Issues under finance and banking law

 
 

Existing debt/security interests

In order to obtain information about all security interests encumbering the assets of the company or its shares, it is important, in addition to obtaining statements from the seller, also to examine the relevant registers for intangibles and movables as well as the land and mortgage register for real estate.

From the buyer’s point of view, it is particularly important to examine the pledge register in order to verify whether the shares or assets are subject to a registered pledge. If a registered pledge has been established and the pledge agreement prohibits sale of the asset, the sale will be invalid unless the buyer did not know and could not have known of the prohibition (which would be very unusual, since a prohibition on sale of a pledged asset is disclosed in the public pledge register).

As a result, failure to examine the register or obtain required consents or other statements may result in invalidity of the acquisition.

Share deal

In the case of a share deal it should be examined whether:

  • The target company is a borrower or guarantor under a loan or credit agreement.
  • The assets or shares of the company are encumbered by security interests.

Depending on the type of existing credit or loan agreement, and after the prospective buyer analyses its provisions (particularly the financial terms), the buyer and the seller will determine whether:

  • The given financing will be continued, or
  • The outstanding balance will be paid off by the buyer or the seller or refinanced by another bank.

If the decision is to continue the financing, the specific provisions of the credit or loan agreement should be examined, particularly the borrower’s representations and warranties, as well as the circumstances constituting events of default, in terms of the feasibility of transferring the shares and operations of the borrower to a new capital group. (For example, the credit agreement may require that all the borrower’s cash flows be conducted through the lender, but the acquirer’s group may do business with a different bank.)

Of particular importance is the inclusion of any change of control clauses, and if so, the specific terms.

In consequence, prior to transfer of the shares it will sometimes be necessary to obtain consent to the transaction from the lender, or a waiver of certain rights under the credit agreement, or else amend certain provisions of the credit agreement.

When the financing is to be continued and there are encumbrances on the borrower’s shares, it is important to make relevant modifications to the security instruments when the shares are transferred. It must also be determined whether there are any restrictions on sale and whether all consents required by the security instruments have been obtained.

If the decision is to pay off the outstanding borrowings of the target, the provisions of the credit or loan agreement concerning early repayment (e.g. with respect to fees and commissions) will be relevant, as will provisions concerning termination of the agreement (on notice or by agreement). An analysis of these aspects of the credit or loan agreement will enable the parties to prepare a repayment strategy before presenting the proposal to the lender.

From the buyer’s point of view it is important to determine the conditions, and ideally the wording of the future declarations, with respect to repayment of obligations and release of existing security interests or confirmation that they have expired, as well as consent to deletion of the entry of the security interests from the relevant registers. Therefore prior to conclusion of the sale agreement, the buyer should obtain undertaking of the lender to issue a release letter upon repayment (pay-off letter). Specific wording of release letter including confirmation of repayment and expiry of the security interests is usually attached to the pay-off letter.

The type of security interests that are being released will determine the wording of the release letter. It is particularly important in the case of security that is based on disclosure in a register to assure that the security is precisely identified and that the release letter is worded correctly to enable deletion of the entry from the register.

The release letter should also contain an undertaking to return the original documents related to the principal forms of security, such as powers of attorney or declarations regarding submission to enforcement, and to prohibit the use of copies of such instruments.

Asset deal

In the case of an asset deal, first and foremost any security interests encumbering the acquired assets as a whole should be examined, as well as encumbrances on elements of specific assets (for example, the plant as such may not be encumbered but the production line may be subject to a pledge).

The wording of the release letter in this case is typically even more crucial than in the case of a share deal. Most often, because the secured claims are not being repaid, the release letter will not include provisions concerning expiry of the debt, but only a statement on waiver of the specific security interest.

From the seller’s point of view, it is important to obtain the necessary consents and declarations from the lender for sale of the specific assets.

An exception to this structure in the case of an asset deal, closer to the structure described above, where the target is the borrower, is the situation where the seller’s acquisition of the assets in question was financed by a bank or other specialised institution. In such case (if it is planned to pay down the existing claims of the target) the rules for repayment the claims and the wording of the release letter should be similar to those described earlier.