Financial Ability Representation Clause
(Long Form)

Summary

This clause is a representation made by the buyer as to its financial ability to pay the amounts required for the closing of the transaction and related closing deliverables. This clause contains practical guidance, drafting notes, and alternate clauses. Many acquisitions are funded, at least in part, through debt financing from a lender or group of lenders. When a buyer contemplates using third-party financing to pay all or any part of the purchase price for an acquisition, the seller should obtain a representation from the buyer relating to the buyer's financial ability to consummate the acquisition. In connection with making the representation, a buyer typically provides the seller with copies of documentation relating to the financing. The documentation allows the seller to understand the terms of the financing, including any conditions thereto. In an acquisition where the parent or other affiliate of the buyer entity (such as a fund sponsor) is involved in obtaining financing, the seller should consider whether such affiliated entities should participate (jointly and/or severally) in making the financial ability representations relating to the financing. These form provisions provide (1) buyer representations relating to its acquisition financing and (2) any related closing deliverables. If a buyer is not relying on third-party financing for any portion of the purchase price, use Financial Ability Representation Clause (Short Form). Drafting a Financial Ability Representation The following sections detail various components that are customarily included in a buyer's financial ability representation. Financing Documents As mentioned above, one of the key aspects of the buyer's representation is that the buyer has provided the seller with true and correct copies of all of the financing-related documents that exist at the time the acquisition agreement is signed. This includes equity and debt commitment letters, fee letters, and engagement letters relating to any proposed issuance of debt securities that are part of the debt financing. One point of negotiation, which will be reflected in the representation, is whether a redacted version of the fee letter between the buyer and the lenders will be presented to the seller and what information from the fee letter will be redacted. Because fee letters contain confidentiality provisions, a buyer will not be able to provide the seller with an unredacted version of the letter without the lenders' consent. Typically, fee letters include not only the amount of fees payable to the lenders but also other potentially confidential terms such as "market flex" provisions that allow the lenders flexibility in changing terms of the commitment in connection with syndicating the financing. Lenders will usually insist on redaction of the fee amounts at a minimum and may also require redaction of the market flex provisions and other amounts. A seller, however, may seek some limited information on market flex provisions since it will want to ensure that such provisions do not give the lenders the ability to require additional conditions to the availability of financing at the closing. Other Representations as to Financing Documents In addition to representing that the buyer has provided the seller with copies of all the relevant financing documents, the buyer representation should include statements that (1) the copies of the financing documents provided to the seller have not been amended; (2) the commitment to provide the financing has not been terminated; (3) there are no contingencies to funding the full amount of the financing, other than as specified in the provided financing documents; and (4) there has been no event that would constitute a default under the financing documents. Acknowledgement of Absence of Financing Out A financing condition, or "financing out," is a term that requires the buyer to have obtained the contemplated debt financing described in the agreement, or alternative financing on comparable terms, as a condition to the buyer's obligation to consummate an acquisition. A transaction with a financing out puts the risk of the consummation of the debt financing, and thereby the closing of the acquisition itself, on the seller. In a pro-seller acquisition agreement, the financial ability representation will include an acknowledgement by the buyer that the failure to obtain the financing does not relieve the buyer of its obligation to consummate the transaction or otherwise provide it with a "walk right." See Sub-Clause (a) below. Solvency In the context of leveraged buyout transactions, the financial ability representation may be bundled with a representation that after giving effect to the proposed acquisition, the acquired entity will be solvent. A solvency representation will be drafted in a manner that is consistent with applicable state and federal fraudulent transfer laws and in light of certain case law findings that aspects of leveraged buyout transactions may be challenged as fraudulent transfers. Such representations will thus include not only a balance sheet test but also statements to the effect that the entity will be able to pay debts as they become due and that it will not have unreasonably small capital.