Financing Contingencies in Merger Agreements: Negotiating Buyer Reps, Target Covenants, and Commitment Letters

Description

Financing conditions are critical in a merger transaction, providing assurances to the target that the buyer has sufficient funds to close and assurances to the buyer that the target will cooperate as needed to close the financing. The financing commitment is a critical component in the transaction and figures heavily in negotiating and drafting those provisions.

Since the buyer faces potential liability if it fails to close, counsel must seek certainty in drafting the financing commitment. The commitment letter should be precisely worded and contain a detailed list of all material conditions and expressly state that they are the only conditions to close. If the financing involves multiple lenders, intercreditor terms may need to be negotiated as well.

Care must be taken in drafting buyer financing representations in the merger agreement. These representations will typically relate to the enforceability of the commitment, the financing conditions, and the adequacy of loan proceeds to close.

Successful financing will depend on the cooperation of the target in loan closing. The cooperation covenant is often heavily negotiated, balancing the target's interest in minimizing the amount and type of information provided against the lender's need to conduct adequate due diligence.

Listen as our authoritative panel discusses these and other concerns about financing commitments and related provisions in merger agreements.