CANADA Law and Practice Contributed by: Scott Hyman, Anthony Spadaro and David Wilson, Davies Ward Phillips & Vineberg LLP
financing, this uncertainty is addressed through the sale of “subscription receipts” that entitle the purchaser (without any further payment or other action) to an equivalent amount of com- mon shares upon the closing of the acquisition. As a result, the underlying equity is not issued unless and until the acquisition closes. Prior to the acquisition closing, the subscription receipt proceeds are held in escrow. In contrast, debt securities sold to fund an acquisition are issued, and will trade, prior to the closing of the acquisition. However, those debt securities are commonly subject to a special mandatory redemption by the issuer if the acquisition does not close. Depending on the circumstances, it may be necessary for the proceeds from the sale of the debt securities to be held in escrow until the acquisition closing. Certain issuers (including special purpose vehicles) may also be required to over-fund the escrow to satisfy the intervening accrued interest on those securities. 3.5 Private Placements/Loan Notes Any offering of debt securities to fund an acqui- sition may be conducted by way of a public offering (ie, qualified by a Canadian prospec- tus filed with securities regulators in the prov- inces and territories in which the offering is to be made) or on a private placement basis (ie, pursuant to an exemption from the prospectus requirements). Although not strictly necessary, an “offering memorandum” is typically used to market a Canadian private placement of debt
replacement revolving credit facility to the target company post-acquisition, that facility could be structured as an asset-based loan if the nature of the target’s business lends itself to that type of financing. Asset-based financings in Canada are struc- tured in a similar manner to those in the Unit- ed States, where lenders will advance up to a certain percentage of the borrower’s inventory and accounts receivable. Generally, less liquid underlying assets result in lower loan-to-value ratios. Where two or more groups of creditors have security over the same collateral, they must enter into an intercreditor agreement that establishes the rights and priorities of the creditors over that collateral. The simplest scenario arises where first-lien lenders provide a revolving credit facil- ity and/or term loans to a borrower, and another set of lenders provide second-lien term loans to the same borrower. An intercreditor agreement will customarily address the following matters between creditors: • acknowledging and agreeing to the existence and terms of the security and rights of the other creditors to the intercreditor arrange- ments; • establishing the relative priorities of the credi- tors and setting out “waterfall” to deal with the proceeds of realisation on the collateral; • determining which creditor will lead the enforcement and realisation proceedings (typically the senior creditor); 4. Intercreditor Agreements 4.1 Typical Elements Intercreditor Agreements
securities to fund an acquisition. 3.6 Asset-Based Financing
Asset-based financing is a form of working cap- ital financing and, as such, is not common in the context of acquisition financings in Canada. However, if the lenders providing the acquisi- tion financing commitments are also providing a
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