CANADA Law and Practice Contributed by: Scott Hyman, Anthony Spadaro and David Wilson, Davies Ward Phillips & Vineberg LLP
agreed on by the parties in advance of execut- ing the commitment letter for the acquisition financing. Typically, the precise parameters of this concept are clearly expressed, and defined parameters are put on the scope of market flex provisions, capping the extent to which the arrangers can increase the cost of the financing to the purchaser. Highly confident letter Although less common, if the timeline for a par- ticular transaction does not allow sufficient time for lenders to obtain credit approval for a com- mitment letter, the acquirer may ask for a non- binding “highly confident letter” . In general, this letter confirms to the acquirer that, subject to certain conditions, the lenders are highly confi- dent that they can provide the requested financ- ing. Types of financing Acquisition financing typically takes the form of term loan “A” financings, whereby lenders provide financing on a more permanent basis to fund the acquisition. Such term loans are typi- cally provided by banks to investment grade or near investment grade purchasers. The second type of term financing is often called term loan “B” financing, whereby lenders provide financing to sub-investment grade purchasers. Term loan “A” financings are often structured as amortis- ing term loans, with amortisation sculpted to match the cash flow models of the purchaser, which demonstrate its ability to meet its debt service requirements and reduce its leverage. Term loan “B” financings are typically character- ised by lesser amounts of amortisation, or none, affording purchasers more time and flexibility to achieve targeted synergies to allow for leverage reduction.
Regardless of the terms of bank-led acquisi- tion financing, the documentation will include a credit agreement, credit support documents and security such as guarantees, general secu- rity agreements, securities pledge agreements, intellectual property security agreements and control agreements, and customary legal opin- ions from counsel to the borrower. Lender review Prior to executing a commitment letter, the lend- ers and their counsel will review the terms of the acquisition, including the acquisition agreement, lock-up agreements with directors, officers and key shareholders, support agreements, key employment agreements and other related doc- umentation to ensure that the terms on which the proposed acquisition is to be effected are satisfactory, because the lenders typically will not have another opportunity to express reserva- tions on the structure or terms of the acquisition and will be bound to fund, absent any proposed material change or amendment. Lenders will also want to ensure that the acquisition documenta- tion contains customary provisions designed to protect lenders from potential claims brought by the target in connection with the financing being provided (commonly referred to as “Xerox” pro- visions in the United States). Contractual protections Unlike other jurisdictions that provide for third- party beneficiary rights, the laws of Canada do not provide contractual protections to persons not party to a contract. Accordingly, lenders will not directly benefit from the terms of acquisition documents intended to protect the purchaser, so it is critical for the successful execution of the acquisition transaction and related financing that thorough diligence and analysis of the acquisi- tion terms and documentation are conducted, especially in cases where “certain funds” provi-
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