The role of Payoff Letters in M&A transactions

In mergers and acquisitions (M&A) transactions, ensuring transparency and managing financial risk are key factors to ensure success. One of the key tools to achieve this goal is the Payoff Letter. This is a document provided by the creditors of the target company, confirming the remaining amount of debt, the terms of payment, and a commitment to release the financial obligations after the debt is paid in full. The payoff letter serves as a protection mechanism for the buyer, helping to ensure that the target company does not leave behind unexpected financial liabilities after the transaction is completed.

 

 

1. What is a payoff letter?

A payoff letter is a legal document provided by the creditors (or their representatives, such as a bank or financial institution) of the target company in an M&A transaction. This document typically includes the following information:

• Remaining debt amount: The total amount of debt (including principal, accrued interest, and related expenses) that needs to be paid in order to fully release the debt obligations.
• Liens release: Confirmation that after payment, liens, mortgages, or other restrictions on the company's assets will be released.
• Payment instructions: Details of the payment method, such as a bank account, transfer method, or other agreed method.

In M&A transactions, the payoff letter plays an important role in ensuring that the acquirer is not liable for the target company's undisclosed or unpaid debts. In addition, the payoff letter also provides transparency about the financial status of the target company, helping the buyer accurately assess the transaction value. At the same time, the payoff letter also helps to meet the closing conditions, ensuring that the transaction is completed without any legal or financial obstacles.

2. The role of payoff letters in M&A transactions

Payoff letters play a variety of important roles in M&A transactions, from financial risk management to legal compliance support. Below are the main roles of a payoff letter.

2.1. Financial risk management

One of the biggest risks in M&A deals is the possibility that the target company has undisclosed debts or liens on assets that have not been released. Payoff letters help mitigate this risk by:

First, verify the exact amount owed by the target company

The letter provides a specific figure on the total debt, including interest rates and related expenses, helping the buyer accurately predict financial obligations.

Secondly, the commitment to release debt obligations

By requiring creditors to confirm that the liens will be released after payment, the buyer ensures that the target company no longer has legal or financial restrictions on the assets.

Third, prevent unexpected responsibilities from arising

A payoff letter ensures that the remaining parties after the merger or the buyer do not face payment demands from creditors that were not previously disclosed during M&A proceedings.

2.2. Meeting the conditions for closing a transaction

In most M&A transactions, the completion of the transaction depends on meeting a series of conditions precedent, including the settlement of the target company's debts. A payoff letter is usually a mandatory requirement under these conditions. As the payoff letter will confirm that the target company's debt obligations have been properly handled. As well as the fact that this letter will ensure that there are no financial or legal obstacles to the transfer of ownership in an M&A transaction upon completion.

2.3. Ensure financial transparency

Financial transparency is a core element in any M&A transaction. A payoff letter helps ensure that:

All liabilities disclosed: The seller or the merger party, in M&A transactions, undertakes that its assets are not bound by substantial liens, except those that have been disclosed to the other party. A payoff letter serves as proof that the debts have been identified and disposed of.

Financial due diligence assistance: A payoff letter provides detailed information about the debt obligations, helping the other parties verify that the representations and warranties of the seller/merged party regarding the financial condition are accurate and free from any fraud.

2.4. Legal compliance and ownership transfer support

The payoff letter also plays a role in ensuring that the transaction complies with legal and regulatory requirements, such as the requirement for compliance with tax laws. The payment of debts can affect tax matters, and the payoff letter helps ensure that financial obligations are handled appropriately to avoid unexpected tax liabilities, as mentioned in the assignment/merger agreement entered into by the parties. In addition, in some countries, the provision of a payoff letter is to identify and provide information to regulators and shareholders about the company's financial status and this is also one of the necessary steps to complete transactions in the US stock market[1].

The payoff letter also helps ensure that the other company after the merger has a "clean balance sheet", not bound by debt obligations or liens. This is especially important in corporate merger transactions.

 

 

3. Analysis of the "case study" of the merger between Ferrero and WK Kellogg Co,

The merger between Ferrero International S.A. and WK Kellogg Co[2]., announced on July 10, 2025, is a prime example of how a payoff letter is used in a large-scale M&A transaction[3].

3.1. Specific requirements for payoff letters[4]

According to the published documents of the transaction, WK Kellogg Co is obliged to provide a payoff letter with the following requirements:

(1) Payoff letter delivery time

The letter must be delivered to Ferrero at least three business days prior to the Closing Date. This allows Ferrero sufficient time to review and prepare financial resources.

(2) Contents of the payoff letter

• Confirm the total amount of debt remaining, including principal, interest, and related expenses.
• Undertaking from creditors that upon payment, all liens or restrictions on WK Kellogg Co's assets will be released.
• Specific payment instructions so that Ferrero or the other company can make payments efficiently.

(3) Purpose of payoff letter

Ensure that the other company is not subject to unexpected debt obligations, and at the same time meet the closing conditions specified in the merger agreement entered into by the parties.

3.2. Linked to trade closing conditions

The payoff letter is part of the prerequisites for Ferrero and the Merger Sub to fulfill their obligation to close the transaction. Concrete:

• If WK Kellogg Co fails to provide this letter on time or if the content is incomplete, Ferrero reserves the right to treat this as a breach of the Covenant or the conditions of closing the transaction, resulting in the possibility of delay or termination of the Agreement.
• In the event of termination due to breach, WK Kellogg Co may be subject to the Termination Fee agreed upon by the parties in the merger agreement.

3.3. Importance for Ferrero

For Ferrero, the surviving corporation, the payoff letter is an important tool to: (1) Verify financial commitments: Ferrero uses the letter to verify that WK Kellogg Co's liabilities are in accordance with the commitments and guarantees outlined in the merger agreement. This helps to ensure that there are no serious adverse effects (Company Material Adverse Effect) arising from undisclosed debts. (2)  Financial Preparation: Based on the information in the letter, Ferrero will arrange financial resources to pay the debts through the Payment Fund or other financial mechanisms, as mentioned in the merger agreement.

3.4. Impact on shareholders and employees

The payoff letter also indirectly supports Ferrero's commitments to shareholders and employees of WK Kellogg Co. By ensuring that debts are properly disposed of, Ferrero can focus resources on maintaining employee benefits (such as bonuses,  vacation benefits, and retirement plans) for at least one year after the merger. This also helps to reinforce shareholders' confidence that the transaction will be completed transparently and without causing unexpected financial risks.

4. The importance of payoff letter in M&A transactions

Overall, payoff letters are important in M&A transactions. A payoff letter is a way to strengthen shareholder confidence by providing transparency about the financial position, helping the target company's shareholders feel secure about the value of the transaction. Moreover, the letter is part of the finance due diligence process, which helps the parties accurately assess the value and risk of the transaction. And last but not least is a payoff letter in highly regulated markets like the United States, which will aid in compliance with the requirements of the SEC and other regulators[5].

Payoff letters are an indispensable tool in M&A transactions, playing an important role in managing financial risk, ensuring transparency, and meeting closing conditions. The merger of Ferrero and WK Kellogg Co, is a prime example of how a payoff letter is used to manage a key aspect of the M&A process, thereby contributing to the success of the transaction. In the context of increasingly complex M&A transactions, the role of the payoff letter will continue to be a core element to protect stakeholders and ensure transparency in large, complex M&A deals.