The recent increase in transaction activity in the market and in acquisition financing has prompted financing banks to require an assessment of fair conditions under which financial assistance is given, as laid down in Section 200(1)(a) and Section 311(a) of the Companies Act.
In acquisition financing, the parent company (the buyer) very often makes use of a loan to finance the acquisition of another company, and the creditor (mostly a bank) requires guarantees in the form of guaranty/security granted both by the parent company (the buyer) and the (target) company to be acquired. This financial assistance from the target company must comply with the above statutory rules and must be provided under fair conditions.
In this context, banks require their clients to present an expert report for financing purposes, to confirm the fair terms of the financial assistance.
Assessing the terms of financial assistance
A fairness opinion on financial assistance must determine the value of the financial obligation arising from the security granted, which obligation is to be paid by the company deriving benefit from the security.
The level of the financial obligation usually reflects the following parameters:
- The terms of the contract under which funds are made available and for which security is given.
- The volume of funds for which security is provided.
- The risk of default of shareholders using the secured loan to acquire shares in the target company (is assessed by a valuation institute).
- The value of assets that are given as a guarantee.
The value of the financial obligation arising from the security can be determined as an algorithm (formula) that allows the absolute value of the obligation to be determined each year. As a rule, the value of the financial obligation is determined as a percentage multiplied the value of the security given.
Each case has its specific characteristics that must be reflected in the assessment of the terms of financial assistance.
We should point out that financial assistance should comply with fair terms even where the provider and the recipient of the financial assistance have entered into a merger process. The terms must be fair until the financial assistance ceases to exist as a result of the merger taking effect. Consequently, the assessment should cover and analyse the entire period until the effective date of the merger.
Considering the statutory requirements for the assessment of fair terms of financial assistance, the banks usually make do with a valuation expert’s assessment and no expert opinion is required.
RSM TACOMA Valuation has produced a number of expert assessments and opinions addressing the terms of financial assistance to set proper terms that we consider fair and that meet the requirements of financing banks.
Please contact us for more information. We would be happy to advise you.