It is quite common that an existing credit facility has to be paid out in connection with the completion of an M&A transaction, as a result of, for example, a new credit facility being put in place to finance the acquisition which replaces the purchaser’s existing credit facility, or as a  result of both the purchaser and the target having separate credit facilities in place prior to the transaction, only one of which will be required going forward.

The process of paying out an existing credit facility should be quite straightforward as long as proper consideration is paid to the following five items:

1. Payout letter – A payout letter should be obtained from the lender being paid out (or in the case of a syndicated credit facility, from the agent on behalf of the lender).  The payout letter should at a minimum state that, upon receipt of a specific payout amount (including applicable per diem amounts should closing be delayed) set out in the letter, the credit facility is repaid in full, and all guarantees and security are released.  If the credit facility being paid out includes a revolving facility (and especially a swingline facility), the final payout amount may not be available until the day of payout given the possibility of daily fluctuations, in which case you will need to ensure to follow up with the lender being paid out for the amount on the date of repayment.
2. Letters of credit – Letters of credit issued under the existing credit facility will need to either be cancelled and re-issued to the beneficiary under the new facility, deemed to be issued under the new facility (if the prior lender is the same as the new lender or if it is a part of the syndicate of new lenders), cash collateralized (this is the more common approach where the prior lender is not part of the new credit facility, as it avoids the hassle of obtaining back the original letters of credit) or back-stopped by back-to-back letters of credit.  If letters of credit are to be cash collateralized, additional security documentation may be required and some of the security registrations will need to stay in place (with a more limited collateral description).
3. Bankers’ acceptances – Advances by way of bankers’ acceptances cannot be repaid prior to their maturity, and as a result any outstanding bankers’ acceptances at the time of the payout will need to be cash collateralized by the borrower (triggering the requirement to deliver additional security and maintain existing registrations in place as described above).  To avoid this issue, if you are expecting to pay out credit facilities, you should consider converting bankers’ acceptances borrowings to prime borrowings as they mature prior to the date the credit facilities are to be repaid.
   
4. Discharges of security – While security discharges will not be filed until the payout amount has been received, some discharge documents, such as for example real property discharges, require the signature of the lender that is being repaid and therefore it is preferable that such documentation be signed and delivered in escrow for closing of the M&A transaction so that you do not have to approach the lender again for these after it has been paid out.
5. Return of pledged collateral – You should ensure that all share certificates and other original collateral pledged to the lenders is returned on payout of the credit facilities.  It is quite likely that such collateral will need to be pledged immediately to any new lender on closing.  In addition, any notes issued to lenders evidencing the loan should be returned on payout of the facilities, so that they can be cancelled.

Lenders which are to be paid out at closing should be approached early on in the transaction to avoid timing issues.  If this is done and the points above are considered in advance of closing, the payout process should then proceed quite smoothly at closing of the deal, permitting the parties to focus on the more substantive and important points of the M&A transaction instead of dealing with last minute hitches relating to a payout of credit facilities.

Although we often think of the regimes that govern registrations made against personal property as a concern to lenders and their counsel, M&A lawyers and business people are unable to escape this area of the law… at least not completely. As part of the legal due diligence process in almost any M&A deal, registrations against the target’s assets will be uncovered. As such, the target and its counsel will want to ensure that any disclosure surrounding these registrations lines up with the representations made in the purchase agreement, and the buyer and its counsel will want comfort surrounding the scope of the registrations, and in particular, whether they attach to any of the assets being acquired as part of the M&A transaction.

U.S. counsel will be familiar with Article 9 of the UCC, but what about its Canadian equivalent? The good news here is that the Canadian equivalent of the UCC in common law provinces and territories, the Personal Property Security Act (or more commonly referred to as the “PPSA”), need not be a source of intimidation to U.S. counsel and business people in the context of a cross-border M&A deal. This is because the UCC and the PPSA are old friends, with the PPSA being based (at least loosely anyway) on the UCC and because there is a separate, yet comparable PPSA in each of the Canadian common law provinces and territories, the PPSA is not unlike the regime provided for by the UCC.

Personal property security searches will be performed at the diligence stage of an M&A transaction in order to determine whether there are any registered interests against the assets to be acquired. In Canada, these searches are not unlike those that would be performed in the U.S. However, unlike in the U.S. where “perfection” of a security interest in an asset is based on the jurisdiction of a company’s formation, under the PPSA, perfection is based on the location of a company’s chief executive office or the location of the asset, depending on the type of asset. This means that, in the context of an M&A transaction, in addition to searching the jurisdiction of formation, PPSA searches should also be conducted in the province or territory where the target’s chief executive office is located, and in the jurisdiction(s) in which the target’s assets are located.

When reviewing Ontario PPSA search results, it may be difficult to determine what assets a particular registration relates to. This is because in Ontario, a full collateral description is not required at the time of registration and instead secured parties have the option of only checking broad collateral descriptions. This means that buyers and their counsel will want to make use of estoppel letters in order to get comfortable with the scope of these “unknown” (and potentially far-reaching) registrations.

Although there are a number of additional distinctions between the UCC and the PPSA, we hope that this post provides a useful overview of the considerations likely to be of relevance to U.S. parties involved in the acquisition of a Canadian target. If you want to learn more about what to think about when considering the purchase of a Canadian business, check out our publication, Doing Business in Canada 2012.

The concept of an “estoppel letter” (also sometimes referred to as an “acknowledgement”, “waiver” or a “collateral narrowing letter”) in respect of personal property security registrations can be quite puzzling to US clients, as it is a much more common practice to obtain these in Canada than in the United States. However, purchasers in an M&A transaction often rely on estoppel letters for comfort that they are purchasing a target company’s assets free of any liens.

What is an estoppel letter? An estoppel letter is an acknowledgment obtained from a prior secured party (identified through personal property security searches – effectively the equivalent of UCC searches in the United States) to the effect that a registration only perfects a security interest against specific collateral and that the registration will only be used in the future to perfect a security interest against such specific collateral.  

Why are estoppel letters necessary? Estoppel letters provide comfort to a person filing a subsequent registration about the actual scope of a security interest in the case where an existing registration is overly broad. Estoppel letters are especially common in Ontario where registrations do not require that a specific collateral description be included, but rather, only require that the secured party select the very broad categories of collateral being charged, such as Inventory, Accounts, Equipment, Consumer Goods and Other. A collateral description, if included, has the effect of narrowing the collateral types selected and as a result, it is quite common that no specific collateral description to be included.  As a result, in Ontario secured parties often only select collateral types in a registration and do not list the specific collateral (such as leased office equipment or motor vehicles, etc.) that the registration relates to, prompting the need to obtain an estoppel letter.  The good news is that most secured parties are quite familiar with the requirement for estoppel letters and have their own forms which they readily provide upon request.

In practice, the requirement for estoppel letters comes up in both secured financings (where the new lender will typically want comfort that it has first priority security) and (as mentioned above) in the context of a share or asset sale, where the purchaser will want comfort that it is acquiring the shares or assets, as applicable, free of any liens.

Want to learn more about what to think about when considering the purchase of a Canadian target? Check out our publication, Doing Business in Canada 2012.

The acquisition of a Canadian business by US-based purchasers is often financed by way of a cross-border credit transaction involving a Canadian borrower (such as when the US purchaser sets up a Canadian company to make the acquisition, often for tax reasons), possibly also a US borrower (or as is common when a new Canadian company is set up to make the acquisition, a US guarantor), and some combination of Canadian and foreign lenders. In cross-border credit transactions involving a Canadian borrower, certain particularities of Canadian law should be kept in mind when structuring and negotiating documentation:

• Bank Act – Under the Bank Act (Canada), foreign banks are not authorized to “carry on business in Canada”, other than through a Canadian branch or a Canadian bank subsidiary. This issue arises when a foreign bank lends to a Canadian entity. Any cross-border transaction with a Canadian borrower will need to be structured to ensure Bank Act compliance.
• Bankers’ Acceptances – LIBOR is only very rarely used in Canada for Canadian dollar-denominated loans (although it is frequently used for US dollar-denominated loans). The equivalent method of availment for Canadian dollar-denominated loans is bankers’ acceptances (for Canadian banks) or bankers’ acceptances equivalent notes (for lenders that are not Canadian banks). There are specific mechanics that are required to be included in agreements in connection with bankers’ acceptances and bankers’ acceptances equivalent notes.
• Interest Act – As a consumer protection measure, the Interest Act (Canada) requires that the rate of interest be stated in an agreement as a yearly rate, or an annual rate of 5 per cent will apply. As a result, it is customary where there is interest charged to a Canadian borrower to provide for a statement as to how to calculate interest on a yearly basis. This is especially relevant where any of the interest is to be calculated on a 360-day basis.
• Permitted Liens – In Canada, similar to other jurisdictions, there are customary types of standard permitted liens that should be considered and included in the credit documentation as applicable. In addition, further to the Ontario Superior Court of Justice case Engel Canada Inc. v. TCE Capital Corp., there is a risk of “unintentional subordination”, whereby a lender may unintentionally subordinate its interest as a result of listing permitted liens in credit documentation. It is typical in Canada to include protective language in credit agreements to avoid such a risk.
• Bankruptcy Matters – The Canadian bankruptcy regime is quite distinct from the US regime. As a result, provisions dealing with bankruptcy matters, such as bankruptcy events of default and any agreement dealing with intercreditor arrangements, should be customized to reflect the Canadian bankruptcy regime.

One note of caution, the Quebec legal system is based on civil law, and accordingly, additional considerations are applicable if the transaction involves a Canadian entity that is a Quebec entity or if any of the documents are to be governed by Quebec law. To learn more about some of the key considerations when planning to acquire a Canadian business, see our publication Doing Business in Canada 2012.

Read the first post in our special series, Buying a Canadian Business, eh? An Introduction to a Special Series.

In my prior post, Seven Considerations for Borrowers Completing an Acquisition, I described seven key issues that borrowers should consider when completing an acquisition.   Similarly, if your company is considering a disposition (either of assets or of shares) and is a borrower under a credit facility, it is important to consider whether the proposed disposition will result in a breach of any of the provisions of your credit documentation.  Here are five key questions to ask when undertaking a disposition:

1. Is the disposition permitted under the credit agreement? Many credit agreements contain negative covenants that prohibit dispositions without consent of the lenders or impose restrictions on dispositions. For example, some credit agreements will impose limits on the dollar amount of permitted dispositions (either in the aggregate over the term of the credit facility, in the aggregate over a fiscal year or individually) or a requirement that the disposition meet certain requirements, such as being on reasonable commercial terms with a third party. If the disposition is not permitted, you will need to seek consent of the lenders.
2. Is there a requirement to use the proceeds of the disposition in a specific manner?  Some credit agreements require either that the borrower re-invest the proceeds of a disposition in the business within a certain time, or that all, or a portion of, the proceeds of the disposition be applied as a repayment of the credit facilities.
3. Are there several steps to the disposition? If so, each step should be reviewed to determine whether it is permitted under the credit agreement or whether consents or notices are required under the terms of the agreement in order to implement any step or series of steps.
4. Will the disposition affect the calculation of financial covenants?  The completion of a disposition may affect the calculation of various financial covenants under the credit agreement.
5. Is there a need for a release of security?  If the credit facilities are secured, the purchaser may require the delivery of a specific release of security from the lenders whereby the lenders agree to release their security interest against the assets or shares being sold.  There may be timing concerns since lenders generally do not wish to provide a release of security prior to the disposition having been successfully completed. These timing issues are typically addressed through escrow arrangements.

As the structure of the disposition transaction evolves, you should regularly review and consider your existing credit documentation to ensure that such changes do not result in non-compliance with the credit documentation.

If your company is considering an acquisition, and it also happens to be a borrower under a credit facility, it is important that you review the credit documentation to ensure that the acquisition will not result in a breach of any of the provisions. Here are seven key questions to ask when identifying possible issues under the credit documentation when undertaking an acquisition:

1. Is the acquisition permitted under the credit agreement? Most credit agreements contain negative covenants that may prohibit acquisitions without consent of the lenders, or may allow only certain types of permitted acquisitions.
2. Does the credit agreement permit the funds thereunder to be used to complete the acquisition? It is typical for a credit agreement to restrict the purposes for which funds drawn thereunder may be used. Such permitted uses may be broad (such as general corporate purposes) or may be quite limited. The funding of an acquisition may or may not be permitted under the agreement. If it is not permitted, you will need to use other funds to complete the acquisition. 
3. Is there a requirement to deliver additional security? The credit agreement may require that additional security (and corresponding ancillary documentation such as legal opinions, etc.) be delivered in connection with an acquisition.
4. Will the target be subject to representations and warranties, covenants and events of default under the credit agreement? The representations and warranties, covenants and events of default contained in the credit agreement may automatically apply to acquired subsidiaries. If they apply, these terms should be reviewed carefully to ensure that the target will be able to comply with these starting from the date of acquisition.
5. Are there a number of steps to the acquisition? If so, each step should be reviewed to determine whether it is permitted under the credit agreement and whether any consents or notices are required under the terms of the agreement to implement such step.
6. Will the acquisition affect the calculation of financial covenants? The completion of an acquisition may affect the calculation of various financial covenants under the credit agreement.
7. Does the acquisition target have any existing debt and/or security in place? If so, will such debt be repaid and security discharged prior to or upon the completion of the acquisition? If not, intercreditor arrangements may be required between your lender and the lenders to the target. These arrangements can be time consuming to negotiate and should be identified as early as possible to avoid delays. The terms of the existing debt should also be reviewed to determine whether such debt is subject to any change of control provisions (which may require, for example, consent from the target’s lender to the change of control, or a make whole payment), as this will also affect the analysis of whether such debt should be repaid or remain in place.

On a final note, as the structure of your acquisition transaction evolves, you should regularly review and consider your existing credit documentation to ensure that such changes do not result in non-compliance with the credit documentation.