578 20 Acquisition Finance
Third, the loan facility agreement ordinarily contains a material adverse change
clause and a change of control clause. Furthermore, terms of senior loans will
generally require early payment in the event of a public offering, a flotation, a list-
ing, or a significant business sale (whether or not a change of control occurs).
On the other hand, A often has an exit plan for its investment. The provisions of
the loan facility agreement and their cost implications should be reviewed in light
of A’s exit strategy. For example, B typically tries to ensure that the planned exit
of A will not result in any obligation to prepay the loan nor any obligation to pay
an early prepayment fee.^111
Analysis of representations and warranties. Usually, the acquisition agreement
and the loan facility agreement contain generic representations and warranties that
can be found in both contract types as well as particular representations and war-
ranties for each contract type.
Both contract types can contain seemingly similar representations and warran-
ties relating to the characteristics of the target.
The representations and warranties have been described as follows: “In the context of a
loan, the representations will usually cover legal matters such as due incorporation, power
to carry on business, the finance documents being legal, valid and binding, no defaults un-
der existing agreements or finance documents, no litigation, the correctness of accounts, no
material adverse change since the date of the last accounts, accuracy of the information
memorandum and other reports provided, pension scheme compliance and compliance with
laws, ownership of assets and other representations as appropriate (for example, intellectual
property or environmental depending on the nature of the business), as well as a representa-
tion that the borrower has no reason to believe that the representations under the sale and
purchase agreement are incorrect.”^112
The representations and warranties under the acquisition agreement may even
have been incorporated in the loan facility agreement through an explicit refer-
ence.^113
However, the acquirer/borrower should take into account that those two sets of
representations and warranties neither share the same purpose nor trigger identical
remedies. Under the acquisition agreement, misrepresentations typically trigger
the adjustment of the purchase price and/or a duty to pay damages. Under the loan
facility agreement, misrepresentations typically entitle the lenders to stop making
further advances and/or trigger an event of default. Consequently, it is important
for the acquirer/borrower to ensure that the representations and warranties are
suitably diluted under the loan facility agreement (for dilution, see Volume II).^114
(^111) Ibid, p 303.
(^112) Ibid, p 303.
(^113) Ibid, p 303.
(^114) Ibid, pp 303–304.