Clean-Up Period: What It Covers After an Acquisition

Due diligence is a reading of what the seller shows. It cannot see everything: a security registration under another name, a contract with an unusual consent clause, a liability nobody has quantified. Before completion the buyer has no right to fix any of it, because it does not yet control the target. After completion it does, but by then the target has usually joined the borrower group, given guarantees and security, and become subject to the facility's representations and undertakings.

Without a clean-up period, the lender could call a default in the first week over a problem the buyer inherited and is already fixing. That would make the acquisition loan unworkable, and no buyer would sign it. The clause trades a short delay in the lender's rights for a borrower group that is put right properly.

The working parts recur across agreements, though every one is negotiated. The window runs to a defined number of days after completion, and some agreements start it at signing; filed agreements show windows from about 60 to 180 days after completion. Its scope is limited to matters relating to the target and its subsidiaries: the representations they would breach, the undertakings they would fail, the events of default they would trigger. The buyer's existing group is outside it.

The shelter is conditional. The matter must be capable of being put right within the window, steps to put it right must be under way, the buyer's group must not have caused or approved it, and it must not have, or be reasonably likely to have, a material adverse effect. If the matter is still continuing when the window closes, the agreement treats the default as occurring at that moment. Some leveraged facilities give a fresh window for each later acquisition that the agreement permits, of the same length or shorter.

A veterinary group, constructed for this page like every figure in it, buys a rival with nine clinics, funded by an acquisition term loan from its bank. Its facility gives a 120-day clean-up period; the length is the example's, not a market norm. The rival's companies accede as guarantors and grant security as soon as the law allows: in Australia, for example, a target guaranteeing its buyer's acquisition debt is giving financial assistance, which needs shareholder approval and notice to ASIC first.

Each problem was real, and each would have been a default from completion. Each was capable of remedy, was being remedied, came from the target rather than the buyer, and was not large enough to threaten the group. Had the third landlord refused and the clinic been forced to close, the buyer would have needed the bank's waiver before the window closed. And had the holiday-pay review shown a liability large enough to threaten the group, the material adverse effect condition would have taken it outside the shelter from the start.

A cure period is part of most events of default clauses: a short grace, often counted from when the borrower knew or was told of the breach, for a failure capable of remedy. It applies to any breach at any time. A clean-up period runs from a fixed date, covers only the acquired companies, and shelters breaches that may have existed before anyone knew of them. A file can use both, one after the other.

Certain funds is the protection before completion: it limits the lender's reasons to refuse to fund the purchase. The clean-up period is the protection after: it limits the lender's reasons to call a default over what was bought. Known problems are treated differently again, usually as conditions subsequent: named tasks with their own deadlines.

DEFINED IN ONE PARAGRAPH → · EVENT OF DEFAULT → · CORPORATE LENDING AND CREDIT RISK →

A lender agrees to a clean-up period because the alternative is a buyer that will not sign. What it controls is the shape. The diligence it relies on decides what can be treated as known and turned into conditions subsequent, leaving the clean-up for genuine surprises. The length is argued against how long the target's problems could plausibly take to fix, rather than carried over from the last deal. And the material adverse effect condition is the lender's assurance that a surprise large enough to change the credit is not sheltered at all.

For the borrower, the window is a project plan. The register searches, the contract review, the payroll audit and the consents all need doing in the first weeks, because anything still open at the end becomes a default on that day. A buyer that reports progress to the bank as it goes makes a waiver easier to ask for if one item runs late.