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?
For acquisitions of private companies, the commitment papers will typically include a commitment letter attaching a detailed long-form term sheet and a fee letter. Full form documentation is usually not required upon signing of the acquisition agreement and are finalised prior to closing of the acquisition.
For acquisitions of public companies, a fundable facility agreement will be required by the time the offer for the acquisition is made to satisfy the cash confirmation requirement under the Takeovers Code (see question 4).
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?
Commitment letters provided for acquisition financing for purchasers requiring debt financing at closing typically include fully underwritten commitments (provided on a ‘certain funds’ basis), especially in a competitive bid process.
Conditions precedent for funding
What are the typical conditions precedent to funding contained in the commitment letter in your jurisdiction?
Commitment letters provided on a ‘certain funds’ basis will have limited condition precedent requirements and such conditions are some of the most negotiated provisions in the commitment letters for acquisition financing. Some of the more typical conditions precedent include delivery of:
- constitutional documents and other corporate authorisation documents of the obligors;
- executed finance documents;
- copies of the executed acquisition documents;
- evidence that the condition precedent requirements under the acquisition documents (other than payment of the purchase price and other conditions to be satisfied on the closing date) have been met;
- group structure chart;
- original financial statements;
- evidence of payment of fees and expenses; and
- legal opinions.
Are flex provisions used in commitment letters in your jurisdiction? Which provisions are usually subject to such flex?
Market flex provisions for financing obtained in Hong Kong are more limited and will typically only permit the lenders to:
- increase the margin subject to an agreed cap and/or reallocate a portion of the upfront fees to margin; and/or
- reallocate a portion of the facility commitments between different tranches.
Market flex provisions are usually included in the fee letters for confidentiality reasons.
Are securities demands a key feature in acquisition financing in your jurisdiction? Give details of the notable features of securities demands in your jurisdiction.
Securities demands is not a key feature in acquisition financing documents in Hong Kong.
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?
The key elements in the acquisition agreement that are most relevant to the lenders providing acquisition financing to a purchaser include the following:
- the conditions precedent to the closing of the acquisition;
- the purchaser’s right to adjust the purchase price and its termination rights under the acquisition agreement;
- the definition of ‘material adverse change’ to the target’s business (or any analogous term);
- the ‘drop-dead date’ or the ‘long stop date’, which is often the date on which the commitments under the acquisition financing will expire;
- the seller’s covenant to provide financing assistance for the purchaser’s acquisition financing (including delivery of financial statements and any other information relating to the business and giving access to the key personnel of the target company); and
- any indemnity provided by the seller to the purchaser.
Xerox provisions limiting the liability of lenders (or allowing lenders to be third-party beneficiaries under certain provision of the acquisition agreement) are not common in Hong Kong acquisition agreements.
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?
There is generally no requirement to make public the acquisition agreement, commitment papers and finance documents in respect of acquisitions of companies in Hong Kong. However, if one of the parties to the transaction is a company listed on the HK Stock Exchange (eg, the listed company group is acquiring an asset), and if the transaction constitutes a ‘discloseable’, ‘major’ or ‘very substantial’ transaction under the Listing Rules on the part of the listed company (which is so classified depending on the size of the transaction relative to the size of the listed company group), then the listed company will need to issue a public announcement (and in addition, a shareholders’ circular for ‘major’ or ‘very substantial’ transaction) containing salient terms of the underlying transaction. Generally, the financing documents or the terms of the underlying transaction are not disclosed in the public announcement and the shareholders’ circular (as applicable) as financing is typically viewed as being carried out in the ordinary course of business and hence not a reportable transaction. However, if the listed company considers a particular financing to be very material (eg, the loan amount is significant), it may decide to make a public announcement to set out a high-level summary (such as the name of the financier, the loan amount, maturity date and interest rate) of the financing terms.
If the acquisition (and the related financing) is in respect of the shares of a listed company that triggers the mandatory general offer obligation on the part of the acquirer offeror under the Takeovers Code, then the offer document issued by the offeror pursuant to the Takeovers Code must contain a description of how the offer will be financed and the source of such financing (including the name of the principal lenders or arrangers of the financing).