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Negotiating a Business Transaction: Did You Check Your Loan Agreement?
Practical Law Legal Update 8-585-6705 (Approx. 3 pages)
Negotiating a Business Transaction: Did You Check Your Loan Agreement?
by Practical Law Finance
| Published on 07 Nov 2014 • USA (National/Federal) |
Before committing to certain transactions, a borrower's in-house counsel should review the company's loan agreements to ensure that the proposed actions do not violate any restrictions or obligations in the loan covenants. This Update outlines steps to ensure loan compliance in select business transactions.
Many companies are borrowers under one or more loan agreements, which typically contain covenants with which the company must comply until the loan is repaid. Some of these covenants require affirmative action on behalf of the borrower (for example, delivering notices), while others restrict the borrower's ability to take certain actions (for example, incurring more debt). These obligations and restrictions are typically drafted to allow the borrower enough flexibility to operate its business while protecting the lender's interests.
Certain transactions require a borrower to take a closer look at its loan agreements and other relevant documents (for example, guaranties and security agreements) to ensure that it remains in compliance with the terms of the loan. These transactions often include:
- Acquiring a new company.
- Selling certain assets.
- Paying a dividend to stockholders.
- Establishing a joint venture with a third party.
Failure to comply with loan covenants can result in an event of default triggering the lender's remedies under the agreement, including the right to accelerate repayment of the loan. Therefore, counsel should:
- Understand the terms of the proposed transaction. Counsel should carefully review the preliminary documents (for example, terms sheets and letters of intent) and, if possible, a draft of the main agreement in the transaction (for example, the acquisition agreement).
- Review the loan agreement and related documents. Counsel should review the loan agreement and any security documents, including any amendments and supplements to those agreements. Counsel should pay special attention to the provisions that address the issue at hand and any other provisions that may directly or indirectly apply.
If the proposed transaction is not permitted under the loan agreement, the borrower may need to amend the loan agreement (see Standard Document, Loan Agreement Amendment) or obtain a waiver of a specific provision of the loan agreement (see Standard Document, Loan Agreement Waiver/Consent).
Practical Law has a suite of resources available to guide in-house counsel in determining whether certain proposed actions are permitted under a loan agreement generally, including: