When client companies undertake a material acquisition of shares or substantial assets often they finance it through a Bank loan. There are myriad types of funding, but the essence is, of course, that a substantial sum is lent by the Bank for the company to use and the Bank takes ‘security’ over assets such as property or shares as a guarantee of getting repayment.
Many smaller client companies initially think it is a simple transaction – a loan agreement and then something akin to their house mortgage and similar to loans you get as a consumer/individual. As mortgages for houses are simple, many think it is just as simple in the corporate arena. Unfortunately, it is quite a bit more complicated and so I thought it might be beneficial to explain what is often required, particularly as the work of the Borrower’s solicitor can take a great deal of time and therefore be expensive. I’d like clients to understand why it can take significant time and effort to deal with. The Bank and its solicitors have no pressing timescale like you may have, they just want everything done perfectly according to their preferred documentation text which we have to consider, make fit to the circumstances, negotiate and agree (often the initial drafting can be simply wrong). So they control the pace and dictate their requirements. Let’s take an example: Alpha Ltd (owned by Mr Jones) is buying all the 100 shares in Omega Ltd from a single individual Seller, Mr Smith, for £2m with a loan from Bank A. Omega Ltd owns a property worth £1m from which it conducts its business – and this has a mortgage on it with its day-to-day different Bank (which also provides overdraft facilities), Bank B. Additionally, Alpha Ltd will also issue some new shares in itself to Beta Ltd to raise £500,000 extra capital so that the Bank borrowing is £1.5m. So, how many documents do you think have to be drafted, negotiated and agreed and matters checked before the money can be released; and what information does the lending Bank A want in order to make itself comfortable that it has enough security for the loan?
It is likely that at least the following may be required, in addition to all the normal company share acquisition and due diligence process and ancillary documents, such as the Share Purchase Agreement, Disclosure Letter approvals, all property forms and other practical matters investigated etc:
All of these documents have to be drafted, reviewed, negotiated and agreed, and this is all in addition to the purchase of shares work. Furthermore, much of our Due Diligence work is reviewed by the Bank’s solicitors. I hope this gives just a flavour of the extensive work and time needed to sort out the security for the Bank funding being given, and why it may take time and incur significant cost. Of course, the client has to pay Bank A’s solicitors’ fees, those of Bank B as well as its own solicitors’ costs relating to the acquisition work, the new shares issue work and of course all this security work and Due Diligence in relation to what may have been seen at the outset as a simple Bank Loan.
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