The importance of reviewing and replacing personal guarantees in mergers and acquisitions to protect sellers' assets and avoid future risks
A relevant aspect common on most mergers and acquisitions (M&A) that is sometimes overlooked is the mapping and replacement of guarantees provided by shareholders in favor of the company.
It is common practice among business owners to provide guarantees on contracts between third parties and the company, often linking their own assets as personal guarantees and mortgages for bank financing agreements, lease agreements and other similar arrangements. In the context of a transfer of corporate control, it is highly advisable to review all such guarantees and focus on establishing an action plan in the definitive documents to replace them, thereby disconnecting the sellers' assets from the risks associated with the sold business.
The 2nd Reserved Chamber of Business Law of the São Paulo State Court of Justice (TJ-SP) addressed this issue when ruling on Civil Appeals No. 1109854-34.2022.8.26.0100 and 1111375-14.2022.8.26.0100, as per decisions published on 14th August. In this case, the court examined a dispute regarding the obligation of fuel station buyers to replace the guarantees provided by the seller to the fuel distributor and the landlords of the properties, as contractually stipulated.
In the case in question, the buyers had committed to replacing these guarantees within 120 days and, in the event of refusal by the counterparts, to offer in rem or bank guarantees of equal value to the seller for their due protection. However, the buyers, even after notification at the end of the term, remained inactive, keeping the seller contractually bound to the third parties.
Before the TJ-SP, the buyers argued that the replacement of the guarantees depended on the consent of the fuel distributor and the tenants, and that fulfilling the obligation would be impossible without this agreement. However, the court ruled that the buyers' failure to fulfill the contractual obligation, combined with the lack of evidence of attempts to comply, justified upholding the first-instance ruling. The daily fine was maintained, to be applied in the event of unjustified non-compliance after the granted deadline.
This decision highlights the importance of meticulous attention to the replacement of guarantees in M&A transactions. Considering that failure to comply with this step can expose sellers to unnecessary risks after the business is sold, it is essential for the parties to contractually detail the necessary criteria and deadlines for completing all replacements. Moreover, buyers must rigorously fulfill this obligation after the closing, diligently and transparently conducting all required procedures with the guaranteed third parties, thereby avoiding potential litigation between the parties.
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