Debt commitment letters and acquisition agreements
Types of documentation
What documentation is typically used in your jurisdiction for acquisition financing? Are short-form or long-form debt commitment letters used and when is full documentation required?
The documentation for acquisition financings varies, depending on, among other things, the size and structure of the particular transaction. Smaller transactions are often financed by a limited number of banks stepping in as senior lenders and the documentation for such transactions is often, especially where the borrower is a non-financial buyer, relatively straightforward. In such transactions, it is not uncommon in Switzerland, especially in domestic transactions, that parties work with a short-form debt commitment letter or even without a formal debt commitment letter but with a ‘highly confident letter’ or solely with a term sheet of a bank. By contrast, in the context of larger acquisition financings, and especially in leveraged transactions and in cross-border transactions, the documentation is typically more complex and also frequently suitable for the international syndicated loan markets. In such transactions, it is not uncommon to see long-form debt commitment letters. In the context of public takeover transactions, parties typically sign the full documentation prior to the publication of the offer.
Level of commitment
What levels of commitment are given by parties in debt commitment letters and acquisition agreements in your jurisdiction? Fully underwritten, best efforts or other types of commitments?
Swiss market practice recognises both fully underwritten transactions and best efforts’ transactions.
Conditions precedent for funding
What are the typical conditions precedent to funding contained in the commitment letter in your jurisdiction?
The set of conditions precedent in a debt commitment letter depends on the particular transaction. Quite often, the conditions precedent will include:
- that no major default has occurred or is continuing (major defaults being a subset of particularly important defaults as more fully set out in the full documentation);
- that no major representations and warranties have been breached (major representations and warranties being a subset of particularly important representations and warranties as more fully set out in the full documentation);
- that no major covenants have been breached (major covenants being a subset of particularly important covenants as more fully set out in the full documentation);
- that it is not unlawful for a lender to perform its obligations or to fund its participation; and
- certain other points (eg, evidence that additional funds (eg, equity) are available to the borrower, copies of the signed acquisition agreements, and delivery of utilisation request).
Are flex provisions used in commitment letters in your jurisdiction? Which provisions are usually subject to such flex?
As mentioned in question 23, if any commitment letter is used it is not uncommon in Switzerland that parties work with a short-form debt commitment letter. Short-form debt commitment letters often do not set out market flex provisions. However, there is generally a mandate letter in place in such transactions and mandate letters will typically provide for market flex provisions. These provisions will typically entitle the arrangers to increase the interest margin, increase certain fees, or change other terms or the structure of the facilities. These rights are typically drafted such that the arrangers can only exercise them where they, in good faith, determine them to be necessary. Parties sometimes also agree on a cap that any such changes are allowed to fall within.
Are securities demands a key feature in acquisition financing in your jurisdiction? Give details of the notable features of securities demands in your jurisdiction.
This is not frequently seen in Switzerland.
Key terms for lenders
What are the key elements in the acquisition agreement that are relevant to the lenders in your jurisdiction? What liability protections are typically afforded to lenders in the acquisition agreement?
Lenders typically want to make sure that they are not obliged to fund if the bidder is not obliged to close the acquisition transaction. Attention is therefore paid, among other things, to the drafting of the material adverse change provisions in the acquisition documents, on the one hand, and the finance documents on the other hand. In addition, lenders will typically want to have an ‘out’ in the finance documents if a material adverse change occurs in relation to the bidder, if a change of control occurs in relation to the bidder or if certain other draw-stop events occur.
As regards liability protection afforded to lenders in acquisition agreements, such provisions are relatively uncommon in Switzerland. Parties generally take sufficient comfort from making sure that the seller is not party to any of the finance documents and that the finance documents are drafted such that the seller does not have a legal basis for a claim against the banks. On the rare occasion that this is not viewed as giving sufficient comfort, banks seek the inclusion of specific liability protection in acquisition agreements.
In finance documents, one would typically see waiver of liability provisions for the benefit of the lenders. Also, as regards indemnities for the benefit of the lenders, see question 9.
Public filing of commitment papers
Are commitment letters and acquisition agreements publicly filed in your jurisdiction? At what point in the process are the commitment papers made public?
Commitment letters do not have to be and are not publicly filed under Swiss law and do not, as a matter of law, have to be made public. The same holds true for acquisition agreements, with exceptions for specific transactions for which the agreements have to be filed with the commercial register. In asset transactions, registration requirements exist for certain assets. Finally, as in other jurisdictions, merger control provisions and filing requirements exist under Swiss competition law. Special rules apply in the context of public takeover transactions. See question 4.