Important Decision Regarding Enforceability of Bank Commitment Papers
In Amcan Holdings, Inc. v. Canadian Imperial Bank of Commerce, a New York appellate court has reaffirmed a lender's right to avoid funding under a financing commitment that is clearly conditioned upon the execution of definitive documentation. Amcan Holdings and the other plaintiffs had sought to enforce a 15-page "Summary of Terms and Conditions" for a CDN $22 million credit facility which was to be used to fund an acquisition. The "Summary" described in detail many terms of the credit facilities, including the maximum amount to be borrowed, interest rates, fees, amortization, security, proposed closing date, and definition of key terms. The Summary, which was signed by CIBC, contained an italicized statement to the effect that the credit facility will be effective only upon execution of definitive loan documentation, including a credit agreement containing the terms set out in the Summary and such other terms and conditions as CIBC may reasonably require. The Summary also referred to "usual and customary" conditions precedent, including "[e]xecution and delivery of an acceptable formal loan agreement and security…documentation, which embodies the terms and conditions contained in this Summary." The Summary required payment of CDN $150,000 "upon acceptance of this committed offer," which was paid by the plaintiffs.
After providing a draft credit agreement, CIBC broke off negotiations and the deal was never consummated. The borrowers sued. The trial court dismissed most of the complaint, but sustained a single claim against CIBC for breach of contract, ruling that it was unclear whether the Summary was a binding agreement or merely an "agreement to agree." CIBC appealed. The Appellate Division, First Department ruled that the contract claim also should have been dismissed. It held that the Summary, though detailed, clearly was dependent on definitive loan documentation, and the parties never explicitly said they would be bound by the Summary pending final loan documentation. The appellate court cited a recent New York Court of Appeals decision that rejected the federal court-created classification of preliminary agreements into "Type I" (terms fully negotiated) and "Type II" (terms still to be negotiated), in favor of a single simple question: "whether the agreement contemplated the negotiation of later agreements and if the consummation of those agreements was a precondition to a party's performance." The appellate court noted that the detailed nature of the Summary did not change the fact that CIBC clearly expressed an intent not to be bound until final documentation was executed and so the complaint must be dismissed.
Buyers and sellers should consider the implications of the Amcan decision for leveraged acquisitions that require so-called "certain funds" commitments to be delivered at signing of the acquisition agreement. Customary practice in the United States is to deliver an executed commitment letter and term sheet containing closing conditions which include execution of definitive documentation. This differs from the European practice of delivering fully executed credit agreements at signing of the acquisition agreement. In light of the Amcan decision and other recent experiences, buyers and sellers may seek to incorporate elements of the European model into U.S. practice. However, parties should carefully consider the potential pros and cons of the European model when negotiating particular transactions.
If you would like a copy of this decision or have any questions regarding the potential impact on specific transactions, feel free to contact any of the attorneys listed above or the Ropes & Gray attorneys who usually advise you.