Q re Bank of America and guaranty
Posted November 11th, 2008 by David Harlow
Hypothetical: Individual shareholder in company is being bought out. Company agrees to approach B of A to release shareholder from guaranty. Remaining shareholders unwilling to indemnify withdrawing shareholder for guaranty obligations. Anyone have recent experience with B of A in such a scenario? Other thoughts on protecting withdrawing shareholder?
Guaranty
While I haven't dealt with B of A on the issue, in general banks will not release anyone from a guaranty unless there is a new gurantor or collateral suffficient to satisfy the banks loan. Given the current banking environment, I think it would be hard to get him removed as a guarantor. Of course, the facts and circumstances of the terms of the loan, the strength of the company, the strength of the other owners etc. may all have a bearing on how this plays out.
The unwillingness of the other shareholders to indemnify the withdrawing shareholder is unfortunate. That is usually one way to protect the withdrawing party.
You could see if the bank will reduce the withdrawing shareholder's guaranty to a limited guaranty up to a certain amount. My guess is the guaranty is joint and several. Again, not sure the bank would agree to this but it is worth a try.
Hope this helps. Email me if you would like to talk further about this.
Re BOA guaranty
I was one of three shareholders with a bank guaranty(not BOA) a number of years ago and one shareholder agreed to resign his position, and accept other employment to save the company a salary. The two remaining shareholders agreed to accept his liabilities under the existing joint and several guaranty.
The bank would not agree to release him even though there was sufficient collateral. They just did not see how they would benefit even though the salary reduction would improve company profits.
This was a number of years ago, but I can't see any bank accepting a weaker collateral position in this economic climate. A potential solution is to approach other banks with only the remaining shareholder guaranties and try to obtain replacement financing. A new deal can sometimes be easier to sell than a request for BOA to increase their perceived risk.
Contact me if you want to discuss this in any greater detail.