If your company is considering an acquisition, and it also
happens to be a borrower under a credit facility, it is important
that you review the credit documentation to ensure that the
acquisition will not result in a breach of any of the provisions.
Here are seven key questions to ask when identifying possible
issues under the credit documentation when undertaking an
Is the acquisition permitted under the credit agreement? Most
credit agreements contain negative covenants that may prohibit
acquisitions without consent of the lenders, or may allow only
certain types of permitted acquisitions.
Does the credit agreement permit the funds thereunder to be
used to complete the acquisition? It is typical for a credit
agreement to restrict the purposes for which funds drawn thereunder
may be used. Such permitted uses may be broad (such as general
corporate purposes) or may be quite limited. The funding of an
acquisition may or may not be permitted under the agreement. If it
is not permitted, you will need to use other funds to complete the
Is there a requirement to deliver additional security? The
credit agreement may require that additional security (and
corresponding ancillary documentation such as legal opinions, etc.)
be delivered in connection with an acquisition.
Will the target be subject to representations and warranties,
covenants and events of default under the credit agreement? The
representations and warranties, covenants and events of default
contained in the credit agreement may automatically apply to
acquired subsidiaries. If they apply, these terms should be
reviewed carefully to ensure that the target will be able to comply
with these starting from the date of acquisition.
Are there a number of steps to the acquisition? If so, each
step should be reviewed to determine whether it is permitted under
the credit agreement and whether any consents or notices are
required under the terms of the agreement to implement such
Will the acquisition affect the calculation of financial
covenants? The completion of an acquisition may affect the
calculation of various financial covenants under the credit
Does the acquisition target have any existing debt and/or
security in place? If so, will such debt be repaid and security
discharged prior to or upon the completion of the acquisition? If
not, intercreditor arrangements may be required between your lender
and the lenders to the target. These arrangements can be time
consuming to negotiate and should be identified as early as
possible to avoid delays. The terms of the existing debt should
also be reviewed to determine whether such debt is subject to any
change of control provisions (which may require, for example,
consent from the target's lender to the change of control, or a
make whole payment), as this will also affect the analysis of
whether such debt should be repaid or remain in place.
On a final note, as the structure of your acquisition
transaction evolves, you should regularly review and consider your
existing credit documentation to ensure that such changes do not
result in non-compliance with the credit documentation.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
While most are well aware that the sale of a business is generally a complex process, even sophisticated business owners are surprised by just how much cost and effort is required to complete the sale.
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