576 20 Acquisition Finance
20.5.4 Internal Coherence of Contracts
The terms of the acquisition agreement and the loan facility agreement form a
whole for each of the three parties (acquirer, lender, vendor).
Interests of lenders, acquirers and vendors. Lenders understand that the charac-
teristics of the target and the terms of the acquisition agreement will influence
their own risk exposure.
The vendor is interested in the loan facility agreement for at least three reasons.
(1) The vendor wants the acquirer to be able fulfil its payment obligations. The
terms of the loan facility agreement influence the ability of the acquirer to pay. (2)
The vendor needs to know about the plans of the acquirer for the target in order to
protect its own reputation. (For example, selling a subsidiary for buyers to loot
might cause plenty of negative publicity, ruin the value of the parent’s brand, and
reduce the parent’s sales, and the fate of the target’s employees will make future
divestments easier or more difficult. Siemens got plenty of adverse publicity for
the sale of its incorporated mobile phone division to BenQ after it turned out that
BenQ let the division file for bankruptcy in a Munich court and continued its mo-
bile business from Asia.) (3) The vendor should also study the representations,
warranties and covenants of the acquirer and sanctions triggered by the occurrence
of an event of default under the loan facility agreement. Breach of contract by the
vendor under the acquisition agreement can cause breach of contract by the ac-
quirer under the loan facility agreement. Under the terms of the acquisition
agreement, the vendor may be liable for damage sustained by the acquirer. Fur-
thermore, the acquirer will require the vendor to have delivered whatever the ac-
quirer has promised to the lenders about the specifications of the target.
The acquirer is most clearly interested in all terms of both agreements. For ex-
ample, the acquirer should pay particular attention to: the coordination of condi-
tions precedent; the need to agree on a clean-up period; the extent of borrower dis-
cretion in the light of its business plans and exit plans; as well as the coordination
of representations and warranties under both agreements.
Conditions precedent and drawdown conditions. The interaction of the condi-
tions precedent to the financing with the terms of the sale and purchase agreement
should be considered carefully.
The availability of funds is a common condition precedent to the closing of the
acquisition agreement. Where it is not a condition, the acquirer/borrower should
study the conditions precedent to drawing the loans and ensure that what is re-
quired is within its control. The acquirer/borrower should also consider carefully
what liabilities it will incur if it fails to complete the acquisition.
The acquirer/borrower should also be aware of other events which may prevent
the advance of funds (drawstops). It can be a condition to the advance of funds
(payment condition, section 4.3) under an acquisition loan facility agreement that
all representations and warranties under the loan facility agreement are correct and
that there is no potential or actual event of default both before and after the loan is
made. Furthermore, the contents of the acquisition agreement may have been in-
corporated into the acquisition loan facility agreement by means of an explicit ref-
erence. As compliance by the vendor with its obligations under the acquisition