With Canadian prime and US federal interest rates maintaining an all-time low since the 1980s, the current market is well-positioned for leveraged acquisitions. Whether a purchaser does not have the liquidity to acquire a business or believes the potential growth of the investment will outpace any interest accumulating, the use of borrowed money to purchase a company is a shrewd business move.
Notwithstanding the favourable market conditions for leveraging, purchasers should expect that lenders will require certain lender protections in the acquisition agreement.
Introduced during the acquisition of Affiliated Computer Services, Inc. by Xerox Corporation (hence the “Xerox” provisions) in 2009, the Xerox provisions have gained wide-spread use in the U.S. and in cross-border transactions and are achieving traction within home-grown Canadian deals. The Xerox provisions serve to ensure that: (1) payment of a reverse break fee limits the remedies of the seller against the purchaser, and also against the purchaser’s lenders and (2) lenders will not be subject to litigation from the seller with respect to the financing provided in favour of the purchaser. In order to achieve these limitations, the following provisions should be included in the acquisition agreement:
- Sole and exclusive remedy. That the reverse break-fee is the only recourse of the seller against the purchaser and the purchaser’s lenders. Purchaser’s counsel needs to ensure that the reverse break-fee is the sole and exclusive remedy of the seller and that no other remedies, including specific performance, are available to the seller.
- Direct enforcement. That the seller cannot directly enforce the lender’s obligations to fund the acquisition. Note that typically a seller’s counsel will negotiate for the right to force the purchaser to pursue litigation against any lender who fails to ‘pony up’ on their commitment once the financing conditions have been met.
- Forum. That any litigation arising in respect of the financing be brought in New York. New York is the chosen venue in the US as it is considered a “lender-friendly” venue. For a Canadian only deal, preference would be for an Ontario court sitting in Toronto (i.e. the Commercial List), where the courts have the greatest exposure to complex commercial law matters
- Jury trial. That the parties waive any right to a jury trial relating to the financing (to avoid uncertainty in proceedings)
- Amendments. Restrictions on amendments to the foregoing provisions without lender’s consent. This provision can also be found in the financing agreement between the lender and the purchaser (or similarly, the financing agreement can (and frequently does) contain a provision requiring the acquisition agreement to be satisfactory to the lender)
- Third-party beneficiary. Confirmation that the lender is a third-party beneficiary of the foregoing provisions. This differs from an assignment of the acquisition agreement which permits the lender to directly enforce the remedies of the purchaser against the seller.
The Xerox provisions are one of many ways that lenders seek protections when financing acquisitions but their availability may be limited by the status of the negotiations of the purchase agreement once a financing commitment is finalized. The bargaining strength of the purchaser and seller may also be a deterrent to a lender asserting itself into the purchase agreement. This is not to say in these situations a lender will be out of luck, simply that alternative protections will need to be used to protect a lender’s interest.
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