20.5 Debt 569documentation” increases the probability that the commintment letter leads to an
enforceable promise to provide funding, if the parties have agreed on the core
commercial terms of the loan facility (in the term sheet annexed to the commit-
ment letter or otherwise) and the court will be able to decide what the others terms
should be.^70 How a commitment letter works can be illustrated by the following
example.
A certain borrower may need to raise the following funding in the context of an acquisition:
a short-term bridge loan facility; a long-term loan facility following refinancing after the
completion of the acquisition; and excess cash. In such a case, the commitment letter could
first: describe the various loan facilities; contain a statement that no other financing will be
required for the uses described in the commitment letter; and contain a statement that the
borrower will have no other indebtedness or preferred equity. Subsequently, the commit-
ment letter would contain a bank’s promise.
The promise to provide a bridge loan could look as follows: “The Bank is pleased to ad-
vise you of its commitment to provide the entire amount of the Bridge Facility to Borrower
upon the terms and subject to the conditions set forth or referred to in this Commitment
Letter.”
The commitment letter would contain core information about the Bridge Facility. The
Bridge Facility Term Sheet would set forth its terms and conditions.
The commitment letter would nevertheless be diluted in many ways. First, the commit-
ment of the bank would be subject to contract: “The commitment of the Bank hereunder is
subject to the negotiation, execution and delivery of definitive documentation with respect
to the Bridge Facility reasonably satisfactory to the Bank reflecting the terms and condi-
tions set forth in the Bridge Term Sheet, the Conditions Annex and the Fee Letter, and such
other terms (but not conditions) as you and we may mutually agree.” Second, the commit-
ment would be diluted by conditions. For example, the bank could reserve the right to ter-
minate its commitment if: (a) a material adverse change has occurred; or (b) any condition
set forth in either Term Sheet or the Conditions Annex is not satisfied or any covenant or
agreement in the Commitment Letter or the Fee Letter is not complied with in any material
respect. Third, the borrower would be made to undertake a duty to pay a fee under a Fee
Letter.
“Certain funds”. Sometimes a relatively high degree of enforceability is necessary
for legal reasons. In order to protect market participants and the target, the City
Code on Takeovers and Mergers (the City Code or the Takeover Code) requires
the existence of “certain funds” before the making of a bid. The “certain funds”
requirement is a legal implant used even in other contexts and in other Member
States. Competition has driven the mandatory City Code “certain funds” require-
ment to be adopted as market practice in private equity transactions and in many
public takeover bids. It is often used in auctions, and it has also influenced many
other privately-negotiated acquisitions.
According to the general principles of the Code, an offeror “must announce a bid only after
ensuring that he/she can fulfil in full any cash consideration if such is offered, and after tak-
ing all reasonable measures to secure the implementation of any other type of considera-
(^70) See Cranston R, Principles of Banking Law. Second Edition. OUP, Oxford (2002) pp
301–303.