Frequently, borrowers you finance are looking to expand their operations through asset or share purchase transactions involving other businesses. Often they will be looking to you to fund the acquisition. The business to be acquired is generally known as the target or the target corporation.
In this video, we discuss:
- The target's pre-existing financing arrangements
- Sale of purchased assets or shares
- Payout letter and undertaking to discharge
Transcript
Hi my name is Richard Dusome and I'm a Financial Services lawyer at Gowling WLG and this video is part of our Arrangements with Third Party Creditors video series.
Frequently borrowers you finance are looking to expand their operations through asset or share purchase transactions involving other businesses. Often they will be looking to you to fund the acquisition.
The business intended to be acquired in any acquisition is generally known as the Target or the Target corporation.
It is not unusual for the Target of your borrower's acquisition to have obtained pre-existing financing from another lender on its own operations. The Target will likely have granted a full security package to its lender over the assets of the Target that are being purchased (known as the Purchased Assets).
Alternatively in a share purchase transaction, the owners of the shares of the Target (known as the Purchased Shares) may have pledged their shares to a lender in support of loans made to the business.
On the sale of the Purchased Assets or the Purchased Shares, the security interest of the Target's lender will follow those Purchased Assets or Purchased Shares into the hands of your borrower and rank in priority to any interest you may have in those Purchased Assets or Purchased Shares. This is the case even though you are the senior lender funding the purchase.
So you need to be careful. You will need to do some due diligence searches on the Target to identify what security interests it has granted and to whom. This is the only way to determine what security interest need to be released and which security registrations need to be discharged.
In most cases, before you fund the purchase you will need to obtain from the Target's secured lender a Pay-out Letter and Undertaking to Discharge. This is a document to address the release of any security interests so that the Purchased Assets or Purchased Shares are transferred to your borrower free and clear of any lingering security interest.
In other cases, the Target's secured lender may in fact have security but that security does not actually extend over the specific Purchased Assets or the Purchased Shares so that it does not follow the assets or shares. In these instances, before you fund the payout the Target's secured lender will need to provide a No Interest Letter confirming that its security does not extend to or cover the Purchased Assets or the Purchased Shares.
Let's consider the Pay-out Letter and Undertaking to Discharge in more detail.
Simply put, a Payout Letter and Undertaking to Discharge is a document requested by a borrower intending to repay in full the indebtedness it owes to a secured creditor.
On an acquisition, the Payout Letter is typically issued by a secured lender to its borrower (that is the Target) that identifies the aggregate amount of indebtedness, liabilities and obligations of the Target secured by its secured lender's security as at a specified date.
It also provides that upon the secured lender's receipt of the specified sum of money from the Target, its security interest will be released so that the Purchased Assets or Purchased Shares can be transferred to the Borrower free and clear of those security interests.
The release of the security interest is not the only thing you will need to consider including in this document.
For reliance purposes, you will also want the Target's secured lender to include the name of your borrower and your lender as addressees of the Payout Letter. Some lenders however will refuse to do this and will only include the name of the Target on their Payout Letters.
It's important to have the Target's secured lender authorize your counsel or the borrower's counsel to attend to the discharge of that lender's security to expedite the clean up of the security register post-closing.
No one wants to have to chase the Target's lender to attend to the discharges that have been delegated to its back office and may be delayed by up to 30 days.
There are of course other deal-specific elements that will need to be included in any Payout Letter to address other aspects of the transaction, and any liabilities intended to survive the Payout. But what we reviewed are some of the key terms.
Should you have any questions about the content of this video, please feel free to reach out to me directly, or any one of the Gowling WLG lending team. Thank you so much for watching this video.
Read the original article on GowlingWLG.com
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
