Debt financier liability protection in M&A documentation – are Xerox provisions the new black?

"Bankability" points in sale and purchase documentation

We are all accustomed to the usual debt financier review of acquisition documents, both in the context of private M&A and schemes of arrangement. That review has typically been focused on some key points, including the conditions precedent and how they interact or correspond to any financing conditions, post completion obligations (including any deferred consideration and earn outs), if and how red flags identified as part of diligence are addressed, liability caps and time periods, as well as the overall 'balance' of the terms of the transaction.

Separately, sellers also usually look to include provisions in acquisition documentation related to debt financing confirming that the debt commitments that the buyer has represented to them are in place, restricting amendments or replacements of those debt commitments in a way which would prejudice the ability of the buyer to pay the purchase price and undertakings from the buyer to enforce its rights under its debt commitment papers.

From a debt financing perspective, buyers are typically focused on ensuring that sale documentation includes appropriate obligations on the seller to provide assistance with the syndication of their debt facilities (including provision of updated financial information and accounts) and cooperation in relation to any repayment/replacement arrangements of the target's debt facilities, bank guarantees etc. on and following completion.

Putting aside commercial negotiations around the terms of the debt commitment, any financing conditions and/ or break fees in the acquisition documentation and beyond these fairly settled approaches to debt financing in acquisition documentation described above, we are increasingly seeing requests from the buyer's (US based) debt funding sources to include so called 'Xerox' liability management provisions aimed at protecting debt funding sources from claims by sellers in broken deals resulting from debt financing not being available or not being provided.

A US import ? Xerox provisions

Xerox provisions (so-called because they were first included in a merger agreement for Xerox in 2012) have become part of established practice in US M&A deals following litigation between sellers, buyers and lenders in the US in relation to acquisition financing which was not available after signing of deals coming out of the 2008 GFC/ credit crunch.

The key features of these provisions are agreements between the buyer and seller as follows:

• that no debt funding sources will have any liability to the parties to the sale documentation, and that those parties will not take any action against the debt funding sources, in relation to the debt financing (or alternatively that any liability cap available to the borrower would also apply to those debt funding sources), in each case with a carve out for the rights of the buyer under applicable debt commitment papers;
• that any action related to the debt financing be exclusively governed by the laws of an agreed (US) jurisdiction, with a carve out for certain acquisition document related matters which would be dealt with under the governing law of the sale documentation, an agreement not to bring or support any action in any other forum and a waiver of a jury trial;
• an express acknowledgement that the debt funding sources will not be subject to special, consequential, punitive or indirect damages or damages of a tortious nature; and
• an agreement that the debt financing sources can enforce the Xerox provisions and that the Xerox provisions may not be amended without the consent of the debt financing sources.

From an Australian perspective, the traditional view has been (which we share) that Xerox style provisions should not be required since there is no privity of contract between the debt funding sources and the seller and therefore those debt funding sources should not owe any obligations to the seller to which any relevant limitation could apply. Any limitation of liability between the buyer and the debt financing sources should be set out in relevant debt commitment letters. Equally there may be some types of liabilities which cannot be excluded by contract (e.g. for misleading and deceptive conduct) and in relation to which such Xerox provisions would not operate in any case.

While not a new point in Australian deals (we have seen it raised in various transactions over the years, though rarely pressed), recently we have seen the inclusion of Xerox style provisions being a firm requirement of US debt funding sources both from the primary perspective of the Mandated Lead Arrangers but also as a critical item required by lenders coming into the debt financing as part of, and so as to ensure, a successful syndication. The Scheme Implementation Deeds entered into this calendar year for Insignia Financial, Infomedia and Mayne Pharma have all included Xerox provisions.

Australian position

While we think that Xerox provisions are not necessary in Australian deals as mentioned above, we do not see any particular issue in including them from the perspective of either the buyer or seller. If a seller is looking to have recourse to lenders (which would be highly unusual in the Australian context) then the seller should ensure appropriate tripartite arrangements are put in place so that it has a direct right of recourse against the debt financing sources. Without those arrangements, recourse could not be assured. Similarly, the buyer should ensure that there is an appropriate carve out to any Xerox provisions to ensure its rights under the debt commitment letters on which it is relying are not prejudiced. It may well be in the buyer's interest to have the Xerox provisions included if it will assist in either the arrangement or syndication of its acquisition financing.

Conversely, parties advising debt financing sources insisting on these provisions should take care to ensure that any Xerox provisions are either expressed as a deed poll or held by a party to the sale documentation as trustee for the debt financing sources to ensure their enforceability, and should also ensure that their clients are aware of those responsibilities and obligations in conducting their business that cannot be excluded by contract.

While we are not suggesting that inclusion of Xerox provisions will become the norm in Australian deals, we do expect that it will be an ongoing discussion point in those deals where acquisition financing is being sourced out of the US and practitioners will need to be prepared to address requests for such provisions and understand the implications for the parties involved.