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

Private Equity

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).

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 Financial 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.

Mauritius Small Flag Mauritius

The financial sponsors will often offer stock options to the seller in the special purpose vehicle, thus ensuring a form of partnership which aligns the interest of the seller with that of the financial sponsor and ultimately promotes the smooth running of the operating subsidiaries.

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.

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.

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.

United Kingdom Small Flag United Kingdom

Sponsors usually provide the seller with equity commitments and certain funds debt commitment letters prior to signing.

The 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.

The equity commitment letter is often issued solely for the benefit of the purchasing entity (which is a requirement driven by the relevant fund’s governance or structure) but may be enforced by the seller on its behalf against the relevant fund entity.

The form of equity commitment letters are now relatively standard and so there does not tend to be a high degree of negotiation around them.

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.

China Small Flag China

In smaller transactions, transactions in which the seller has limited negotiating leverage and/or transactions in which closing occurs concurrently with or soon after signing, sellers may agree to sign an agreement with a special purpose vehicle without formal legal recourse against an entity of substance. Otherwise, sponsors often provide the seller with equity commitments and, where the transaction is to be financed at least in part with debt, debt commitment letters prior to signing.

The 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. The equity commitment letter is usually issued solely for the benefit of the purchasing entity but may be enforced by the seller on its behalf against the relevant fund entity.

Finland Small Flag Finland

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.

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 commitment. 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

Sponsors usually provide the seller with equity commitments and certain funds debt commitment letters prior to signing. The 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. The equity commitment letter is usually issued solely for the benefit of the purchasing entity but may be enforced by the seller on its behalf against the relevant fund entity. In the event that the German target is a limited liability company, the equity commitment letter should be notarized together with the share purchase agreement in order to be fully enforceable.

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).

Ireland Small Flag Ireland

Equity commitment letters from the Fund itself supported by legal opinions are used on bigger deals. On smaller transactions with less experienced advisers, they may rely on a certain funds rep in the SPA.

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.

Russia Small Flag Russia

The following types of transactions require pre-transaction clearance:

• acquisition of voting stock of another company, resulting in the acquirer and its group holding in total more than 25, 50 or 75 per cent of voting stock of a Russian joint-stock corporation or resulting in the acquirer and its group holding in total more than 33.3, 50 or 66.6 per cent of the voting shares in a Russian limited liability company;

• acquisition of rights to determine the business activities of a Russian entity (man-agement agreement, trust agreement, joint venture agreement, agency agree-ment; or by way of acquisition of more than 50% of shares in the major share-holder of a Russian entity);
• acquisition of more than 50% shares/voting stock in, or otherwise control over, a company registered outside Russia if its (and its subsidiaries) Russian turnover in the preceding year exceeded 1 billion rubles;

• acquisition of fixed assets located in Russia (except for plots of land and non-industrial finished and unfinished buildings, constructions, premises and parts of premises) and (or) intangible assets of an entity (except for a financial organisa-tion) into possession, usage or ownership, if the book value of the acquired prop-erty exceeds 20 per cent of the book value of the fixed assets and intangible as-sets of the entity which is selling or transferring the property;

• various forms of corporate restructuring (mergers, accessions) of companies;

• entering into a an agreement on joint activities (whether on a corporate or a pure-ly contractual joint venture) by competitors on the Russian market;

• establishment of new companies if their capital is paid by using shares/voting stock or assets of other companies.

The specific trigger events are largely formal criteria rather than a universal concept of control.

To the extent the events triggering a filing requirement are based on the acquisition of "control", such control is broadly determined and refers to the ability of an individual or a legal entity to determine, directly or indirectly, the decisions to be taken by another legal entity by any means, whether corporate (e.g. holding of more than 50% of voting shares) or contractually. There is court practice that the acquisition of negative control by way of granting (even far-reaching) veto rights is not sufficient to trigger a filing requirement, alt-hough this has to be carefully evaluated on a case-by-case basis.

Apart from this, differing concepts of control and allocation to a group are used in the Competition Law. For example, when determining an acquirer’s or target’s group, the necessary link between two group entities can be established even by them having one and the same CEO. In contrast, for the application of an intragroup privilege from horizon-tal or vertical restrictions, control is limited to holding more than 50 per cent of the voting shares in an entity or acting as a sole executive body of such legal entity.

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.

Portugal Small Flag Portugal

Special purpose vehicles, or bankruptcy-remote entities, are a method commonly used in Portugal by parent companies and collective investment undertakings (national and foreign) to isolate themselves from the risks of the transaction (as well as for other accounting and/or tax structuring reasons).

To provide comfort to the sellers involved in a transaction involving an SPV, financial sponsors may issue comfort letters, parent company guarantees or even, in some cases, bank guarantees.

In Portugal, comfort letters are issued by parent companies and provide a certain degree of assurance, to the benefit of the subsidiary and sometimes the buyer, that the latter’s obligations will be met. Comfort letters vary in their degree of “strength” and can range from mere letters of intent to full-fledged binding obligations to capitalize the subsidiary in case the latter fails to pay the purchase price or breaches other obligations under the relevant transaction agreement.

Under parent company guarantees, the parent/holding company of the acquisition vehicle will guarantee compliance of the latter’s obligations, in some cases to an extent where the purposes of having the acquirers being shielded from bankruptcy is defeated.

On first demand bank guarantees are, although not frequently, also issued in transactions (in relation to, for instance, construction agreements) for the benefit of sellers to guarantee payment of the purchase price.

Sweden Small Flag Sweden

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

United States Small Flag United States

US sponsors provide both debt and equity commitment letters and employ a limited specific performance construct whereby if there is a debt financing failure, the Sponsor is only liable for a reverse termination fee but can be forced to fund the entire deal with equity (further discussed below).

The 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 paying the purchase price.

The equity commitment letter is often issued solely for the benefit of the purchasing entity (which is a requirement driven by the relevant fund’s governance or structure) but may be enforced by the seller on its behalf against the relevant fund entity.

The form of equity commitment letters are now relatively standard and so there does not tend to be a high degree of negotiation around them.

Malta Small Flag Malta

When financial sponsors adopt the use of Special Purpose vehicles (SPVs) as the purchasing entity in a transaction, the financial sponsor typically undertakes the purchasing SPV’s obligations jointly and severally in favour of the seller, thereby dispelling the seller’s discomfort that the SPV’s limited liability will create an obstacle to the enforcement of any claims by the seller against that SPV. As an alternative, the financial sponsor may provide a guarantee to the seller, acting as surety for the performance of the SPV’s obligations.

The fundamental distinction between circumstances where the financial sponsor provided comfort in the form of suretyship, and circumstances where it provided comfort in the form of undertaking “joint and several” responsibility for the SPV’s obligations, is that in the latter case the financial sponsor assumes liability as a principal co-debtor, eliminating the benefit of discussion of the principal debtor’s assets which would have otherwise applied in the case of suretyship. Thus where the financial sponsor is jointly and severally liable with the SPV, the seller may turn onto the financial sponsor directly for the recovery of any amount/s due or the assertion of any rights, without he need of exhausting the SPV’s assets before doing so, which would be the case where the financial sponsor acts as surety.

India Small Flag India

Usually, the financial sponsors will provide letters of comfort (in case of equity financing) or copies of sanction/commitment letters of the debt financiers (in case of mezzanine financing) as comfort to the sellers. In some occasions, the purchaser has also sought comfort from limited partners and the asset management company for the financial sponsors. In case of exit transactions, the funds prefer supporting the warranties by providing a non-recourse W&I insurance policy.

Updated: March 8, 2019