Acquisition Finance 2025

Definitive global law guides offering comparative analysis from top-ranked lawyers

CHAMBERS GLOBAL PRACTICE GUIDES

Definitive global law guides offering comparative analysis from top-ranked lawyers

Contributing Editors Johannes Tieves and Nicholas A Dorsey Hengeler Mueller and Cravath, Swaine & Moore LLP

Global Practice Guides

Acquisition Finance

Contributing Editors Johannes Tieves and Nicholas A Dorsey Hengeler Mueller and Cravath, Swaine & Moore LLP

2025

Chambers Global Practice Guides For more than 20 years, Chambers Global Guides have ranked lawyers and law firms across the world. Chambers now offer clients a new series of Global Practice Guides, which contain practical guidance on doing legal business in key jurisdictions. We use our knowledge of the world’s best lawyers to select leading law firms in each jurisdiction to write the ‘Law & Practice’ sections. In addition, the ‘Trends & Developments’ sections analyse trends and developments in local legal markets. Disclaimer: The information in this guide is provided for general reference only, not as specific legal advice. Views expressed by the authors are not necessarily the views of the law firms in which they practise. For specific legal advice, a lawyer should be consulted. Content Management Director Claire Oxborrow Content Manager Jonathan Mendelowitz Senior Content Reviewers Sally McGonigal, Ethne Withers, Deborah Sinclair and Stephen Dinkeldein Content Reviewers Vivienne Button, Lawrence Garrett, Sean Marshall, Marianne Page, Heather Palomino and Adrian Ciechacki Content Coordination Manager Nancy Laidler Senior Content Coordinators Carla Cagnina and Delicia Tasinda Content Coordinator Hannah Leinmüller Head of Production Jasper John Production Coordinator Genevieve Sibayan

Published by Chambers and Partners 165 Fleet Street London EC4A 2AE Tel +44 20 7606 8844 Fax +44 20 7831 5662 Web www.chambers.com

Contents

INTRODUCTION Contributed by Johannes Tieves and Nicholas A Dorsey, Hengeler Mueller and Cravath, Swaine & Moore LLP p.5

FRANCE Law and Practice p.183 Contributed by Bredin Prat Trends and Developments p.206 Contributed by Nabarro Béraud Avocats GERMANY Trends and Developments p.213 Contributed by LARK INDIA Law and Practice p.221 Contributed by JSA Trends and Developments p.243 Contributed by JSA JAPAN Law and Practice p.249 Contributed by Nagashima Ohno & Tsunematsu Trends and Developments p.267 Contributed by Anderson Mori & Tomotsune

AUSTRALIA Law and Practice p.7 Contributed by Gilbert + Tobin Trends and Developments p.32 Contributed by Jones Day

AUSTRIA Law and Practice p.41 Contributed by Weber & Co

BRAZIL Law and Practice p.60 Contributed by Pinheiro Neto Advogados

CANADA Law and Practice p.85 Contributed by Davies Ward Phillips & Vineberg LLP

NETHERLANDS Law and Practice p.275 Contributed by Loyens & Loeff Trends and Developments p.296 Contributed by Loyens & Loeff NEW ZEALAND Law and Practice p.305 Contributed by Russell McVeagh NORWAY Law and Practice p.323 Contributed by BAHR PORTUGAL Law and Practice p.340 Contributed by Uría Menéndez SERBIA Trends and Developments p.359 Contributed by Gecić Law

CHINA Law and Practice p.108 Contributed by JunHe LLP DENMARK Law and Practice p.125

Contributed by Moalem Weitemeyer Trends and Developments p.147 Contributed by Moalem Weitemeyer

DOMINICAN REPUBLIC Law and Practice p.154 Contributed by Pellerano Nadal Law & Consulting

FINLAND Law and Practice p.170 Contributed by Wist Attorneys

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Contents

SINGAPORE Trends and Developments p.366 Contributed by WongPartnership LLP SLOVENIA Law and Practice p.372 Contributed by Wolf Theiss Attorneys-at-law

SWITZERLAND Law and Practice p.472 Contributed by Homburger

Trends and Developments p.491 Contributed by Walder Wyss Ltd.

TAIWAN Law and Practice p.498 Contributed by Lee & Li Attorneys-at-Law Trends and Developments p.514 Contributed by Lee & Li Attorneys-at-Law USA Law and Practice p.519 Contributed by Cravath, Swaine & Moore LLP Trends and Developments p.545 Contributed by Cravath, Swaine & Moore LLP

SOUTH AFRICA Law and Practice p.393 Contributed by Bowmans

SOUTH KOREA Law and Practice p.414 Contributed by Kim & Chang Trends and Developments p.429 Contributed by Shin & Kim SPAIN Law and Practice p.436 Contributed by Uría Menéndez

SWEDEN Law and Practice p.458 Contributed by Linklaters

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INTRODUCTION Contributed by: Johannes Tieves and Nicholas A Dorsey, Hengeler Mueller and Cravath, Swaine & Moore LLP

Contributing Editors

Johannes Tieves of Hengeler Mueller advises listed and unlisted domestic and

Nicholas A Dorsey is a partner in Cravath, Swaine & Moore LLP’s corporate department and focuses his practice on

international companies, banks and funds on syndicated loans, high-yield bonds, hybrid financings and restructurings/workouts and insolvencies. His practice also includes advising on financing structures in connection with M&A transactions and public takeovers.

representing corporate issuers and borrowers, and financial institutions, lenders and other parties, in public and private offerings of securities, loan transactions and other financing transactions. He also represents companies in M&A, and regularly advises clients in connection with public disclosure and corporate matters. He has extensive cross-border experience and counts multiple international companies and financial institutions among his diverse client base.

Hengeler Mueller and Cravath, Swaine & Moore LLP HM: Bockenheimer Landstrasse 24 60323 Frankfurt am Main Germany CSM: Two Manhattan West 375 Ninth Avenue New York, NY 10001 Tel: +49 69 170 950/+1 212 474 1764 Fax: +49 69 725 773/+1 212 474 3700 Email: johannes.tieves@hengeler.com; ndorsey@cravath.com Web: www.hengeler.com; www.cravath.com

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INTRODUCTION Contributed by: Johannes Tieves and Nicholas A Dorsey, Hengeler Mueller and Cravath, Swaine & Moore LLP

Acquisition Finance 2025 Overview Cravath, Swaine & Moore LLP and Hengeler Mueller are delighted to combine our worldwide working experience in acquisition finance to act as contributing editors for this 2025 edition. Like prior editions, this guide aims to provide a valuable first resource on the key aspects of acquisition finance in countries throughout the world. We hope that this guide will help read- ers to gain a quick, initial understanding of the opportunities and pitfalls that may come with different forms of cross-border financings in the covered jurisdictions, including taking collateral in foreign jurisdictions. In 2024, global M&A activity totalled USD3.2 trillion, an increase of approximately 10% com- pared to 2023. There were approximately 50,000 deals announced in 2024, a decline of approxi- mately 14% compared to 2023. The fourth quar- ter of 2024 marked the tenth consecutive quarter to fall below USD1.0 trillion in announced M&A deal volume. Private equity M&A is an important driver of acquisition finance activity. Private equity buy- outs reached USD706 billion globally in 2024, representing a year-over-year increase of 24%. However, the number of private equity-backed M&A deals fell by about 32% over the same period, with the result that many private equi- ty M&A and acquisition finance lawyers found themselves working on fewer transactions, albeit at larger purchase prices.

Factors contributing to the relatively subdued acquisition finance market in 2024 included: i) geopolitical instability; ii) the US presidential election cycle; iii) moderately high interest rates; iv) inflationary pressures; and iv) volatile market movements. As in prior years, we would like to thank our esteemed colleagues for sharing their knowledge and market intelligence, gained from countless transactions. We share the belief that a seamless product can be best delivered to the reader by a group of first-class law firms with strong working relationships across the world and deep roots in the legal, commercial and political systems of their home countries. Together with the publisher and the other authors, we hope that this book will assist any- one involved in acquisition finance to under- stand the key legal aspects of the relevant juris- dictions. We hope to receive suggestions and feedback from readers to make this publication an even better companion.

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AUSTRALIA

Australia

Law and Practice Contributed by: John Schembri and Erin Cartledge Gilbert + Tobin

Sydney

Tasmania

Contents 1. Market p.10 1.1 Major Lender-Side Players p.10 1.2 Corporates and LBOs p.11

2. Documentation p.12 2.1 Governing Law p.12 2.2 Use of Loan Market Association (LMA) Agreements or Other Standard Loans p.12 2.3 Language p.13 2.4 Opinions p.13 3. Structures p.14 3.1 Senior Loans p.14 3.2 Mezzanine/Payment-in-Kind (PIK) Loans p.14 3.3 Bridge Loans p.15 3.4 Bonds/High-Yield Bonds p.15 3.5 Private Placements/Loan Notes p.15 3.6 Asset-Based Financing p.15 4. Intercreditor Agreements p.16

4.1 Typical Elements p.16 4.2 Bank/Bond Deals p.17 4.3 Role of Hedge Counterparties p.17 5. Security p.18 5.1 Types of Security Commonly Used p.18 5.2 Form Requirements p.20 5.3 Registration Process p.20 5.4 Restrictions on Upstream Security p.22 5.5 Financial Assistance p.22 5.6 Other Restrictions p.22 5.7 General Principles of Enforcement p.23 6. Guarantees p.24 6.1 Types of Guarantees p.24 6.2 Restrictions p.25 6.3 Requirement for Guarantee Fees p.25

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AUSTRALIA CONTENTS

7. Lender Liability p.25 7.1 Equitable Subordination Rules p.25 7.2 Claw-Back Risk p.25 8. Tax Issues p.26 8.1 Stamp Taxes p.26 8.2 Withholding Tax/Qualifying Lender Concepts p.27 8.3 Thin-Capitalisation Rules p.28

9. Takeover Finance p.29 9.1 Regulated Targets p.29 9.2 Listed Targets p.30

10. Jurisdiction-Specific Features p.31 10.1 Other Acquisition Finance Issues p.31

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AUSTRALIA Law and Practice Contributed by: John Schembri and Erin Cartledge, Gilbert + Tobin

Gilbert + Tobin advises sponsors, leading finan- cial institutions, investment banks and corpora- tions, and the lawyers in its banking and pro- jects team have strong experience in domestic financing and cross-border transactions. The banking and projects team is one of the larg- est dedicated banking and finance legal teams in Australia, comprising 27 partners, 17 special

counsel and approximately 127 associates. The firm has offices in Sydney, Melbourne and Perth and consistently provides an outstanding, com- prehensive offering on the region’s most com- plex, market-leading deals. It also has well-es- tablished relationships with some of the largest firms across the globe.

Authors

John Schembri is the lead partner for Gilbert + Tobin’s banking and projects group. His practice covers the largest, most complex transactions in acquisition, corporate, asset and

Erin Cartledge is a special counsel in Gilbert + Tobin’s

banking and projects group. Her practice is primarily focused on leveraged and acquisition finance transactions, both local and international. In this area, Erin has advised sponsors, lenders and borrowers across a number of transactions including secured, unsecured, syndicated and club loan arrangements (and including TLB and unitranche transactions). In addition to her experience in the Australian market, Erin previously worked in the New York office of a large international firm for a number of years.

project finance in the Australian market. John is recognised by clients and industry alike as a pre-eminent finance lawyer and has unparalleled market connections. He is sought out by clients to work on the highest-value deals in the Australian market.

Gilbert + Tobin Level 35, Tower Two International Towers Sydney 200 Barangaroo Avenue

Barangaroo NSW 2000 Australia

Tel: +61 2 9263 4000 Fax: +61 2 9263 4111 Email: info@gtlaw.com.au Web: www.gtlaw.com.au

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AUSTRALIA Law and Practice Contributed by: John Schembri and Erin Cartledge, Gilbert + Tobin

1. Market 1.1 Major Lender-Side Players

structured, distressed or mezzanine financing in Australia with banks traditionally being the larg- est players in the acquisition finance market. While Australia remains a bank-led market (par- ticularly in comparison to the USA and Europe), private credit providers such as institutional non-bank lenders and private credit funds and, more recently, Australian pension/superannua- tion funds are rapidly gaining significant market share, particularly in large-ticket transactions, with the private credit market accounting for AUD205 billion of the total loan market in Aus- tralia. Private credit providers are increasingly attrac- tive to sponsors, particularly given their willing- ness to offer a range of products not offered by the major domestic banks, such as unitranche or Term Loan B (TLB) facilities and their tendency to underwrite and hold credits on their balance sheets, often leading to faster decision making and deal execution due to the elimination of syn- dication risk. The changes in the ESG landscape have also presented interesting opportunities for private credit providers to provide fund- ing to borrowers where banks have retracted capital due to ESG concerns (for instance, the authors have seen this particularly in the coal and defence sectors). Pension and superannua- tion funds have also been a key provider of funds for social and affordable housing developments, often in combination with institutional lenders and government grants. Private equity firms have gravitated towards these private credit providers and products to benefit from higher leverage multiples, less cov- enants, longer tenors, reduced amortisation and more permissive terms This is particularly the case with the large international private equity funds, such as those identified in 1.2 Corporates and LBOs , which are very familiar with these

There is a long history of M&A activity in Austral- ia, and so leveraged finance is a well-understood and active area for financiers and sponsors alike. The financing of acquisitions in Australia was historically the domain of banks, both domestic and international, but is becoming increasingly occupied by non-bank, institutional and private credit funds. Banks Australia’s major domestic banks (Australia and New Zealand Banking Group, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corporation) have traditionally been active in the acquisition finance market. These banks often take leading roles in arrang- ing acquisition facilities and often provide a sig- nificant portion of the debt commitments them- selves. The major domestic banks compete with a range of foreign and local investment banks, such as Jefferies, UBS, Deutsche Bank, Macquarie, Bank, JP Morgan, Morgan Stanley, Bank of America, Citibank, Royal Bank of Canada and Goldman Sachs, particularly on large-ticket (eg, AUD1 billion plus) transactions, which typically require an underwritten facility. Foreign banks, such as HSBC, MUFG, SMBC, Mizuho, Bank of China and ICBC, are also very active in taking senior debt positions as part of a syndicate, with Chinese banks regularly funding Chinese investment into Australia. Institutional Lenders and Private Credit Providers Historically, debt funds’ and institutional lend- ers’ participation was limited to involvement in

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AUSTRALIA Law and Practice Contributed by: John Schembri and Erin Cartledge, Gilbert + Tobin

structures and able to leverage their experience overseas to adapt these products to the domes- tic market. As such, the increased presence of the private credit providers has resulted in the importation of terms from the US and European markets, including “covenant-lite” structures, payment-in-kind interest and other more flex- ible borrower-friendly terms. However, in the current high interest rate environment, the com- petitive tension between traditional bank loans and private credit fund products have played out in interesting ways. Sponsors who have histori- cally looked to raise debt in the unitranche and TLB financing markets have being considering traditional bank loans more frequently as a viable option for implementing their proposed trans- actions, due to the banks offering lower pricing and a willingness by some sponsors to forgo flexibility in terms for economics in the current macroeconomic environment. The lending activities of private credit provid- ers are likely to come under more scrutiny in the future, with the Australian corporate regulator, Australian Securities and Investment Commis- sion (ASIC) currently considering the regula- tory framework underpinning the private credit market, as evidenced by the discussion paper released by ASIC in February 2025. ASIC’s focus seems to be on governance, valuation practic- es, management of conflicts of interest and the exposure of retail investors to the private credit market (indirectly through compulsory superan- nuation contributions, with superannuation funds providing a significant portion of the private cap- ital). As such, any new regulatory requirements are likely to take the form of increased disclo- sure and transparency, aimed at improving mar- ket integrity and investor outcomes, rather than addressing perceived or actual risks to financial stability, with ASIC’s view being that the Austral-

ian private credit market is relatively small in size when compared to other jurisdictions. 1.2 Corporates and LBOs From a sponsor perspective, acquisition finance activity in Australia is primarily driven by private equity firms. In this respect, a number of the large global private equity firms have a pres- ence in Australia (including Affinity, Bain Capital, Blackstone, Carlyle, KKR and TPG). In addition to the global players, a number of domestic pri- vate equity firms are also active in the acquisi- tion finance space (including BGH Capital, CPE Capital, PEP and Quadrant). M&A-related activity remained relatively sub- dued in 2024, despite showing a few signs of recovery. While inflationary pressures eased slightly, the cost of funding remained high, with the Reserve Bank of Australia maintaining a cau- tious approach on monetary policy, announcing the first reduction in the official cash rate in Feb- ruary 2025, after opting to hold the official cash rate steady in 2024 and the aggressive increases in the official cash rate during 2022 and 2023. Geopolitical challenges abroad and economic uncertainty also contributed to the reduced level of M&A activity. Due to the reduction in M&A activity, and the “wait and see” approach adopted by sponsors in relation to exiting their current investments, there was an increase in refinancings, repricings and shorter-term loan extensions in the Austral- ian loan markets in 2024. The authors expect this trend to continue in 2025, particularly given recent tariff announcements in the US and the Australian federal election in May 2025.

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AUSTRALIA Law and Practice Contributed by: John Schembri and Erin Cartledge, Gilbert + Tobin

2. Documentation 2.1 Governing Law

2.2 Use of Loan Market Association (LMA) Agreements or Other Standard Loans The Loan Market Association (LMA) equivalent in Australia is the Asia Pacific Loan Market Asso- ciation (APLMA), which has produced a suite of documents, including bilateral facility docu- mentation, commitment letters, confidentiality letters, mandate letters, and both investment grade and standard secured syndicated facility agreements, but is yet to produce an equivalent to the LMA’s leveraged acquisition documenta- tion (unlike the LMA suite, these documents are not specifically tailored to acquisition finance transactions). The APLMA standard secured syndicated facility largely mirrors the structure of the LMA version, with notable differences in Australia’s interest withholding tax regime, local laws (eg, financial assistance legislation) and market practice. The APLMA documentation has largely followed the approach of the LMA precedents to the use of risk-free rates as replacements for IBOR rates, again with some differences (eg, taking into account that Australian dollar denominated loans typically use a forward-looking term rate rather than a backwards-looking risk-free rate – a position that appears unlikely to change in the short term). Each firm tends to have its own precedent acqui- sition facility documentation, which is, to a great- er or lesser extent, based on the APLMA stand - ard facility documentation. As US and European private equity funds have become more active in the Australian market, facility documentation has become more aligned to offshore norms, often incorporating documentation “technol- ogy” seen in more developed capital markets. Similarly, as the market dynamic has changed, there have been a number of acquisition financ-

For domestic transactions, debt documentation (including commitment letters, term sheets and full-form facility and intercreditor agreements) is governed by the law of an Australian state or territory – generally New South Wales or Victoria. There are no material differences between the laws of each state or territory from a governing law perspective, with all Australian companies regulated by Commonwealth law irrespective of the governing law of the documentation. If the acquisition debt is arranged offshore, the gov- erning law of that offshore jurisdiction may be used (typically, English law or the laws of a state of the USA). Security documents affecting Australian assets are similarly governed by the law of a state or territory, and only one jurisdiction is chosen for the governing law even if the assets are located in multiple states. Again, the choice of law is usually determined by where the grantor oper- ates, where its assets are located and/or where the Australian lenders have lending offices. If assets are located outside Australia, financiers will usually require the relevant obligor to provide security governed by the law of the jurisdiction where the assets are located. Where a foreign company is granting security over assets locat- ed in Australia, financiers will require separate security documents to be executed over those assets, with one security document governed by the law where the foreign company is incorpo- rated and one governed by the jurisdiction where the assets are located.

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AUSTRALIA Law and Practice Contributed by: John Schembri and Erin Cartledge, Gilbert + Tobin

ings of Australian companies documented via an offshore law-governed facility document, wheth- er a US-style TLB or an English law-governed “unitranche” -style facility. Local liability management transactions are less common in Australia and, while the rel- evant “technology” (including J.Crew, Chewy/ PetSmart, Revlon, Envision, Serta and simi- lar clauses) developed to address leakage concerns arising from these transactions has started to make its way into Australian facility documentation, these provisions are less rel- evant in Australian facility documentation given that any potential risk of leakages addressed by these provisions is already addressed in some way by APLMA standard facility documentation and other market standard provisions. Austral- ian financiers are nevertheless aware of these transactions and focused to address any poten- tial leakage risks, particularly in light of recent decisions of the US bankruptcy courts, which have shown inconsistent views on how they interpret these provisions. Each firm also has its own precedent security documentation, though all asset security will be taken under “general security” agreement/deed (equivalent to a UK debenture) and security over a specific asset or class of asset (typically shares or other equity interests) will be taken under “specific security” agreement/deed. 2.3 Language From a domestic perspective, debt documen- tation (including the finance documents and security documents governed by Australian law) is almost exclusively drafted in English. Occa- sionally, debt might be arranged in an offshore jurisdiction such as China, where the facility documentation will be in the national language of that offshore jurisdiction, with an English transla-

tion required by the financiers. In that case, any security documents affecting Australian assets will be drafted in English (and governed by Aus- tralian law), with security over offshore obligors governed by the local customs applicable to the relevant jurisdiction. 2.4 Opinions As is typical, lenders will ordinarily require the provision of a legal opinion as a condition precedent to the initial drawdown of the facili- ties (and any subsequent accessions). Legal opinions typically cover the capacity, authority and corporate power of the obligors incorpo- rated in Australia to enter into the finance docu- ments and the enforceability of the Australian law-governed finance documents against the obligors. In a secured transaction, the relevant legal opinion will also cover the creation of valid security interests, though will not typically opine on the priority of security interests over assets other than real property due to the complexities of the federal law that applies to the priority of such security interests. These opinions are often expanded to cover additional matters such as the payment of stamp duty, withholding tax, immunity from suit and whether the transaction requires the financiers to be licensed or registered in Australia (which is often requested by international banks). The general rule remains that counsel to the financiers will issue the legal opinion, even where the borrower’s counsel has drafted the finance documents (noting that there is no hard and fast rule in Australia as to whether the borrower’s or financier′s legal counsel drafts the documents, though increasingly strong sponsors’ legal coun- sel will hold the pen on all key documents). How- ever, due to increased cross-border acquisition activity, borrowers’ counsel have become more

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AUSTRALIA Law and Practice Contributed by: John Schembri and Erin Cartledge, Gilbert + Tobin

willing to issue opinions addressed to the finan- ciers, particularly if they are drafting the docu- ments or if the acquisition debt is being raised in the USA to fund an Australian acquisition. In a syndicated financing, it is typical for reliance on the legal opinion to be offered to financiers joining primary syndication within the first three or six months. The one exception to the above rule is in the context of an offshore capital transaction (eg, a high-yield bond), where the borrower’s lawyers will typically opine on “fair disclosure” in the con- text of the Australian-related disclosure and risk factors in the offering memorandum. While each law firm has its own form of prec- edent opinion, most are consistent (in substance but not necessarily form) with a precedent legal opinion made publicly available by the Banking and Financial Services Law Association of Aus- tralia. Traditionally, a senior Australian acquisition finance package featured an amortising Term Loan A (though this is no longer common), together with a bullet Term Loan B, to collective- ly fund the acquisition of the target group. The financing package will usually include a revolving credit facility to be used for the group’s working capital and general corporate purposes (includ- ing any contingent instrument requirements) and may include capex or acquisition facilities, which tend to be on a committed basis. These facilities will typically rank pari passu in both payment and security. 3. Structures 3.1 Senior Loans

However, in recent times, the market has seen a shift away from the traditional senior bank loan capital structure to standalone TLB facilities and unitranche loans offered by institutional lenders (which generally contemplate limited amortisa- tion). This competition has led the major domes- tic banks to offer more flexible terms in both their traditional leveraged products, including reduc- ing or eliminating amortisation and in relation to financial covenants. This has now become the norm. Unitranche facilities are generally accompa- nied by “super senior” revolving credit facility for working capital and contingent instrument purposes. Facilities of this nature are typically provided by a local bank and rank in priority to the term facilities on enforcement. In addition to the above, loan documentation increasingly includes mechanics that provide the borrower with the flexibility to incur accordion or incremental facilities, which facilitate increased leverage within the confines of the existing facil- ity documentation. 3.2 Mezzanine/Payment-in-Kind (PIK) Loans “Opco” mezzanine financing was previously a common feature of the Australian acquisition finance market, but is something of an anachro- nism in the current market. If additional leverage is required to fund larger acquisitions, sponsors typically achieve this via “holdco” instrument. In these circumstances, mezzanine financing is provided at a holdco level above the senior debt obligor group. This structure enables sponsors and senior lenders to avoid the complexity of having the subordi- nated debt provided at the same level as the senior debt, as the debt will be structurally sub-

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AUSTRALIA Law and Practice Contributed by: John Schembri and Erin Cartledge, Gilbert + Tobin

ordinated to the senior debt. This also avoids the often-protracted negotiations between sen- ior and mezzanine lenders on the intercreditor arrangements to achieve a contractual subor- dination of these facilities. Holdco financings have become increasingly popular as a means to reduce debt service in the current high inter- est rate environment, as the holdco can typically elect to either pay or capitalise (ie, payment-in- kind – PIK) interest on such debt. For similar reasons, on occasions, a further spe- cial purpose company (topco) will be interposed between the sponsors and the holdco, the pur- pose of which is to facilitate the raising of PIK debt, which is again structurally subordinated to both the mezzanine and senior debt. 3.3 Bridge Loans Bridging debt facilities may be used where it is intended that the acquisition debt will be refi- nanced shortly after completion of the acquisi- tion by either a capital raising or a high-yield debt or private placement raised in the US market. Typically, bridging facilities have a tenor of 365 days or less. Such facilities are less common in the Australian leveraged finance market than the facilities mentioned in 3.2 Mezzanine/Payment- in-Kind (PIK) Loans , but are sometimes seen in situations where debt commitments need to be put in place in a compressed timeframe. 3.4 Bonds/High-Yield Bonds The Australian debt capital markets are tradition- ally not as diverse (or deep) as those in Europe or the USA. As such, there is no domestic high- yield market to speak of. There have been limited examples of acquisi- tions accompanied by subordinated retail notes issuances (which sit alongside a more traditional senior loan structure), although these are rela-

tively rare. Such issuances are made to retail as opposed to institutional investors, so they are distinguishable from high-yield products. While the domestic Australian market does not cater for the high-yield needs of sponsors, it is common for Australian companies to seek to raise funding through offshore capital markets. Accordingly, there are examples of companies that have sourced funding through the US high- yield and private placement markets (see 3.5 Private Placements/Loan Notes ). 3.5 Private Placements/Loan Notes Consistent with the position expressed in 3.4 Bonds/High-Yield Bonds , domestic private placement transactions are not a feature of Aus- tralian acquisition financings. However, the “tapping” of the US private place- ment market is a common feature for sponsors and companies that seek longer term debt. This style of financing is particularly common in the infrastructure space, where the longer-term nature of the debt (together with the flexible terms) is attractive to investors. Often, a private placement will be sought to refinance a portion of the original acquisition debt (rather than being a form of debt that is sought to fund the acquisi- tion itself). Accordingly, sponsors who are raising debt in the Australian market will often have their inter - creditor and security sharing arrangements reviewed by US counsel to ensure that they can be marketed to investors in the private place- ment markets. 3.6 Asset-Based Financing Asset-based finance structures in Australia have followed structures implemented in the Euro- pean market, and products include borrowing

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AUSTRALIA Law and Practice Contributed by: John Schembri and Erin Cartledge, Gilbert + Tobin

base-style financings, property-backed financ- ings and receivables-backed financings. The main consideration in Australia is around the security structure and issues relating to the secured party establishing “control” over certain classes of assets that form part of the underlying collateral. This can either be control in the ordinary sense of the word or, depend- ing on the class of asset, where the Personal Property Securities Act (2009) (PPSA) requires certain conditions to be satisfied for a secured party to establish control. A secured party that establishes control prevents the borrowing base collateral from being categorised as “circulating assets” and in certain circumstances can give the secured party higher priority as compared to other secured creditors (irrespective of the order in which the secured creditors registered their security interests). Certain assets will always constitute circulating assets (unless control is established over these assets), including authorised deposit-taking institution (ADI) accounts, receivables, currency and inventory. In addition, circulating assets are any asset over which the secured party has giv- en the grantor permission to transfer the asset in the ordinary course of the grantor’s business, free of the security interest. Establishing control over circulating assets is an important consideration from an insolvency per- spective as certain unsecured creditors will have a priority claim to certain insolvency proceeds (such as claims in respect of certain employee entitlements and certain costs of an adminis- trator and liquidator). Such priority claims will be paid from the proceeds of circulating assets ahead of secured parties that have security over those circulating assets. The level of con- trol required to ensure that the borrowing base

collateral is not treated as circulating assets is set out in the PPSA. This concept of control is distinguishable from the control that establishes superior ranking security in respect of certain assets, including ADI accounts, investment instruments (such as shares) and intermediated security (such as listed shares). Perfection by control is discussed in 5.3 Registration Process .

4. Intercreditor Agreements 4.1 Typical Elements

Intercreditor agreements are customary in the Australian market and, as is typical, regulate the rights and obligations of the providers of the various classes of debt raised to fund the acqui- sition (including shareholder debt and hedging liabilities). Unlike the position in Europe, where the LMA suite of documents contains various market standard intercreditor agreements, there is no market standard document in Australia. A set of intercreditor principles (primarily applicable to leveraged transactions) has been circulated within the market but has not been universally adopted. Several provisions remain negotiated points, such as drag rights, standstill periods, mezzanine information rights and release provi- sions. Australia recognises the concept of contractual subordination and, as such, intercreditor agree- ments contractually regulate the order of priority for the repayment of each class of debt. The sen- ior debt will rank ahead of the junior debt, and any “super senior” facilities will rank ahead of the senior debt on enforcement. Repayment of the junior debt is typically deeply subordinated so that no principal repayments are permitted until the senior debt has been repaid in full. The pay-

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AUSTRALIA Law and Practice Contributed by: John Schembri and Erin Cartledge, Gilbert + Tobin

ment of interest to the junior creditors is permit- ted, subject to certain conditions being satisfied (which may include a leverage or debt service coverage ratio set at a tighter threshold than the financial covenants contained in the senior debt documents, and that no event of default occurs). Equity or quasi-equity financing provided by non-sponsor entities will always be subject to contractual subordination unless it is structurally subordinated (sponsor debt is typically subject to both). The common position is that equity or quasi-equity financing is deeply subordinated to all other layers of the acquisition debt, and no payments can be made, except to the extent they are made from amounts that would oth - erwise be permitted to be distributed to equity holders. Structural subordination is less common, how- ever with a notable exception for holdco PIK instruments discussed in 3.2 Mezzanine/Pay- ment-in-Kind (PIK) Loans , which is mainly used for mezzanine or PIK debt, or for other vendor financing raised at the holdco or topco levels. Intercreditor agreements usually contain a provi- sion whereby any amounts paid by a debtor to a subordinated creditor are agreed to be paid by the subordinated creditor to the senior creditor (this is referred to as “turnover subordination” ) or held on trust by that subordinated creditor for the benefit of the senior creditor until the senior creditor has been repaid (referred to as “trust subordination” ). In addition to regulating the right of repayment of competing creditors, intercreditor agree- ments will also regulate how the proceeds of the enforcement of security are to be applied (com- monly known as the enforcement waterfall) and set out which creditors can instruct the security

agent in relation to the enforcement and release of the security (which is typically shared by the senior and junior debt). The default position will be that the senior credi- tors rank ahead of the subordinated creditors in the waterfall, and as such, the senior credi- tors will form the “instructing group” unless and until the subordinated creditors obtain rights to enforce. The rights of subordinated creditors to enforce their security will be limited and often arise only after a standstill period has expired (in some transactions, the subordinated creditors will not benefit from any such right prior to the senior debt being discharged). The prevalence of unitranche-style facilities has had an impact on intercreditor arrange- ments. The working capital provider is typically given “super-senior” status on any recoveries of enforcement, which has manifested (from an intercreditor perspective) in a modification of certain terms to lessen these lenders’ ability to unilaterally take (or control) enforcement action. 4.2 Bank/Bond Deals As noted in 3.4 Bonds/High-Yield Bonds , there is no domestic high-yield market to speak of. Accordingly, the bank and bond transactions seen in the market are governed by laws other than those of Australia (and, therefore, the inter- creditor position and approach reflect the norms in those markets). 4.3 Role of Hedge Counterparties There will often be hedging liabilities owed to hedge counterparties relating to the hedging of interest and/or exchange rate risks under the senior (and potentially the mezzanine) debt documentation.

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AUSTRALIA Law and Practice Contributed by: John Schembri and Erin Cartledge, Gilbert + Tobin

Under the terms of the intercreditor agreement, hedge counterparties will typically benefit from security and will rank pari passu in right of pay- ment and right of enforcement proceeds with the senior lenders (and, in unitranche structures, will rank super senior alongside revolving credit providers). However, the intercreditor agreement will typi- cally contain restrictions on the hedge counter- parties’ right to: • terminate the hedging arrangements prior to enforcement; • make amendments to the terms of the hedg- ing documents; • take enforcement action; or • benefit from additional guarantees and/or security. These restrictions are often coupled with provi- sions that enable the hedges to be novated to a new hedge provider in certain circumstances. Such hedging arrangements are typically docu- mented using the market standard ISDA Master Agreement and Schedule, with some modifica- tions by way of the Schedule for local law issues and market practice. 5. Security 5.1 Types of Security Commonly Used Acquisition financings in the domestic market are typically secured. Any security interests in real estate must be in the form prescribed by the jurisdiction where the relevant land is located. The granting of security over “personal prop- erty” by Australian companies is governed by the PPSA. Security will nearly always be granted in favour of a security trustee, who will hold the

security for the benefit of the secured parties (including lenders, hedge providers and the facil- ity agent). A general security agreement is used to secure all types of property (other than real estate, which under Australian law must be secured by way of a real property mortgage). Typically, all obligors enter into a general security agreement to grant all asset security. If all asset security is not agreed, specific security can be granted over a particular asset under a specific security deed (commonly used for standalone security over shares or bank accounts). Security will be provided by each borrower, rel- evant holding companies and sufficient operat- ing companies to ensure compliance with the guarantor coverage test. The latter category of obligors will generally accede and grant security within a prescribed timeframe post-funding (from 45 to 120 days, depending on the sponsor’s bargaining power). The key reason for this is to allow sufficient time for such operating companies to complete “whitewash” process, as described in more detail in 5.5 Financial Assistance . The guarantor coverage test typically requires entities that own between 80% and 95% of the target group’s assets and contribute between 80% and 95% of the target group’s EBITDA to grant guarantees and security in favour of the financiers. Each of the main asset classes is considered

below. Shares

Shares are considered “personal property” under the PPSA, and security interests may be

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AUSTRALIA Law and Practice Contributed by: John Schembri and Erin Cartledge, Gilbert + Tobin

perfected by either control or registration. While financiers will always perfect security interests by registration of a financing statement on the Personal Property Securities Register (PPSR), the security document will also require deliv- ery of any physical share certificates and share transfer forms executed in blank to be delivered to the security trustee to allow perfection by control. If the shares being secured are shares in a listed company, a secured party can perfect its security interest over such shares by con- trol by entering into a Clearing House Electronic Subregister System (CHESS) security deed with the CHESS participant, under which the CHESS participant agrees to hold the shares subject to the secured party’s order. Inventory Security over tangible movable assets, which is stock-in-trade ( “inventory” under the PPSA), is usually a circulating security interest over fluc- tuating assets and is called “circulating asset” (as discussed in 3.6 Asset-Based Financing ). A security interest over tangible movable prop- erty is perfected by way of the registration of a financing statement on the PPSR. The timeframe within which to register a security interest over inventory on the PPSR is very short compared to other categories of collateral and can require that the security interest be registered on or prior to the day it is granted. Bank Accounts It is customary for bank accounts with regu- lated Authorised Deposit-taking Institutions (ADI accounts) subject to security to be held with an ADI. If the bank account is of material importance or value, an account control agree- ment will often be sought between the account holder, the security trustee and the ADI where the account is maintained, in addition to the registration of a security interest on the PPSR.

An ADI will have a security interest in an ADI account that is perfected by control by virtue of the ADI account being held with that ADI. Where the secured party is not also the ADI where the ADI account is held, an account control agree- ment may have been entered into to establish perfection by control because the ADI itself may have a superior ranking security interest in the account that would be perfected by control. Notwithstanding the legislative framework that affords superior ranking priority to security in an ADI account that is perfected by control, the entry into account control agreements for acqui- sition financings has become less typical in the market, and it is more common for a security interest in an ADI account to be perfected solely by registration. This is mainly due to a recent development in which many Australian banks implemented policies refusing to enter into any account control agreements. Receivables Security is commonly taken over claims and receivables (such as debts, trade receivables or contractual rights) and perfected by registra- tion. In certain circumstances, an assignment of receivables will also constitute a deemed secu- rity interest (and will be capable of a separate registration without the need for a standalone security document). Intellectual Property Rights A security interest over registered intellectual property rights (such as trade marks, patents, registered designs and copyright) are commonly registered on the PPSR to prevent a third party from acquiring an interest in those rights free of the security interest. Specific registers exist for patents, registered trade marks and regis- tered design rights, and security interests can be recorded in those registers maintained by the Intellectual Property Office of Australia, although

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AUSTRALIA Law and Practice Contributed by: John Schembri and Erin Cartledge, Gilbert + Tobin

this only provides certain limited procedural ben- efits and does not have any effect on the priority of such security interests. Real Property Most Australian land is registered under a sys- tem known as the Torrens system. Each state and territory operates its own Torrens system for land located in its jurisdiction, and records details of the land and any registered interests in that land, such as mortgages, via a central- ised registry. The most common form of secu- rity granted over real estate is a registered real property mortgage, which is a separate docu- ment to the all-asset general security agree- ment. While the general security agreement will secure all assets of the grantor, including land, the PPSA excludes interests in land, and this means that a registration on the PPSR in relation to the secured property that is the subject of the general security agreement will not perfect the security interest over land. Financiers, therefore, require a mortgage over land to be registered on the Torrens system, which is done by recording the particulars in the relevant land titles register (in most cases using an online electronic con- veyancing platform). It should be noted that it is common for the agreed security principles to specifically exclude any real property mort- gages being granted, though this will, of course, depend on the nature of the transaction, the val- ue of the real estate in the context of the deal, and the bargaining position of the parties. Movable Assets Security may be granted over tangible mov- able property. As mentioned above, security over tangible movable property that is stock-in- trade ( “inventory” under the PPSA) will usually be a circulating security interest over fluctuat- ing assets, which are referred to as “circulating” assets under the PPSA. A security interest over

collateral that secured the obligations of a gran- tor to pay the purchase price of that particular collateral is “purchase money security interest” under the PPSA, which may, if certain conditions are satisfied, afford the secured party a form of “super priority” over the relevant collateral in pri- ority even to a prior-perfected security interest. 5.2 Form Requirements Security over real property requires a mortgage form to be used and lodged at the relevant land registry. The form must be the one prescribed by the jurisdiction where the land is located (noting that, distinct from the position regarding secu- rity over personal property, security over real property is dealt with on a state-by-state basis). All states and territories have now implemented a standardised “National Mortgage Form” , but each imposes its own requirements on how the form is completed, executed and lodged for reg- istration. There are generally no prescriptive form require- ments for other types of security, though it is common for all asset security to be granted by way of a general security agreement and for security over a single class of asset to be grant- ed by way of a specific security agreement. 5.3 Registration Process A secured party can perfect its security interest in personal property in the following ways: • by effecting a registration on the PPSR in respect of the collateral; • by the secured party having “possession” of the collateral; • by the secured party having “control” of one of the limited classes of collateral; or • by a combination of these ways.

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