As part of our discussion on letters of intent (hereinafter referred to as the “Letter” or “Letters“) in commercial transactions involving the sale of shares (see – https://endlex.ca/letter-of-intent-definition-and-purpose/ ), we will be taking a closer look at buyer financing conditions at the Letter stage.
Buyer financing will be discussed in depth in a series of future articles.
1. Financing conditions
The Letter generally stipulates that the transaction is conditional on the buyer obtaining the necessary financing to proceed with the acquisition of the target company, all to the buyer’s satisfaction and discretion. Thus, when the buyer fails to obtain financing, this constitutes a way out of the transaction for the latter, as the Letter is often resolved without recourse on either side.
However, there are several nuances worth mentioning. Firstly, it is recommended that the seller oversee the buyer’s discretion to avoid wasting time with a buyer who is not serious, especially in the context of a non-binding letter (see https://endlex.ca/letter-of-intent-and-binding-nature/ ). For example, the seller can add to the letter that the buyer must take reasonable steps to obtain the said financing (for what it’s worth) and, above all, that the buyer must keep him regularly informed of the results of these steps.
In addition, when the terms of the transaction include payment of a balance of purchase price to the seller after closing, it is advisable for the seller to add to the Letter that the financing terms are also to the seller’s satisfaction regarding the buyer’s ability to pay the balance of such purchase price.
The subject of the balance of the purchase price will be covered in greater detail in another article!
2. Proof of financing confirmation
The buyer will eventually need to provide proof of adequate financing to proceed with the forthcoming transaction, but is this proof of financing relevant at the Letter stage?
This depends on the circumstances of the forthcoming transaction, and especially on the timeframe agreed between the parties for closing the transaction. For example, if the parties have agreed that the transaction will close within three months of signing the Letter (which in itself is an unreasonable timeframe, but parties often have unrealistic expectations of the transaction), it is imperative for the seller that the buyer provides at least an outline (offer) of financing at the time of signing the Letter.
Where the parties have given themselves reasonable time frame to close the transaction, the financing confirmation should generally arrive no later than the buyer’s confirmation of his due diligence, so that this stage is the last hurdle before the parties concentrate all their efforts on completing the transaction in hand.
3. Closing
Obtaining financing is an important step in a business transaction, and it’s in the parties’ best interests to negotiate the right clauses. Don’t hesitate to contact us for more information!
Information provided in this article is intended as general introductory information only. The information provided in this article is not legal advice. It should not be construed as legal advice and should not be relied upon as such. Should you want legal advice regarding the information provided in this article, please contact one of our lawyers.
