Why funded transactions work better when banking and corporate advisers collaborate

For any business embarking on a funded acquisition or other corporate transactions, there are two closely connected considerations: what the business wants to achieve, and how its existing or proposed funding arrangements affect its ability to do it.

It can be tempting to treat the corporate and banking elements as separate workstreams. In practice, decisions made in one can have significant implications for the other.

Bringing the two together at an early stage can help identify potential issues sooner, control costs and reduce the risk of delays as completion approaches.

When a routine corporate decision has banking implications

Sometimes the issues involved can appear relatively straightforward. In one corporate exercise, the parties intended to amend a company’s articles of association. It was only relatively late in the process that the existing finance documents were identified as restricting changes to the company’s constitutional documents without the lender’s consent.

The solution was to postpone the changes, but the example demonstrates how an apparently routine corporate action can have implications under existing banking arrangements.

Similarly, on a recent acquisition, the target group had borrowings from a significant number of different lenders. We needed to deal with each facility appropriately as part of the transaction, including obtaining repayment confirmations and arranging the necessary releases. Because that process had not been coordinated sufficiently early, it became a genuine blocker as the parties approached completion.

Contrast that with a demerger on which I am currently advising, where it was identified at the outset that a release from existing security would be required. The client has therefore been able to engage with its bank early and build the necessary consents and documentation into the transaction timetable.

These are very different transactions, but there is a common lesson: understanding the banking implications at the beginning can prevent them becoming an issue at the end.

Avoiding last-minute surprises

The same principle applies when new funding is itself enabling a transaction.

On another recent acquisition, funding had been arranged to support the deal, but the intended funds flow included using some of that finance to repay an existing intra-group debt.

From the client’s perspective, this was simply part of completing the overall transaction. However, that use of the money was not permitted under the agreed funding arrangements.

Because the issue was identified before completion, there was time to address it with the bank. Ultimately, the transaction had to be adapted to fit the available funding. Had the issue only emerged on the proposed completion date, the transaction could not have completed as planned.

None of these examples involves particularly unusual circumstances. That is precisely the point. Problems can arise when perfectly reasonable corporate decisions interact with banking arrangements that have been considered separately.

Two sides of the same transaction

My own practice has developed across both corporate transactions and banking, giving me experience on different sides of funded deals.

That provides two complementary perspectives: as an M&A lawyer who understands the funding considerations behind a transaction, and as a banking lawyer who understands how acquisitions are negotiated and structured.

It is particularly useful on transactions where having completely separate corporate and banking teams may not be proportionate. Even where a dedicated banking lawyer is not required on the client’s side, understanding the issues that are likely to matter to the lender can help prevent problems emerging further down the process.

The same applies when advising the bank. A banking lawyer who understands the underlying M&A transaction can more readily identify how the SPA, transaction structure and funding arrangements interact.

A more joined-up approach

Collaboration will not remove every complication from a funded transaction. Negotiations evolve, commercial priorities change and lenders will have their own requirements.

But greater alignment between corporate and banking advisers can reduce avoidable problems.

That means understanding existing and proposed funding arrangements from the outset, keeping the lender appropriately informed as the transaction develops and considering the financing implications of corporate decisions before they are agreed.

It also means bringing the right people into the conversation at the right time. Where consents, releases or changes to funding arrangements will be required, identifying them early gives the parties the opportunity to incorporate them into the transaction timetable rather than dealing with them as completion approaches.

For businesses contemplating a funded acquisition, demerger or other significant corporate exercise, the objective is straightforward: fewer surprises, less duplicated work and a smoother route to completion.

Advisers with a detailed understanding of both sides of that equation can play an important role in achieving it.