THE BOTTOM LINE
- M&A Seller Financing Risk: In M&A deals, the repayment terms for seller financing are critical. This case shows how a third-party lender’s conditions can override the buyer-seller agreement, making specific wording paramount.
- Define Your Terms: Undefined terms like “the group” in a contract will be interpreted based on context. The court defaulted to the narrowest logical scope—the entities involved in the financing—not the buyer’s entire corporate family.
- Subordination Agreement Pitfalls: When a bank requires a seller’s loan to be subordinated, the bank’s conditions for allowing repayment are non-negotiable. Sellers must scrutinize these clauses as they can effectively block payment, even if the buyer’s wider business is thriving.
THE DETAILS
This dispute arose from the sale of an audio-video wholesale company. The buyer paid a portion of the €1.3 million purchase price upfront, with the remaining €700,000 structured as a seller’s loan. To finance the acquisition, the buyer secured a credit facility from Rabobank. As a condition of its financing, the bank required the seller’s loan to be subordinated, meaning the bank had to be paid first. A key clause in the subordination agreement stipulated that the buyer was only permitted to repay the seller’s loan if the “(consolidated) EBITDA of the group where the debtor is a part” exceeded €1.2 million.
The core of the legal battle was the interpretation of “the group.” The seller argued that “the group” encompassed the buyer’s entire corporate family, including several affiliated companies. Under this broad definition, the €1.2 million EBITDA threshold was met, and the €700,000 loan was due. The buyer, however, contended that “the group” referred only to the specific legal entities that were debtors under the bank’s credit agreement—namely, the buyer itself and the newly acquired company. The combined EBITDA of these two entities alone did not meet the required threshold, meaning the condition for repayment had not been satisfied.
The Dutch court sided with the buyer, ruling that the loan was not yet payable. The judgment hinged on interpreting the agreement based on the reasonable expectations of the parties (the Haviltex standard in Dutch law). The court found that the subordination agreement was inextricably linked to the bank’s financing. The bank’s clear intention was to protect the liquidity of the specific companies it was lending to. Therefore, the most logical interpretation was that the performance test (the EBITDA threshold) applied only to those same entities. The court noted that if the parties had intended to include the financial performance of other affiliated companies, those companies should have been explicitly named in the agreement. Since they were not, the narrower definition prevailed, and the seller’s claim was dismissed.
SOURCE
Source: Rechtbank Zeeland-West-Brabant
