What to do with guarantee in sale and purchase of shares?

Article

In a share sale and purchase agreement, if there is any guarantee given for a loan granted to the target company or the target company has given any guarantee for a loan granted to other company in the seller’s group, the buyer and seller should address what to be done with the guarantee. 

Guarantee given by target company 

The buyer will typically require any guarantee given by the target company in respect of loan granted to other company in the seller’s group to be released if the buyer is not acquiring the other company in the seller’s group. 

Guarantee given by seller 

Similarly, the seller will normally expect release of guarantee which the seller (or where the seller is a corporate seller, any other company in the seller’s group) has given in respect of loan granted to the target company.  

Guarantee given for a company which will not be wholly owned by buyer 

If the buyer is not acquiring all the shares in the target company and there is an existing guarantee for a loan granted to the company, the seller and buyer will usually agree to bear the liability on a proportionate basis to their shareholding in the company, if there is default on the loan after completion.  

This may take the form of (1) a new guarantee given by the seller and buyer to replace the existing guarantee; or (2) maintaining the existing guarantee and the buyer indemnifying the seller in proportion to the buyer’s shareholding in the company if the existing guarantee is being called upon. 

Timing 

The release and substitution of existing guarantee given by the seller (or other company in the seller’s group) with another guarantee given by the buyer is subject to the consent of the relevant financial institution. Typically, it will be a post completion matter in the sale and purchase agreement. This is because the buyer will not want to assume liability for any default on the loan prior to it becoming a shareholder of the target company. The relevant financial institution will usually require documents to prove the buyer is a shareholder and/or director of the target company before the financial institution consenting to the change of guarantor.  

The sale and purchase agreement should set out the seller’s and buyer’s agreement with regards to the guarantee and the allocation of liability between them in the event the existing guarantee is being called upon during the period from completion until substitution of the guarantee. 

The information in this article is intended only to provide general information and does not constitute legal opinion or professional advice. 

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