lenders). In any case, the acquirer will need to understand the process from the
lenders’ perspective in order to align the funding process with the acquisition
process.
For example, evidence of “certain funds” is often required in auctions in which
the vendor can require the potential bidders to submit documentation showing that
the lenders have promised to provide funding.^66 Furthermore, the acquirer will
need funds at the time of closing of the acquisition agreement, but, under the terms
of the loan facility agreement, the facility may not be drawn unless all security and
collateral arrangements are already in place.
20.5.2 Commitment of Banks
There is a conflict between the legal interests of the acquirer, the lenders, and the
vendor. The acquirer should not promise to buy the target unless the lenders have
promised to provide the necessary funding.
On the other hand, the lenders cannot promise to provide the necessary funding
unless they have been able to perform the customary credit checks and due dili-
gence inspections and determine the creditworthiness of the borrower. For exam-
ple, the lenders must analyse both the proposed acquisition and the proposed
credit facility, and the due diligence inspections should cover not only the pro-
spective borrower but also the target company and other relevant companies.
Furthermore, the lenders will not promise funding unless they understand the
acquirer’s restructuring and refinancing plans for the target. Unfortunately, the
lenders might not have free access to the target company, the terms of the acquisi-
tion agreement might not yet be clear, and the restructuring and refinancing plans
might still be open.
(^66) Diem A, op cit, § 2 number 22.