How do financial sponsors provide comfort to sellers where the purchasing entity is a special purpose vehicle?

Private Equity (2nd edition)

Greece Small Flag Greece

The main obligation of a purchaser is payment of the agreed price upon closing. As a matter of practice, where special purpose vehicles are used, financial sponsors are expected to provide an equity commitment letter, whereby they will undertake to fund the special purpose vehicle if and when all conditions precedent (if any) for the transaction are fulfilled. It is not uncommon for sellers to alternatively require that a financial sponsor participates as a guarantor to the sale purchase agreement; however, rarely this is accepted, since financial sponsors are usually not willing to accept such potential liability (in many cases this is also prohibited by their by-laws).

Luxembourg Small Flag Luxembourg

Where the purchasing entity is a special purpose vehicle, financial sponsors can provide comfort to sellers by:

  • providing an equity commitment letter or parent guarantee from the ultimate fund;
  • providing debt commitment letters from the relevant banks, where a deal is financed by external bank debt.

Debt commitment letters are less commonly seen in practice – if seller requires specific comfort as to the buyer’s ability to finance an acquisition, it is more typical to have buyers provide an equity commitment letter / undertaking or parent guarantee.

The Netherlands Small Flag The Netherlands

Where the purchasing entity is a special purpose vehicle, financial sponsors often provide comfort to sellers by providing an equity commitment letter or parent guarantee from the purchasing fund.

If the acquisition by the special purpose vehicle is funded through external financing, buyers will seek to provide the sellers with debt commitment letters from banks before the signing of the SPA.

Norway Small Flag Norway

The comfort provided to sellers where the purchasing entity is a special purpose vehicle varies.

International financial sponsors typically offer to issue an equity commitment letter to the acquiring entity. Such letters customarily contain an obligation for the sponsor to provide equity funding at closing of the acquisition, and it may be made subject to satisfaction of all closing conditions and certain funds debt being available. Frequent negotiation topics with the seller are whether the equity commitment letter also should be addressed to, and be enforceable by, the seller, and whether draw-down of funds could be enforced should the acquiring entity breach the share purchase agreement.

Norwegian financial sponsors typically tend to be more flexible on the form and scope of the comfort to be provided, and are frequently willing to execute the share purchase agreement directly in the capacity as guarantor for all the obligations of the acquiring entity under the share purchase agreement.

Poland Small Flag Poland

These depend on the negotiating strength of the seller. A full range of mechanisms exist including:

a. the equivalent of a parent company guarantee;

b. undertakings to retain a certain net value and financial covenants for a defined period;

c. escrow arrangements

d. W&I insurance, where appropriate.

South Korea Small Flag South Korea

In Korea, sellers often rely on the reputation and credibility of financial sponsors and do not require any additional guarantee from them (particularly in the transaction involving well-recognized financial sponsors).

Sometimes, financial sponsors are requested to provide binding debt and/or equity commitment letters from their financing sources or limited parent guarantees depending on the negotiation powers of the parties and other dynamics of the transaction (e.g., auction deals or deals involving attractive targets).

Sweden Small Flag Sweden

Most commonly, with an equity commitment letter from the fund. Sometimes (but rarely) the fund guarantees the payment obligation of the special purpose vehicle.

Switzerland Small Flag Switzerland

As transaction certainty is key for sellers, financial sponsors often are required to provide sellers with a sufficient proof of funds. This is normally done with an equity and/or debt commitment letter for (at least part of) the purchase price in cases where the purchasing entity is a special purpose vehicle. Under the equity commitment letters, sellers are usually only entitled to claim payment to the special purpose vehicle (and not directly to them). In the context of public transactions, the availability of funds must be confirmed by the review body before launch of the offering.

Belgium Small Flag Belgium

Where the purchasing entity is a special purpose vehicle, financial sponsors seek to provide comfort to sellers by providing an equity commitment letter or parent guarantee from the purchasing fund.

If the acquisition by the special purpose vehicle is funded through external financing, buyers will seek to provide the sellers with debt commitment letters from banks before the signing of the SPA.

Canada Small Flag Canada

Financial sponsors will rarely intervene directly in the purchase agreement with an SPV purchaser. Instead, financial sponsors will either agree to put the balance of purchase price in escrow or provide equity and debt commitment letters. The equity commitment letter is typically addressed solely to the SPV, and provides for a firm commitment to pay the subscription price equal to the portion of the purchase price the SPV owes to the seller. Concurrently, the debt commitment letter confirms the debt to be assumed by the SPV to make up the balance of the purchase price.

China Small Flag China

First, in transactions where the purchasers are prestigious financial sponsors with extensive financial resources, the sellers might agree to sign an agreement with the special purpose vehicle without obtaining any comfort from the parent fund.

On the other hand, if the sellers have much more negotiation leverage, the purchasers might have to provide comfort to the sellers. Such comfort can be provided in forms such as equity commitment letters, debt commitment letters, signing escrow, etc. On or prior to the singing of the purchase agreement, the purchasers can provide to the seller equity commitment letters (signed between the parent fund and the purchasing entity) and/or debt commitment letters (signed between the borrower and the lender) evidencing that the purchasing entities will have access to sufficient funds to make the acquisitions. The sellers in some cases might also request the buyer’s parent to provide its financial statement, although such request will usually face great resistance from the purchaser for confidentiality reasons. Signing escrow is another mechanism for providing comfort to the seller. The purchaser may agree to put the signature pages in the seller’s or the seller legal counsel’s hand prior to the expected date of signing for escrow, and such signature pages shall only be released upon the purchaser’s subsequent authorization. Under this arrangement, no official contract will be signed until closing (i.e., simultaneous signing and closing).

France Small Flag France

In situations where the purchaser is a special purpose vehicle with no substance, the sellers will require the financial sponsors to provide, together with their binding offers, equity and debt commitment letters with certain funds commitments. Under the equity commitment letters, the financial sponsors irrevocably undertake to fund the bidding company if the bid is successful.

When reviewing the offers, the sellers will make sure that (i) the funding obligations of the financial sponsors and/or their debt providers are subject to no or very limited documentary conditions and (ii) the commitment letters can, upon closing, be enforced by the sellers themselves.

Germany Small Flag Germany

Prior to signing, the seller is generally provided with equity and debt commitment letters by the financial sponsor. Equity commitment letters are typically structured as an irrevocable commitment by the fund to the special purpose vehicle to invest funds in the special purpose vehicle. It is often solely for the benefit of the purchasing entity, however, it may be enforced by the seller on behalf of the purchasing entity against the relevant financial sponsor.

Mexico Small Flag Mexico

The structuring of acquisitions through an SPV is common in transactions in Mexico. To provide comfort to seller, guarantees (obligación solidaria) by parent companies or UBOs are often put in place, thus giving seller a direct claim in case of a breach by buyer.

Equity and debt commitment letters are also used in order to provide comfort to seller that the purchasing SPV will ultimately have the funds required to carry out the acquisition.

United Kingdom Small Flag United Kingdom

It is standard for sponsors to provide an equity commitment letter at signing to provide the seller comfort that the sponsor’s fund(s) will provide equity financing to the acquisition vehicle to fund the equity financing portion of the purchase price. It is also common to include a separate commitment to fund damages suffered by the seller should closing not occur as a result of the buyer’s breach of the terms of the purchase agreement. The level of damages to be funded under the equity commitment letter is normally left up to a court to determine, typically capped at the equity commitment amount. A debt commitment letter may also be used to evidence the availability of sufficient funding to the acquisition vehicle. This will often be supported by an interim facility agreement that the debt provider agrees to sign on short notice if required.

Vietnam Small Flag Vietnam

In small size transactions, sellers with limited bargaining leverage often agree to contract with a special purpose vehicle (SPV) without recourse to a fund entity of any substance. In larger transactions, financial sponsors often provide comfort to the seller by way of an equity commitment letter, committing the fund to invest certain funds in the SPV for the purpose of the acquisition by the SPV as the purchasing entity, and where the transaction is to be partly financed with debt, debt commitment letters prior to signing.

India Small Flag India

While, in our experience, it is not common for sellers to seek comfort from financial sponsors as financial sponsors can provide this comfort by extending representations on the availability of liquid funds to close the transaction. In certain cases, they may also provide proof of availability of such liquid funds in their bank accounts or provide copies of their agreements with debt financiers, in order to provide comfort to sellers. Providing such comfort could also involve a guarantee from the purchaser’s parent entity to cover the solvency risk of the special purpose vehicle, or a comfort letter from a bank, for this purpose.

Ireland Small Flag Ireland

On larger transactions, financial sponsors tend to provide the seller with equity commitment letters which are supported by legal opinions. Equity commitment letters are usually structured as an irrevocable commitment given by the fund to the acquisition vehicle pursuant to which the financial sponsor commits itself to invest certain funds in the acquisition vehicle for the purpose of either paying the purchase price or, if closing does not occur as a result of the purchaser’s breach, a damages claim.

On smaller transactions, financial sponsors may opt to provide comfort to the sellers through certain fund representations made in the Share Purchase Agreement.

Finland Small Flag Finland

Hannes Snellman: In transactions involving financial sponsor backed buyers, the purchasing entity is typically a special purpose vehicle incorporated as a Finnish limited liability company. It is customary that the purchasing financial sponsor issues an equity commitment letter whereby the investing fund commits to fund the SPV’s equity portion of the purchase price and damages for breach of agreement. Moreover, a commitment letter from the financial sponsor backed buyer’s debt financier is typically provided to the vendor’s knowledge e.g. in connection with auctions.

Brazil Small Flag Brazil

Normally the financial sponsors issue a binding and irrevocable equity commitment letter to the acquiring entity and/or parent guarantee from the purchasing entity. The relevant letters customarily contain an enforceable obligation for the financial sponsor to provide equity funding at closing of the acquisition.

Austria Small Flag Austria

Private equity buyers will typically be willing to provide a copy of the executed equity commitment letter from the fund and copies of the definitive financing agreements together with documents evidencing that all conditions precedent (other than those within the private equity investor’s sole control) have been satisfied, to provide comfort that the necessary funds will be available at closing. If those financing commitments are not complied with, sellers are typically limited to claims for damages. Equity underwriting of debt funding is the exception but, in situations where definitive financing agreements are not in place at signing, experienced sellers will insist on an equity underwrite, particularly in auctions (to limit execution risks).

United States Small Flag United States

US financial sponsors often use newly formed special purpose vehicles and a combination of debt and equity to fund the purchase price.

Financial sponsors typically provide additional comfort by (i) delivering to sellers an equity commitment letter pursuant to which the financial sponsor commits to invest certain funds in the newly formed acquisition vehicle at the closing of the acquisition so that the funds can flow to the sellers for a portion of the purchase price, (ii) as a financial sponsor’s equity commitment typically does not cover 100% of the purchase price, the financial sponsor also usually procures a debt commitment letter for the remaining portion of the purchase price setting out the terms on which the debt provider is prepared to lend the funds to the acquisition vehicle (generally accompanied by a term sheet setting out the loan terms), which is also provided to sellers and (iii) including a reverse termination fee in the purchase agreement and delivering a separate guarantee pursuant to which the financial sponsor backstops such obligation if the deal fails to close because, among other things, the debt financing fails to materialize.

The equity and debt commitment letters as well as the sponsor guarantee are delivered at the time when the purchase agreement is executed to serve as evidence that the acquisition vehicle will have sufficient funds at closing to consummate the acquisition. The forms of equity and debt commitment letters and sponsor guarantees have become relatively standard with very little negotiation of terms.

Japan Small Flag Japan

Financial sponsors usually cannot provide a guarantee to secure the obligations of the purchasing entity. Sellers are typically more concerned about closing uncertainties with respect to debt financing, and often request (particularly in auction processes) financial sponsors to submit binding commitment letters from the financial sponsors’ banks prior to the execution of transaction documents. Also, sellers are often unwilling to accept any financing condition in transaction documents.

Specifically for going-private transactions, where tender offers are regulated under the Finance Instruments and Exchange Act of Japan, a tender offeror who is a financial sponsor will be required to submit and make available to the public equity commitment letters from its fund entities and debt commitment letters from its banks to show that it has secured sufficient funds to settle the tender.

Updated: January 16, 2020