568 20 Acquisition Finance
For such reasons, the lenders might not be willing to give any binding promise
to provide the necessary funding.
This could lead to problems with the vendor. In practice, the vendor’s legal ad-
visers will carefully inspect the debt funding term sheets of the potential acquirer
for clauses that enable the lenders – and therefore even the acquirer – to walk
away. In many cases, the vendor will not continue talks with a potential acquirer
unless the latter can show that it has the required financial means to fulfil its pro-
posed obligations. This is particularly the case in auctions.^67
There are two main ways to address this problem at least partly: (1) through a
combination of conditions precedent to closing under the acquisition agreement
and commitment letters before the drafting of the loan facility agreement; and (2)
through “certain funds” rules that are mandatory as a legal requirement or de facto
mandatory as market practice.
Commitment letter. The legal meaning of a commitment letter depends on how
it will interpreted, and interpretation depends on the exact wording of the com-
mitment letter and the circumstances. In any case, the banks will not want to make
any binding promise enforceable by the court to lend money before the terms of
the acquisition and the refinancing and restructuring plans for the target are clear.
On first sight, the commitment letter contains an undertaking to provide fund-
ing. (a) In large transactions, the commitment letter can lay down an obligation to
underwrite the loan. In that case, the underwriter bears the risk that it cannot sell
the loan to other investors or that syndication will fail. (b) Some commitment let-
ters might only lay down an obligation to arrange a loan facility. If the arranger
has not undertaken any obligation to underwite the loan itself, the arranger only
has a duty to use its best efforts to arrange a consortium that will underwrite the
loan.^68
The lender typically tries to mitigate risk by using extensive conditions. (a) For
this purpose, the commitment letter can contain a description of all financing
transactions in the context of the acquisition. It can be explicitly stated that there
will not be any other indebtedness than indebtedness mentioned in the commit-
ment letter. (b) The commitment letter can be made subject to the fulfilment by
the borrower of all its obligations under the commitment letter, in particular the
prompt payment of all fees, and the fulfilment by the borrower of all terms under
the proposed loan facility agreement or the term sheet that contains its core terms.
(c) The commitment letter is usually made subject to the absence of a material ad-
verse change. (d) In addition, it can, in many ways, be subject to contract.^69 How
this is done depends on the case, and different commitment letters can have vari-
ous terms of enforceability. A commitment letter “subject to contract” will not be
regarded as an enforceable promise to provide funding. The same can be said of a
commitment letter “subject to documentation satisfactory to the bank”, although
the bank may have a duty not to withhold its acceptance unreasonably under the
mandatory provisions of the governing law (Volume II). The phrase “subject to
(^67) Ibid, § 2 number 22.
(^68) Ibid, § 2 number 25.
(^69) Ibid, § 2 number 24.