20.5 Debt 577agreement is not within the control of the acquirer/borrower, the ac-
quirer/borrower can try to ensure that representations and warranties under the ac-
quisition agreement will not influence the obligation of lenders to advance funds.
Generally, where the loan facility agreement contains a payment condition, the
acquirer/borrower should try to ensure that the determination of breach of contract
(misrepresentation, an actual event of default, or a potential event of default) is
objective. The lender would prefer a term according to which the determination of
breach of contract is subjective in the lender’s opinion (or, in a syndicated loan, in
the agent’s opinion).^107
Clean-up period. The loan facility agreement contains terms based on the
specifications of the target. For example, the warranties and covenants of the ac-
quirer/borrower state that the target will have certain characteristics. However, the
acquirer/borrower will not obtain control before the closing of the acquisition
agreement, and it may take some time before the acquirer/borrower has both legal
and de facto control over the target. For this reason, the acquirer/borrower will
need some time after completion of the acquisition to ensure that the target is in
conformity with all warranties and covenants under the loan facility agreement
(clean-up period). Without a clean-up period clause, the lender might have a right
to terminate the loan facility agreement immediately or take other action due to
the occurrence of an event of default by the borrower.^108
Borrower discretion. The borrower will always need to preserve a sufficient
amount of managerial discretion (section 4.2). This question is even more impor-
tant in the context of acquisition loan facility agreements, because the manage-
ment of the target is subject even to other contractual constraints than those im-
posed by the lenders.
First, the acquirer/borrower (B) is often an acquisition vehicle used by an ulti-
mate acquirer (sometimes a venture capital investor or a private equity fund) that
has invested in it. The ultimate acquirer (A) has its own investors. The terms of
A’s own direct investment in B and the terms of the latter company’s investment
in the target (T) can be constrained by the obligations that A owes to its own in-
vestors. For these reasons, A will try to preserve both B’s and T’s managerial dis-
cretion. A will ideally want B to have enough flexibility under the acquisition loan
facility for A to be able to comply with its obligations to its own investors.^109
Second, the terms of the loan facility agreement should be consistent with A’s
and B’s business plan for T. If they are not, actions required by the business plan
will, in practice, be subject to approval by the lenders. This is because the repre-
sentations, covenants, and events of default in the loan documentation are de-
signed to give debt providers a veto right in relation to major or unusual deci-
sions.^110
(^107) Gayle C, Acquisition Finance – Syndication Best Practice, Int Comp Comm L R 13(8)
(2002) p 303.
(^108) Diem A, Akquisitionsfinanzierungen. C.H. Beck, München (2005) p 113.
(^109) See also Gayle C, op cit, p 301.
(^110) Ibid, p 302.