Equity Commitment Letters – Are They Binding?


This blog examines a recent High Court decision on building an equity undertaking letter and asks how committed an equity undertaking letter is?

Why is this interesting? In short – “rarity” – this case is the first of its kind on this subject. Although this is a decision dealing only with preliminary matters, it is interesting to see how an English court interprets a letter of equity commitment.

Background: this case concerns: (i) the conditional purchase of a Spanish company that owns a hotel in Gran Canaria (the Hotel) for 93 million euros under a sale and purchase contract (the SPA ) between private equity funds (the PE Funds), a new acquisition company (the Buyer) and the owner of the Hotel (the Seller); and (ii) the construction of an equity commitment letter (the ECL). ECL is governed by English law and SPA is governed by Spanish law. SPA was subject to EU merger authorization which was subsequently obtained.

COVID affects: the case of PE Funds was that the consequences of the COVID-19 pandemic on the Hotel were catastrophic during the period between the signing of the SPA and the obtaining of the merger authorization from the EU: the Hotel has been forced to close; tourists were banned from entering Spain; and the restrictions on freedom of movement meant that Spanish residents could not visit the hotel either. The Hotel’s main source of income has completely dried up; and the hotel has faced serious disruptions in its relationships with (among others) its customers, suppliers and employees.

The dispute: In this COVID context, PE funds argued that the SPA had ended, the main reason being that the statements and guarantees in the SPA, following the pandemic, could not be faithfully repeated upon completion. On the other hand, the seller argued that the buyer remained obligated to terminate under the SPA and therefore sought to enforce the ECL against the PE funds.

What exactly is an ECL and why is it needed?

Since a private equity buyer tends to use a new corporate structure during an acquisition, the purchasing entity is often a newly incorporated company with little economic substance, as it will only receive its financing in funds. own (and, where applicable, in debt) only just before completion occurs. Therefore, in transactions requiring regulatory clearance, where it is likely that several months will elapse between signing and completion, it is important for the seller to be certain that the buyer will be able to fulfill its completion obligations to pay the purchase price to the seller. Since it will be the individual private equity funds that will finance the buyer, current market practice is for these funds to sign a capital commitment letter addressed to the accepting buyer (subject to the detailed terms of the ‘ECL) to provide the funds before the date set for completion. The seller is then granted specific third party legal rights to enforce the terms of that letter (sometimes the seller may be a specific party to the ECL, although this is much less common in the United States). In cases where acquisition financing is also provided to fund the purchase price obligation, a debt commitment letter is usually also provided.

Although much shorter than the SPA, the ECL is nonetheless a very important document in the terms of the transaction, as without it the seller would only have recourse to a shell company with no significant assets.

So what did the court decide?

Since the SPA was governed by Spanish law, the key issues of the actual completion date and whether the SPA was legally terminated fell under Spanish law. At the time of judgment in the English proceedings, this issue had not been decided. However, the English courts were able to draw preliminary conclusions on some key issues, as follows:

1. When does the obligation to finance PE funds arise?

The obligation of the PE funds under the ECL to provide the completion funds arose when the buyer became unconditionally obligated to complete the SPA. According to the court’s judgment, this moment came when the condition precedent of the SPA was fulfilled (obtaining the authorization to merge from the EU). As a result, PE funds became obligated to provide completion funds no later than 11:59 am on the date before the date set for completion, unless the SPA was validly terminated before that date.

2. Could the PE funds argue that a fixed termination date (which fell after obtaining the EU merger authorization) set in the ECL meant that they were no longer obliged to provide the completion funds under the ECL because, due to an ongoing litigation, the date had now passed?

The court interpreted the fixed termination date as the date for determining whether the obligation to fund arose. If the obligation to fund arose before the termination date, the mere passage of time would not terminate these obligations. “It will not apply so as to terminate the obligation where completion should have taken place but was not”. (The court also made it clear that any attempt by PE funds to deliberately delay and slow down time – the “lapse argument” – would not result in the release of PE funds from their funding obligations).

3. Are PE funds required to provide completion funds in the event of a dispute between buyer and seller under SPA regarding completion?

Yes, “[the PE Funds are] unable to justify a breach of its obligation by reference to the fact that the buyer has raised a dispute as to its obligation to complete on the Completion Date. Instead of, [the PE Funds] must put the buyer in the funds to allow the buyer to finish before that date; and if in fact the buyer can establish that he is not obligated to complete, then he will have to return those funds to [the PE Funds], since these funds are not to be used for any purpose other than completion. “


The English court considered seven issues relating to the construction of the ECL and ruled in favor of the seller on six of these issues, the crucial findings being that the main conditions for financing the ECL were found to be valid and binding on the funds. PE. Considering the importance of the purpose of a vendor equity commitment letter, this is a welcome decision.

Case referenced in this article: Lopesan Touristik SA V Apollo European Principal Finance Fund III (Dollar A) LP, Apollo European Principal Finance Fund III (Master Dollar B) LP, Apollo European Principal Finance Fund (Master Euro B) LP, Apollo EPF III Capital Management LLC [2021] EWHC 2141 (Comm)

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