Acquisition consents for venture debt transactions: A look into acquisition and credit facility documents

The challenging economic landscape has created opportunities for emerging growth companies with strong balance sheets to expand their businesses through the acquisition of their distressed counterparts. These dynamics have likewise created opportunities for well-prepared venture lenders to expand their relationships with existing borrowers. This alert discusses issues for venture lenders to consider when reviewing acquisition documentation and offers guidance when providing their consent to a proposed acquisition.

Acquisition documents: Key considerations

Acquisition structure and terms

The negative covenants of most venture debt loan agreements restrict the borrower’s ability to make acquisitions, so borrowers often must obtain their lender’s consent before consummating an acquisition. The threshold question for lenders is therefore whether they are comfortable with the borrower proceeding with the acquisition. This determination requires an understanding of the transaction’s terms and its impact on the borrower’s business. Below are some key questions lenders may consider:

• Is the transaction an asset sale (where the acquirer purchases the underlying assets of the seller), an equity sale (where the acquirer purchases the equity interests of the acquisition target), or a merger?
• Does the acquisition transaction result in a change of control of any loan parties?
• Are any assets or liabilities of the acquisition target excluded from the transaction?
• When and in what form is payment required?
• Does the scope of the parties’ indemnification obligations and representations and warranties raise any concerns?
• Are the borrower’s rights under the acquisition documents assignable to the lender as collateral?

To avoid delays, borrowers can reach out to their lender as soon as they know a transaction is likely. Lenders can similarly request copies of any acquisition documents upon learning of a transaction to address any concerns as early in the process as able and to track the progress of negotiations as subsequent drafts become available.

Permitted acquisitions

Particularly acquisitive borrowers may negotiate into their loan agreement a “permitted acquisition” concept, whereby a lender pre-approves an acquisition so long as certain conditions are satisfied. The permitted acquisition concept may obviate the need for the lender’s consent, but lenders might still wish to review the materials they receive and consider whether any changes to the credit facility documents are appropriate, as discussed below.

Credit facility documents: Key considerations

The structure and terms of the acquisition transaction will largely inform whether any actions are required under the credit facility, but lenders may want to keep the following items in mind when considering a consent request.

Joinders of newly acquired subsidiaries

Venture debt loan agreements typically require newly acquired subsidiaries to join the credit facility as co-borrowers or secured guarantors, though some loan agreements may limit this requirement to material subsidiaries. Lenders are encouraged to confirm the terms of their loan agreement, including any timing requirements, and align expectations with the borrower accordingly. Lenders can additionally prepare joinder documentation and take other required actions as soon as possible to avoid the need for post-closing accommodations.

Covenant issues

An acquisition can materially impact a borrower’s business and its ability to comply with the existing loan agreement. Although lenders will commonly review a loan agreement’s covenant package in full, the following negative covenants often require particular attention:

• Indebtedness and Investments –
• To the extent any indebtedness is being paid off concurrently with an acquisition, lenders will typically seek to review any related payoff documents. Occasionally certain indebtedness will remain outstanding following the acquisition transaction. Lenders will generally want to confirm whether such indebtedness and any investments held by the acquisition target are acceptable and whether they fall under any existing permitted indebtedness and permitted investment baskets included in the loan agreement. An amendment to the loan agreement may be required to the extent such indebtedness or investments are not permitted. A subordination agreement may also be required for certain indebtedness (including seller financing in connection with the acquisition transaction).
• Lenders are encouraged to understand any intercompany arrangements expected under the borrower’s new corporate structure. Loans and investments between loan parties generally do not present credit issues, but lenders often prohibit or impose strict limits on down-streaming to non-loan parties. When down-streaming is permitted, lenders may seek to limit the types or amount of assets that newly acquired non-loan parties may hold without joining the credit facility. Additionally, intercompany transactions with newly acquired foreign affiliates may raise issues under transfer pricing or other tax regulations.


• Liens – Lenders will typically want to review the lien searches of the acquisition target or acquired assets. As with the above, lenders may seek to review the release documentation for any liens being terminated concurrently with the consummation of the acquisition and confirm that the outstanding liens are acceptable. To the extent any liens will remain in place, lenders will generally want to confirm whether such liens fall within any existing permitted lien baskets or if an amendment to the loan agreement is required to permit them.


• Financial covenants – Lenders may reconsider whether the existing financial covenants remain appropriate. Changes to the borrower’s corporate structure may call for changes in how a covenant is calculated or for additional covenants to mitigate new risks. Similarly, changes in the scope of the borrower’s operations may necessitate revisions to the levels under the existing covenants.


• Banking – Lenders may find it helpful to understand the liquidity needs and cash management strategy of the acquisition target and the consolidated borrower entity on both a historical and an ongoing basis. Lenders are suggested to confirm any banking requirements in their loan agreement and discuss expectations with their borrowers, including whether a transition period is needed following the acquisition to move any new accounts to the lender (if required). Additionally, both lenders and borrowers should be mindful of any other provisions in their loan agreement that require a control agreement (such as to comply with a liquidity-based financial covenant).

Collateral matters

Secured lenders generally pay close attention to an acquisition’s impact on their collateral, as certain types of assets may require additional actions to maintain a lender’s perfected security interest.

• Intellectual property – If a borrower acquires intellectual property (IP), or acquires an entity owning IP, the lender will typically want to confirm whether the new IP falls within the scope of their collateral and, if so, prepare an IP security agreement covering the new IP. Lenders relying on a negative pledge with respect to IP may want to reevaluate whether that approach continues to be appropriate following the acquisition.


• Pledged equity – If an acquisition transaction is structured as an equity sale, the lender will typically want to confirm whether the equity interests being acquired are certificated. Lenders in such circumstances will often seek to perfect its security interest by possession and require delivery of any physical share certificates and instruments of transfer. Depending on the terms of the loan agreement, additional pledge documentation may be required. Further, lenders may benefit from reviewing the organizational documents of the entity whose equity is being pledged to confirm no amendments are necessary.


• Control agreements – As noted above, lenders may want to discuss any requirements and expectations with their borrower in advance of closing the acquisition and encourage their borrowers to request any form control agreements from the applicable financial institutions as early as possible to avoid delays.


• New locations – Lenders are often mindful of any new locations that a loan party leases or owns, or at which a loan party holds collateral (even if owned or leased by a third party). Borrowers are typically required to obtain landlord or bailee consents for these locations, so lenders may want to confirm the scope of any applicable requirements under the loan agreement and discuss expectations with the borrower.

If you would like to discuss or have any questions regarding the topics outlined in this alert or related matters, please contact one of the authors or another member of DLA Piper’s Venture and Growth Lending team.