General structuring of financing
Choice of law
What territory’s law typically governs the transaction agreements? Will courts in your jurisdiction recognise a choice of foreign law or a judgment from a foreign jurisdiction?
New York law is most commonly selected for financing agreements in international and other large financings. Under New York corporate law, a choice of New York law will be enforceable for commercial contracts having a value of at least US$250,000 without any requirement to prove that either the parties or the contract bear a ‘reasonable relationship’ to the state.
With respect to a choice of law other than New York law, New York courts generally uphold choice-of-law provisions in transaction agreements provided there is some ‘reasonable relationship’ between the parties or the transaction and the selected jurisdiction’s law at the time the agreement was reached and at the time the dispute arises. A reasonable relationship generally exists if one of the contracting parties’ place of business is within the selected jurisdiction or performance under the contract occurs in the jurisdiction. Where a dispute relates specifically to a letter of credit, the Uniform Commercial Code (UCC) requires application of the substantive law of the jurisdiction whose law is chosen to govern the letter of credit regardless of its relation to the transaction.
In the absence of a binding choice of law provision in the agreement, New York courts determine the ‘centre of gravity’ between the controversy and relevant jurisdictions by applying a multi-factor test for a contract dispute. These factors include:
- the place the contract was executed or negotiated;
- location of the parties;
- the place of performance;
- the location or the subject matter of the contract; and
- the domiciles or places of business of the parties.
Courts also consider which territory has the greater interest in having its laws applied to the particular dispute. Where a dispute specifically involves a letter of credit, and there is no choice-of-law provision, the dispute will be governed by the substantive law of the jurisdiction in which the issuer is located, considered to be the address from which the undertaking was issued.
New York courts recognise final money judgments entered anywhere in the United States. They will recognise a foreign money judgment that is ‘final, conclusive and enforceable where rendered’ unless there is a showing that the judgment was procured through a system that did not provide impartial tribunals or due process, or the foreign court lacked personal jurisdiction over the defendant. New York courts assess the foreign court’s personal jurisdiction by considering, among other factors, whether the defendant:
- was served personally in the foreign state;
- voluntarily appeared or agreed to submit to the jurisdiction of the foreign state with respect to the subject matter;
- was domiciled, had a principal place of business or acquired corporate status in the foreign state when the action was initiated; and
- maintained an office in the foreign state from which the action arose.
New York courts may choose not to recognise foreign money judgments if, among other factors:
- the foreign court lacked subject matter jurisdiction;
- the defendant did not receive sufficient notice of proceedings;
- the judgment was obtained by fraud;
- the cause of action was repugnant to New York public policy;
- the judgment conflicted with another final and conclusive judgment; or
- the proceeding in the foreign court was contrary to an agreement between the parties.
Finally, where jurisdiction was based only on personal service, the foreign judgment may not be recognised if the foreign court was a ‘seriously inconvenient’ forum for the trial.
Restrictions on cross-border acquisitions and lending
Does the legal and regulatory regime in your jurisdiction restrict acquisitions by foreign entities? Are there any restrictions on cross-border lending?
Generally, the United States does not restrict foreign acquisitions or cross-border lending. However, transactions that pose national security risks are subject to review, and transactions with sanctioned countries, persons or entities are prohibited. In addition, there are restrictions on foreign investments in certain regulated industries, such as US airlines (which are regulated by the Federal Aviation Administration) and telecommunication companies (which are regulated by the Federal Communications Commission), among others.
The Committee on Foreign Investment in the United States (CFIUS), which is a multi-agency committee chaired by the US Department of the Treasury, exists to review and address national security matters arising from foreign acquisitions or investments in US businesses. If there is found to be credible evidence that the foreign investor exercising potential control over a US business might take action threatening US national security, and other provisions of law, other than the International Emergency Economic Powers Act, do not provide adequate and appropriate authority to protect US national security, then the transaction in question can be suspended or prohibited by the US president or, in the case of a completed transaction, a divestiture may be ordered by the US president. In practice, this power is almost never exercised by the US president, although President Trump blocked Singapore-based Broadcom Ltd from purchasing Qualcomm, Inc in a hostile takeover in 2018 and blocked Chinese-backed Canyon Bridge in its proposed acquisition of Lattice Semiconductor in 2017. More commonly, national security issues are resolved by CFIUS, which has the authority to propose, negotiate and impose mitigation agreements on the parties to address and resolve any national security concerns identified by CFIUS during its investigation.
Under the recently enacted Foreign Investment Risk Review Modernization Act (FIRRMA), Congress expanded CFIUS’s jurisdiction to include investments that do not confer potential control by foreign persons over certain US businesses involved in critical infrastructure or critical technologies or that collect and store sensitive personal data of US citizens, as well as acquisitions of real estate and leaseholds near US military or other sensitive government facilities. Most of FIRRMA’s provisions will not be effective until final regulations are promulgated, which is not expected until late 2019 or 2020. CFIUS did announce a pilot program (the Pilot Program), effective 10 November 2018, which expands the scope of transactions subject to review by CFIUS to include certain non-controlling investments made by foreign persons, whether or not foreign government controlled, in US businesses involved in critical technologies related to specific industries and requires mandatory declarations for transactions that fall within the Pilot Program. All other filings with CFIUS are technically voluntary; however, CFIUS member agencies can initiate an investigation on their own (an ‘agency notice’) and there may be political, reputational and public relations considerations that lead a party to formally notify CFIUS. The content of a CFIUS filing is specified by regulation and includes detailed information about the parties, their proposed transaction and rationale, the US business, and the foreign investor’s plans for the US business. Personal identifier information about individuals serving on the board or in senior management positions at the acquiring foreign company and its parent entities is required to be submitted along with a CFIUS notice. CFIUS filings and submissions are confidential. If the parties to the transaction decide to file such a notice, CFIUS will have 45 days after formally accepting the filing to review and clear the acquisition or to initiate a further 45-day investigation, which may be extended by an additional 15 days in extraordinary circumstances. At the end of the review period, CFIUS could conclude the investigation or refer it to the US president, who would then have 15 days to make a decision. Any such decision would be final and could not be appealed.
The Office of Foreign Assets Control (OFAC) of the US Department of the Treasury administers and enforces economic and trade sanctions based on US foreign policy and national security goals. US economic sanctions generally prohibit US persons from doing business or otherwise dealing with:
- Cuba, Iran, North Korea, Syria or the Crimea region of Ukraine;
- the governments of, or any persons or entities organised or located in, Cuba, Iran, North Korea, Syria or the Crimea region of Ukraine;
- persons or entities listed on OFAC’s specially designated nationals (SDN) list and other restricted party lists; or
- any entity owned or controlled by any of the preceding.
US economic sanctions also prohibit lending and certain other dealings with certain Russian sanctions targets, including those entities listed on OFAC’s Sectoral Sanctions Identifications (SSI) list. OFAC also prohibits certain financial dealings with the government of Venezuela and with Petroleos de Venezuela.
Before entering into any transaction, it is important to check OFAC’s website for the most current SDN and SSI lists and restrictions affecting countries, territories and parties with which you plan to transact. In some cases, OFAC could issue a licence to permit a person or entity to engage in an otherwise prohibited transaction. OFAC issues both general licences, which are granted without the need for application, as well as specific licences, which require application and are evaluated on a case-by-case basis.
Types of debt
What are the typical debt components of acquisition financing in your jurisdiction? Does acquisition financing typically include subordinated debt or just senior debt?
Large acquisition financings would typically be composed of debt in the form of both traditional bank financing and financing through the capital markets. Most often, the debt would include a senior secured term loan facility, a senior secured revolving credit facility and senior unsecured notes. However, many variations on this combination are common, including:
- senior unsecured bank financings (most typically for higher grade credits);
- first lien and second lien bank financings;
- senior secured notes;
- senior subordinated notes;
- subordinated notes; and
- mezzanine financing.
To the extent that an issuance of debt securities is contemplated to fund the acquisition, the commitment papers will include a commitment by the bank lenders for a bridge loan in an amount equal to the principal amount of proposed debt securities. The bridge loan is not intended to be funded, but serves as a backstop in case the securities issuance (which is uncommitted) ultimately fails.
Are there rules requiring certainty of financing for acquisitions of public companies? Have ‘certain funds’ provisions become market practice in other transactions where not required?
Although there is no concept of ‘certain funds’ in US practice, sophisticated sellers will focus on conditionality in the financing commitments provided to potential purchasers and those conditions are highly negotiated, with purchasers pushing to align the conditions in their financing commitments as closely as possible to any conditions to purchase in the underlying acquisition agreement. Conditions are generally more fulsome than those found in a ‘certain funds’ regime, but far more limited than they have been historically in the United States. As a result, there is an increased focus on the terms of the underlying acquisition agreement on the part of the lenders because they are essentially forced to ‘piggyback’ off the terms in that agreement. As consummation of the acquisition in accordance with the terms of the acquisition agreement is a common condition precedent in commitment papers, lenders are ultimately forced to look to the protections built into the acquisition agreement itself for comfort on a number of matters (see question 28).
Restrictions on use of proceeds
Are there any restrictions on the borrower’s use of proceeds from loans or debt securities?
Yes. The margin regulations, which are intended to restrict stock speculation, regulate the extent to which borrowers may use loan proceeds to purchase or carry ‘margin stock’. In general, the amount of any loan provided by a bank that is for the purpose of purchasing or carrying margin stock (purpose credit), and that is directly or indirectly secured by margin stock, may not exceed the maximum loan value of the collateral that secures the loan. The maximum loan value of any margin stock collateral is half of its current market value, while the maximum loan value of other non-margin stock collateral is its current market value. Note that a loan will be considered ‘directly secured’ by margin stock if a lien is placed on the margin stock to secure the loan and ‘indirectly secured’ by margin stock if the loan agreement places any restrictions on the ability of the borrower to incur liens on (or dispose of) its margin stock. A loan that is not ‘purpose credit’ is not subject to these collateral requirements. For any loan over $100,000 that is secured by margin stock, whether or not the loan is purpose credit, the lender needs to obtain a form FR U-1 from the borrower (or a form FR G-3 in the case of a non-bank lender), which states whether the loan is purpose credit and which lists the margin stock that is provided as collateral.
The term ‘margin stock’ is defined to include any equity security trading on a US national securities exchange, debt securities that are convertible into margin stock, warrants to purchase margin stock and certain securities issued by investment companies registered under section 8 of the Investment Company Act of 1940, as amended.
What kind of indemnities would customarily be provided by the borrower to lenders in connection with a financing?
The lenders and the agents are typically indemnified against all liabilities, losses, costs or expenses arising out of the negotiation, execution, delivery, performance, administration or enforcement of the transaction documents, including pursuant to any proceeding or in connection with the borrower’s use of proceeds of that financing. Indemnities typically cover reasonable fees and expenses of legal counsel but are sometimes limited to one principal legal counsel for all such parties and one local counsel in each relevant jurisdiction (with additional counsel permitted where there is a conflict of interest). Where appropriate, reasonable fees and expenses of one regulatory, or special, counsel may also be covered. Lenders and agents are generally not indemnified to the extent that any such losses or liabilities are caused by their own gross negligence or wilful misconduct (and sometimes, if caused by a material breach, by them, of the loan agreement) and contracts will typically provide that such finding must be made in a final and non-appealable determination by a court of competent jurisdiction.
Holders of securities issued initially to underwriters or initial purchasers are not indemnified by the issuers thereof, except for taxes for which a gross-up is payable, as discussed in question 7. Issuers of securities typically indemnify underwriters and initial purchasers against certain liabilities, including liabilities under US securities laws, or agree to contribute to payments that such parties may be required to make in respect of those liabilities. Trustees and collateral agents are typically indemnified by the issuer for any loss, liability, damage, claim or expense incurred by them without negligence, bad faith or wilful misconduct (or such similar provision as the parties may negotiate) on their part arising out of or in connection with the administration of the indenture or collateral documents under which the securities are governed and their duties thereunder. Before trustees and collateral agents will take certain actions requested by holders of securities, they are entitled to seek indemnity from those holders.