February 2016
Certain funds on UK public acquisition facilities
Certain funds provisions are a feature of debt financing for UK public
acquisitions. In this note we explain when and why these provisions are
included, how they work and analyse the certain funds defaults included on
ten of the largest UK public acquisition financings of 2015.
When are certain funds provisions required?
Certain funds provisions are required to be included in a facility agreement
where the loan proceeds may be used to fund consideration for an acquisition
governed by the City Code on Takeovers and Mergers (the “Code”).
Contents
When are certain funds
provisions required? ......... 1
The purpose of certain
funds provisions on Codegoverned takeovers .......... 1
What are major defaults
and major representations?
.......................................... 2
Rule 2.7(a) of the Code requires that an announcement of a firm intention to
make a bid should only be made when an offeror “has every reason to
believe that it can and will continue to be able to implement” it. Responsibility
for compliance rests not only on the offeror, but also on its financial adviser,
who is required to include a confirmation in the bid announcement that
sufficient resources are available to the offeror to satisfy full acceptance of
any cash component of the bid. This is known as a cash confirmation.
Which major defaults are
being included in practice? 2
The purpose of certain funds provisions on Code-governed
takeovers
Change of control ............. 4
Certain funds provisions are needed in order to give the offeror and target
shareholders a high degree of certainty that the facility will be available to
fund the takeover and so to get the financial adviser comfortable that the cash
confirmation can be given. The certain funds provisions are therefore often
negotiated not only between the lenders and offeror, but also with the
financial adviser and its lawyers.
Conditions precedent ........ 5
A committed loan agreement will typically include a number of drawstops
which, if triggered, mean the lenders can refuse to fund. In particular, the
occurrence of a default or breach of representation triggers a drawstop.
Certain funds provisions suspend the consequences of many events of
default and breaches of representation for a prescribed “certain funds period”
so that even if they do occur the lenders are obliged to fund. The lenders’
other rights to take action that would arise absent certain funds provisions,
such as accelerating any drawn loans and cancelling commitments are also
suspended during the certain funds period. These rights are not waived
Certain funds on public acquisitions of 2015
Acquisition undertakings ... 3
More extensive certain
funds provisions ................ 3
Sanctions and illegality
provisions .......................... 4
What is the certain funds
period? .............................. 5
Certain funds outside Codegoverned takeovers .......... 6
Certain funds requirements
outside the UK .................. 6
Summary of certain funds
defaults from ten of the
largest takeover facilities of
2015 .................................. 7
1
entirely - if the default or breach is still continuing at the end of the certain
funds period, the lenders’ usual rights become exercisable at that point.
What are major defaults and major representations?
Major defaults and major representations are the residual trigger events
accepted by the market as being sufficiently material so as to justify a
drawstop during the certain funds period.
In general, they will concern matters which are, to a greater or lesser extent,
within the control of the offeror or concern matters so fundamental that it
would be unreasonable to expect a lender to fund should they occur. This
reflects the need to show the financial adviser that the offeror has sufficient
certainty of funding. With regard to those matters within the offeror’s control,
there is a residual risk that the offeror could cut off its access to funding if
these provisions were breached. To help mitigate this risk, it is usual practice
for the financial adviser to require the offeror to provide a letter confirming,
among other things, that the offeror will not take any action which would
breach these provisions.
Events of default which relate to the performance of the business of the
offeror or target, for example material adverse change provisions or breach of
financial covenant, would not be included as major defaults. Cross-default
provisions would not normally be included either because of the risk that a
breach of a facility which did not contain certain funds provisions could crossdefault the acquisition facility.
The financial adviser providing the cash confirmation will expect the major
defaults and major representations to be broadly consistent with those on
other public acquisitions of a similar nature (although there can be important
variations from deal to deal). This assessment is made easier by reforms to
the Code made in 2011 which require facility agreements for public
acquisition financings to be made publicly available.
Which major defaults are being included in practice?
The table at the end of this note compares the major defaults and major
representations included on ten of the highest value UK public acquisition
financings signed in 2015. There has been a general trend over the years
towards increasing the number of triggers included. Current practice is for a
number of major defaults to be universally, or near universally, included such
as:
>
non-payment of amounts due under finance documents (although
some deals on the comparison table excluded certain types of
payments);
>
breach of certain key undertakings, including the negative pledge,
restrictions on change of business, restrictions on financial
indebtedness and restrictions on merger;
Certain funds on public acquisitions of 2015
2
>
misrepresentations on key legal matters, including corporate status,
power and authority to enter into the transaction, non-conflict with other
agreements and constitutional documents and applicable law, binding
obligations and validity and admissibility in evidence of finance
documents;
>
insolvency and commencement of insolvency proceedings;
>
unlawfulness and invalidity of finance documents; and
>
repudiation and rescission of finance documents.
It is standard for these events (and any other major defaults and major
representations) to be limited so that their occurrence in relation to the target
group is not a certain funds default. This reflects that the offeror does not
control the target until the acquisition is completed, and so could not, for
example, prevent a member of the target group from granting security or
taking some other action that could operate as a drawstop. The scope of the
major defaults and representations may be further limited so that only their
occurrence in relation to, for example, the original obligors (or material
subsidiaries as was the case on ABInBev’s acquisition of SABMiller) would be
a certain funds default.
Acquisition undertakings
Acquisition undertakings are a collection of positive and negative covenants
which concern the details and conduct of the bid. The scope of the acquisition
undertakings varies substantially between transactions depending on the
level of control the lenders wish to have.
Not every breach of an acquisition undertaking will be a certain funds default
(although for ease of analysis the comparison table does not make this
distinction). Various key acquisition undertakings, such as the requirement to
issue the press release by a set deadline, the prohibition on taking any action
that would result in the need to make a mandatory offer and restrictions on
making changes to the terms of the bid (including price) would typically be
certain funds defaults. Less critical provisions, such as general requirements
to keep the agent informed of the status and progress of the acquisition are
not likely to be appropriate.
More extensive certain funds provisions
Of the deals on the comparison table, the acquisition by Wandle Holdings
Limited of the Russian gold producer Polyus Gold stands out as including
more certain funds defaults than the others. This is usually a function of the
borrower’s relative creditworthiness and the structure of the transaction.
Lenders will include contractual controls for less strong and non-investment
grade credits that are not considered necessary for borrowers higher up the
credit spectrum. Examples could include restrictions on making acquisitions
or on issuing shares, breach of which could be included as a major default.
Where the offeror operates in certain markets or sectors, events such as
Certain funds on public acquisitions of 2015
3
expropriation of the offeror’s assets may be included. In each case the
financial adviser will need to get comfortable that it is appropriate to include
as a major representation or default and that it will not affect its ability to give
the cash confirmation.
Transactions which involve an SPV incorporated for the purpose of the
transaction and party to the facility agreement may also attract more
extensive certain funds provisions. For example, a representation that the
SPV has not traded or incurred any obligations other than those associated
with the acquisition might be included as a major representation.
Sanctions and illegality provisions
It has become standard in recent years for facility agreements to include
specific provisions concerning compliance with sanctions and anti-corruption
rules. All but one of the deals on the comparison table included such
provisions (the exception being the facility for the acquisition of Alent PLC,
which was an “interim” facility intended to be refinanced by a longer term
financing).
Only three of the deals included a breach of those provisions as a major
default - Ball’s bid for Rexam PLC, Delphi’s bid for Hellerman Tyton and
Equinix’s bid for Telecity Group PLC. On these transactions, the use of loan
proceeds in breach of sanctions and anti-corruption rules constituted a certain
funds default. It is interesting to note that the facility agreements for all three
of these deals were governed by New York law and may reflect the influence
of the approach taken on US acquisitions where offerors increasingly seek to
include “SunGard” provisions (so named because they were first encountered
on the acquisition of US company SunGard) in acquisition loans. SunGard
provisions provide greater certainty that lenders will fund the acquisition
consideration when needed. SunGard drawstops would typically include a
breach of sanctions/anti-corruption provisions.
It is worth noting that it is usual practice for the lenders’ obligation to fund
during the certain funds period to be made subject to the illegality mandatory
prepayment provision. A lender may be protected against a breach of
sanctions indirectly through the illegality provision or the unlawfulness event
of default, each of which was included as a drawstop on all ten deals in the
comparison chart.
Change of control
Practice in relation to the inclusion of a change of control as a drawstop is
less consistent. The financial adviser giving the cash confirmation may not be
comfortable with including this as a certain funds drawstop given a change of
control of the borrower is not within its control. However, four of the ten deals
in the comparison table made the lenders’ obligation to fund subject to the
operation of the change of control provisions. This suggests the financial
adviser may have taken the view that any change of control could not
realistically be completed during the certain funds period (as might be the
case if the borrower is itself a listed company). Alternatively, the financial
Certain funds on public acquisitions of 2015
4
adviser may draw comfort from the fact that if a bid were to be made for the
offeror, a prospective purchaser would be aware that the offeror is in the
process of making its own acquisition and so would take into account the
need to make arrangements to refinance any debt in the offeror that could
cease to be available on a change of control.
What is the certain funds period?
The certain funds regime which suspends the consequences of many events
of default applies for a defined period known as the “certain funds period”.
The length of this period varies between deals and is typically defined so as
to end upon the earliest to occur of certain trigger events, with a long-stop
date to ensure that the period cannot continue indefinitely. UK public
acquisitions may proceed by way of a court-led scheme of arrangement or
through a contractual offer, with differing trigger events applying according to
the route chosen.
Those trigger events are driven largely by the requirements of the Takeover
Code, which provide for certain deadlines or milestones for the acquisition
process and the court timetable in the case of a scheme of arrangement.
Where the acquisition is to be made by way of a contractual offer, the
procedures and timing set out in the Companies Act for a “squeeze-out” of
minority shareholders will be relevant too.
The Takeover Code does not require certain funds provisions to extend to
loans to buy shares acquired through the Companies Act squeeze-out
procedure, but it is usual for such loans to be included in the certain funds
regime. This was the case on each of the deals included in the comparison
table that contemplated an acquisition by way of an offer.
Similarly, the Takeover Code does not require certain funds provisions to
extend to loans to refinance target group indebtedness (for example resulting
from a change of control), but this was a feature of all but one of the five
deals on the comparison table which allowed loans to be used for this
purpose. The certain funds period will therefore take account of the timing for
these payments too.
Conditions precedent
During the certain funds period, the lenders’ obligation to fund is subject to
the satisfaction of the conditions precedent to utilisation set out in the facility
agreement. At the time the offeror announces its firm intention to make a bid,
which is also when the cash confirmation is given, not all of the conditions
precedent will be satisfied. In particular, various acquisition-related
documents may not exist at the time of announcement (such as the
offer/scheme document setting out details of the bid) and key acquisition
milestones will not have happened (such as the scheme of arrangement
becoming effective or the offer being declared unconditional). As a practical
matter it may be helpful to document the conditions precedent so as to
distinguish those which will be satisfied as at signing and announcement from
those that can only be satisfied as the acquisition progresses.
Certain funds on public acquisitions of 2015
5
The financial adviser will be concerned to ensure that the conditions
precedent which are outstanding when the cash confirmation is given are, as
far as possible, related to the acquisition process and in any event within the
offeror’s control. It is usual for the financial adviser to require the offeror to
provide a letter confirming the outstanding conditions precedent and that it
anticipates no reason why they would not be satisfied by the time funding is
required.
Certain funds outside Code-governed takeovers
Although certain funds provisions were originally developed to address the
requirements of the Code, they have become quite common in private
acquisitions and standard on leveraged acquisition financings. The provisions
allow the buyer to demonstrate to its seller that it will have access to the
necessary cash when it is time to pay.
The inclusion of these provisions outside Code-governed takeovers is
therefore the result of commercial requirements (which has led to established
market practice) rather than a legal or regulatory requirement. They are not
considered in this note.
Certain funds requirements outside the UK
A non-UK public acquisition will be governed by a different set of public
takeover rules. Which rules apply will depend on a number of factors
including the jurisdiction of incorporation of the target and where it is listed.
Where the acquisition consideration includes a cash element, those rules
may include requirements as to certainty of funding, but these will vary from
jurisdiction to jurisdiction. On some transactions, the structure may mean that
multiple certain funds regimes need to be taken into account, as was the case
on ABInbev’s acquisition of SABMiller where Belgian certain funds
requirements were relevant in addition to the English regime. For more
information see Linklaters’ cross border guide to public M&A financing, which
sets out a summary of the takeover regimes, including applicable certain
funds requirements, across 11 key jurisdictions in Europe and the US.
Certain funds on public acquisitions of 2015
6
Summary of certain funds defaults from ten of the largest takeover facilities of 2015
This chart summarises the major defaults and major representations included in a selection of the largest Code-governed acquisition facility agreements of
2015. In some cases (particularly where governed by the laws of other jurisdictions), provisions are expressed differently among these facility agreements,
but where broadly equivalent are treated the same for the purposes of this chart.
Bidder/
Target
Certain
funds defaults
Non-payment
- negative
pledge
AB InBev/
SABMiller
Shell/
BG
Group
Mitsui
Insurance/
Amlin
Sacturino/
Polyus
Gold
Ball UK/
Rexam
MacDermid
Performance/
Alent
Brother/
Domino
Printing
Sciences
Equinix/
Telecity
Group
Delphi/
HellermannTyton
Group
Capita/
XChanging















































- acquisition
(scheme/offer)


undertakings
Breach of undertakings:
- disposals
- financial
indebtedness

etc
- merger
- change of
business




- Restricted

payments/



dividends
- compliance
with laws/
regulations/



authorisations
Certain funds on public acquisitions of 2015
7
Bidder/
Target
Certain
funds defaults
AB InBev/
SABMiller
Shell/
BG
Group
Mitsui
Insurance/
Amlin
Sacturino/
Polyus
Gold
Ball UK/
Rexam



MacDermid
Performance/
Alent
Brother/
Domino
Printing
Sciences
Equinix/
Telecity
Group
Delphi/
HellermannTyton
Group
Capita/
XChanging
- acquisitions
(and loans or

investments)
- maintain

existence
- restriction on


share issue



- joint ventures
- amending

constitutional
documents

Use of proceeds
- pari passu

ranking
- status












































- power and
Misrepresentation:
authority/authori
sations
- non-conflict
- binding
obligations
- validity and
admissibility in

evidence
Certain funds on public acquisitions of 2015
8
Bidder/
Target
Certain
funds defaults
AB InBev/
SABMiller
Shell/
BG
Group
Mitsui
Insurance/
Amlin
- acquisition
documents
Sacturino/
Polyus
Gold
Ball UK/
Rexam
MacDermid
Performance/
Alent
Brother/
Domino
Printing
Sciences




- sanctions/

corruption
Equinix/
Telecity
Group
Delphi/
HellermannTyton
Group
1



Capita/
XChanging
- no trading

liabilities/

indebtedness
- pari passu
ranking

- use of
proceeds
Insolvency/insolve
ncy
proceedings/credit
ors process



Repudiation/
rescission


Cross default
1
2
2




Expropriation
Unlawfulness/
invalidity




















Use of proceeds in breach of sanctions etc undertakings was a certain funds default, but is included in this misrepresentation section for ease of comparison with other deals
Breach of an undertaking on use of proceeds was a certain funds default, but is included in this misrepresentation section for ease of comparison with other deals
Certain funds on public acquisitions of 2015
9
Bidder/
Target
Certain
funds defaults
AB InBev/
SABMiller
Shell/
BG
Group
Mitsui
Insurance/
Amlin
Non-compliance
with certain
agreements
MacDermid
Performance/
Alent
Brother/
Domino
Printing
Sciences
Equinix/
Telecity
Group
Delphi/
HellermannTyton
Group
Capita/
XChanging











Illegality3

Change of control3

3
Ball UK/
Rexam
Sacturino/
Polyus
Gold


While not necessarily strictly certain funds defaults, obligations to fund during the certain funds period may be subject to illegality and change of control provisions.
Certain funds on public acquisitions of 2015
10
Contacts
For further information
please contact:
Trevor Clark
Partner, London
(+44) 20 7456 5565
[email protected]
Oliver Edwards
Partner, London
(+44) 20 7456 4463
[email protected]
Toby Grimstone
Partner, London
(+44) 20 7456 4893
[email protected]
James Martin
Partner, London
(+44) 20 7456 4430
[email protected]
Philip Spittal
Partner, London
(+44) 20 7456 4656
[email protected]
Author: Andrew Stanfield
This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should
you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or
contact the editors.
© Linklaters LLP. All Rights reserved 2016
Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a
law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is
used to refer to a member of Linklaters LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or
entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP together with a list
of those non-members who are designated as partners and their professional qualifications is open to inspection at its
registered office, One Silk Street, London EC2Y 8HQ or on www.linklaters.com and such persons are either solicitors,
registered foreign lawyers or European lawyers.
Please refer to www.linklaters.com/regulation for important information on Linklaters LLP’s regulatory position.
We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and
business communications.
We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to
those of our associated firms.
If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other
marketing communications, please let us know by emailing us at [email protected].
Certain funds on public acquisitions of 2015
Stuart Thomas
Partner, London
(+44) 20 7456 4474
[email protected]
One Silk Street
London EC2Y 8HQ
Telephone (+44) 20 7456 2000
Facsimile (+44) 20 7456 2222
Linklaters.com
11