M&A: Does the buyer have financial standing to replace guarantee?

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In a sale and purchase of shares, a seller should consider the likelihood the buyer is acceptable to financial institutions as a guarantor to replace the seller, if the target company’s borrowings are secured by substantial guarantees.

It is common for the buyer to provide an undertaking in the sale and purchase agreement to replace the guarantee given by the seller to secure the borrowings of the target company. However, financial institutions may refuse to release the seller from the guarantees if the buyer is financially weaker than the seller.

In such instance, if the guarantee given by the seller is called upon after the sale and purchase of the target company is completed, the seller may want to claim an indemnity from the buyer. At this stage, given that the guarantee has been called upon, the buyer is likely to be in financial distress and unable to honour the indemnity.

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This post was first posted on Linkedin on 12 February 2021.

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