Parent Guaranty
(M&A Transaction)

Summary

This template is a guaranty of a party's obligations under an M&A agreement by the party's parent entity in favor of the counterparty in the transaction. This template includes practical guidance, drafting notes, and optional and alternate clauses. There are many reasons why a party to an M&A transaction may request that the counterparty deliver a guaranty of certain obligations under an acquisition agreement. Circumstances under which a parent guaranty may be both advantageous and appropriate may arise from the inherent effects of a particular transaction structure (e.g., asset purchase transactions), or may simply reflect the unique characteristics of a party (e.g., newly formed acquisition entities): • Impecunious or recently formed acquisition entities. In transactions where the buyer is newly formed and undercapitalized (in either relative or absolute terms), the seller may request a guaranty from the buyer's parent entity to ensure either the buyer's payment obligations at closing or their performance of certain pre- or post-closing covenants. • Asset purchase transactions with seller indemnification obligations. In acquisitions structured as asset purchase transactions, the seller will typically be left with no (or few) remaining assets, no cash flow or expectation of future revenue, no reserves (in asset transactions, the owner of the seller will generally sweep the seller's liquid assets and cash prior to closing to avoid selling cash for cash), retained liabilities not assumed by the buyer, and post-closing indemnification obligations or other covenants after the transaction has closed. Sellers under these circumstances have few, if any, reasonable means of satisfying their potential indemnification obligations, and parent guaranties may be more attractive than post-closing escrows under certain circumstances. • Distressed asset sales. In distressed M&A transactions, the buyer may seek a parent guaranty as an additional safeguard against the possibility that a distressed seller may default on its retained liabilities and incline a creditor or other party to pursue the buyer under a theory of successor liability. • Seller-financed transactions. In seller-financed transactions, the seller will often demand that the buyer's parent (or, if the buyer's parent is a holding company with nothing but upstream revenue from another operating company, another entity in buyer's ownership structure) guarantee the buyer's obligations under the promissory note made by the buyer to finance the purchase price. This may arise where seller financing is an unsecured promise to pay only, or where the seller financing is contractually or structurally subordinate to another lender. • Transactions with contingent consideration. In transactions in which a portion of the purchase price is structured as an earnout, the sellers may demand assurances that the earnout will be paid. Achievement of an earnout target suggests, but does not assure, that the buyer will have access to adequate cash to make its earnout payments. A parent guaranty of the buyer's earnout obligations bridges this assurance gap. • Joint ventures. In joint venture (JV) transactions involving a newly formed JV partner, or a JV partner that lacks robust a robust capitalization or access to capital, JV counterparties may request a guaranty of a party's obligations or promises under the JV agreement. This template is not intended to be used as a parent guaranty in connection with the formation of a JV. After you determine that a parent guaranty is necessary or advisable in a transaction, you must consider the appropriate scope of the guaranteed obligations, whether the guaranty will be primary or secondary, and whether the guaranty will be delivered at signing or closing (which may be dictated by the actual guaranteed obligations). You can use the drafting notes and alternate clauses provided in this template to address and understand these considerations. This template is jurisdictionally neutral, and can be used in any M&A transaction in which the parent or other owner of a party to the transaction will guarantee such party's obligations under an acquisition agreement. This template is not intended to be used as a parent guaranty in connection with the formation of a JV, secured or unsecured financing transaction, or commercial transaction. Note that certain terms customarily waived in guaranties exchanged in an M&A transaction, such as a waiver of the right to presentment found in many jurisdictions, may be negotiable in other contexts. For a wide collection of ancillary agreements used in M&A transactions, see Ancillary Agreements in M&A Transactions Resource Kit. For more information on guaranties, see Guaranties Resource Kit. For a template guaranty given by a private equity fund sponsor in connection with an equity commitment letter, see Limited Guarantee (Private Equity Sponsor) (DE).