Ucc Article 9 Investment Property Foreign Stock Subsidiary - DOC by wqo19332


More Info

In the “parent with subsidiaries” organizational structure commonly employed by United States
business enterprises, the operating assets used to generate income available for loan repayment
may be held by the parent, in the subsidiaries, or both. Lenders typically will have a keen interest
in who, within the system of affiliated companies, owns such assets. For a variety of reasons,
however, it is not possible in every case for a lender to structure its transaction to “lend where
the assets are”. Moreover, many enterprises that have so organized their operations have done
so, among other reasons, to facilitate movements of cash among affiliated entities whose
businesses do not share the same seasonality. Because of such periodic cash movements lenders
may have no idea from one moment to the next where within the system the bulk of the
consolidated current assets are. Guaranties and guaranty substitutes have come into being for
reasons such as these.

A.        The Guarantor

          1.         A Guarantor is a party to a tri-party relationship in which one person (the
                     “Guarantor”) signs a promise in favor of a second person (the “Creditor”) to be
                     liable for, or obligated in respect of, the debt or other obligation of yet a third
                     person (the “Principal Obligor”) due or to become due to the Creditor.1/

          2.         A Guarantor is a “surety” under the Uniform Commercial Code (the “UCC”).
                     UCC Section 1-201(40).

B.        The Guaranty

          1.         Definition - a Guaranty is the contract of or the promise by the Guarantor in favor
                     of the Creditor to be liable for the debt or other obligations of the Principal

          2.         Purpose of a Guaranty. A Creditor may be motivated by one or more of the
                     following considerations (among others) in seeking a guaranty:

                “Keep well” agreements and other guaranty substitutes are discussed separately in Section III below. The
                term “Guarantor” is employed herein to denote both the obligor under a traditional Guaranty and the
                obligor under the sorts of “quasi-guaranty” arrangements discussed in Section III.

TPMC/VI Transactions Including Affiliate Guaranties

                     a.         The Creditor may look to the Guarantor as an alternative source of
                                payment or, indeed, the primary source of payment.

                     b.         The Creditor may wish the Guarantor to cause the Principal Obligor to
                                make payment or facilitate liquidation of assets or collateral.

                     c.         The Creditor may wish to create a moral obligation of the Guarantor to
                                stand behind (“keep well”) the Principal Obligor, using a stronger vehicle
                                than the so-called “keep well” agreement discussed in Section C1 below.

          3.         Types of Guaranties

                     a.         An affiliate Guaranty may be characterized in terms of the nature of the
                                relationship between the Guarantor and the Principal Obligor:

                                (1)        a “downstream” guaranty is a guaranty by a parent of the debt of
                                           its direct or indirect subsidiary.

                                (2)        an “upstream” guaranty is a guaranty by a subsidiary of the debt of
                                           its direct or indirect parent (commonly employed in “holding
                                           company” loans when operating assets are held entirely or mainly
                                           in subsidiaries).

                                (3)        a “cross-stream” or “sidestream” guaranty is a guaranty by one
                                           direct or indirect subsidiary of the debt of another direct or indirect
                                           subsidiary of a common ultimate parent.

                     b.         A Guaranty may be characterized in terms of the nature of the Guaranty, or
                                the motive or purpose of the Creditor in obtaining the Guaranty:

                                (1)        A “guaranty of payment” or “absolute” or “unconditional”
                                           Guaranty obligates the Guarantor to pay the principal obligation
                                           upon default by the Principal Obligor and permits the Creditor to
                                           pursue the Guarantor without first pursuing the Principal Obligor.2/

                Institutional lenders virtually always require guaranties of payment because the conditions to enforcement
                of guaranties of collection are so burdensome.

TPMC/VI Transactions Including Affiliate Guaranties

                                (2)        A “guaranty of collection” obligates the Guarantor to pay that
                                           portion of the principal obligation that remains unpaid after the
                                           Creditor has used reasonable diligence to compel the Principal
                                           Obligor to repay the obligation, or after circumstances render
                                           useless further pursuit of the Principal Obligor. (See, e.g., clause
                                           “(4)” below.)3/

                                (3)        A “continuing guaranty” is characterized not by the nature of the
                                           liability or the degree of insulation of the Guarantor from the
                                           Creditor but rather by the latter’s concern with a possible future
                                           course of dealing between the Creditor and the Principal Obligor.
                                           A continuing guaranty requires the Guarantor to answer for all
                                           debts of the Principal Obligor created in those future dealings,
                                           without the need for additional guaranties or any description of a
                                           particular liability.

                In addition to facing the obstacles of delay and proof of loss and diligence, the Creditor accepting a
                guaranty of collection may suffer procedural disadvantages such as a requirement that the Principal Obligor
                be joined in an action against the Guarantor.

TPMC\VI Transactions Including Affiliate Guaranties

                                (4)        Guaranties indorsed on negotiable instruments (as distinct from
                                           being set forth in separate agreements) are governed by Article 3 of
                                           the UCC.4/ A party who indorses a negotiable instrument as a
                                           Guarantor assumes a liability equal to that of a co-maker.
                                           Depending upon the language used, a person who signs an
                                           instrument for the purpose of incurring liability on the instrument
                                           without being a direct beneficiary of the value given may create a
                                           guaranty of payment or some lesser degree of liability. If, for
                                           example, the signature unambiguously indicates the Guaranty is a
                                           guaranty of collection rather than payment, the signer is obligated
                                           to pay the amount due only if:

                                           (a)        a judgment against the Principal Obligor has been returned

                                           (b)        the Principal Obligor is insolvent or in an insolvency

                                           (c)        the Principal Obligor cannot be served with process; or

                                           (d)        it is otherwise apparent that payment cannot be obtained
                                                      from the Principal Obligor.

                                           It should be noted that in cases to which UCC Article 3 applies the
                                           failure of a Guaranty to specify unambiguously that it is a guaranty
                                           of collection creates a guaranty of payment. See UCC Section 3-
                                           419 (UCC Section 3-419 replaces UCC Sections 3-415 and 3-416
                                           which are still in effect in some jurisdictions, including New York,
                                           but this result is essentially the same under both the old and new

                                (5)        A Guaranty can be limited in amount by expressly providing for
                                           the maximum amount of the Guarantor’s liability. This can present
                                           significant drafting concerns. Two examples are:

                                           (a)        does the limitation limit the amount of the Guarantor’s
                                                      liability or the amount loaned to the Principal Obligor?

                Note that the typical privately placed note in registered form (i.e., “payable to x or registered assigns”) is
                not a negotiable instrument.

TPMC\VI Transactions Including Affiliate Guaranties

                                                      Any ambiguity might give rise to an argument that
                                                      compliance with the limitation on the amount loaned to the
                                                      Principal Obligor is a condition to the effectiveness of the

                                           (b)        is the limited Guaranty a guaranty of the first dollars or the
                                                      last dollars? This may be particularly important in a
                                                      secured transaction in which the Guarantor asserts it has
                                                      guaranteed only the deficiency or a portion thereof.

C.        Guaranty Substitutes

          1.         Keep Well Agreements - agreements under which the Guarantor, while not
                     guaranteeing any specific obligation of the Principal Obligor, gives assurance or
                     comfort to the Creditor. Examples are:

                     a.         Covenant to maintain the “solvency” or positive net worth of the Principal
                                Obligor (at $1, or some higher specified minimum amount) so long as the
                                latter’s obligations are outstanding.

                     b.         Covenant (or separate agreement) to make “cash advances” to the
                                Principal Obligor to the extent of any “cash deficiency” (i.e., excess of
                                amount due or past due on the Principal Obligor’s obligations over the
                                cash available to the Principal Obligor for debt service from all other
                                sources). At the option of the Guarantor, the advances may be treated as a
                                capital contribution to the Principal Obligor or the subscription price for
                                additional equity in the Principal Obligor. Sometimes takes the form of an
                                agreement to subscribe for and purchase equity in the Principal Obligor. If
                                the Guarantor is not the parent the advance could be an open account
                                advance subordinated to the guaranteed obligations.

                                A “keep well” agreement is subject to attack on many of the same grounds
                                as a Guaranty, although, strictly speaking, a keep well agreement is not a
                                Guaranty since the Guarantor has not undertaken to perform if the
                                Principal Obligor fails to do so. Once a Principal Obligor has gone into
                                bankruptcy, there may be no legal or practical way for the Guarantor to
                                honor (or be required to honor) its keep well commitment. The rationale,
                                however, is that the Principal Obligor’s solvency will be maintained at
                                such a level that it will not be entitled to seek bankruptcy and the Creditor
                                will have a claim against the Guarantor for damages occasioned by breach

TPMC\VI Transactions Including Affiliate Guaranties

                                of that commitment. If the Creditor is concerned about that possibility, the
                                agreement could provide that in such an event, a guaranty of payment will
                                spring into existence.

          2.         Contingent Purchase Agreements - agreements obligating the Guarantor in certain
                     circumstances to purchase the Principal Obligor’s notes from the Creditor,
                     without recourse or warranty (except as to the state of the Creditor’s title). A
                     contingent purchase agreement is analytically little different from a Guaranty with
                     rights of subrogation. The rationale for this device is that some parties may
                     believe that accounting treatment or third-party loan covenants preclude the
                     Guarantor from providing a guaranty of payment but will permit the Guarantor to
                     purchase the notes. (If this is the motivation, the Creditor should consider
                     whether it could be viewed as a participant in a formalistic avoidance of the
                     Guarantor’s pre-existing obligations.)

          3.         Take-or-Pay Contracts - agreements whereby the Guarantor agrees to make cash
                     payments to the Principal Obligor for goods or services, whether or not received
                     or accepted. The amount of the payment is often determined by the debt service
                     capacity of the Principal Obligor and the payments usually are treated as advance
                     payments for future goods or services.

          4.         Put Agreement - agreements whereby the Guarantor agrees to purchase specific
                     assets of the Principal Obligor at a particular price upon the Creditor’s demand or
                     upon occurrence of one or more specified conditions, e.g. upon default by the
                     Principal Obligor.

          5.         Non-disposal Agreements - agreements whereby the Guarantor agrees to maintain
                     100% ownership of the Principal Obligor until the latter’s obligations to the
                     Creditor are paid. The expected benefit to the Creditor is based upon the
                     assumption that the Guarantor (particularly if it is publicly-held) will not allow a
                     wholly-owned subsidiary to default on the guaranteed obligations. The
                     reasonableness of the assumption depends upon various factors, including
                     (a) reputation and standing of the Guarantor and (b) existence of cross-default
                     provisions covering the Guarantor and its subsidiaries.

          6.         Comfort Letters - letters from a shareholder or parent who may not be willing to
                     provide a keep well agreement or a guaranty. Typically, the letter expresses the
                     shareholder’s intent to enable or cause the Principal Obligor to meet its obligation.
                     The letter, however, is an expression of intent, not a commitment, and thus does

TPMC\VI Transactions Including Affiliate Guaranties

                     not have the legal force of the arrangements discussed in 1-5, above, much less
                     that of a Guaranty.

          7.         Often a Creditor will request that instead of guaranteeing an obligation, the
                     potential Guarantor become at least a nominal co-borrower, jointly and severally
                     liable for the obligation with the Principal Obligor (regardless whether it actually
                     receives any of the loan proceeds). If the joint and several obligation is actually
                     for the benefit of only one borrower and the co-borrower signs the instrument
                     primarily for the purpose of enabling that borrower to obtain a loan, the other co-
                     borrower may have the rights and defenses of guarantors. (See UCC Section 3-
                     419.) The advantage to the Creditor of a co-borrower structure over a guarantor
                     structure is difficult to perceive where only one borrower receives the benefit.
                     Indeed, in certain jurisdictions such as Texas, a guarantor cannot assert certain
                     defenses that a borrower may have, such as usury, but a co-borrower could.
                     (Houston Sash & Door Co. v. Heaner, 577 S.W.2d (Tex 1979)).

D.        Organization Chart

          Counsel for a financing party should obtain and study a schedule of all subsidiaries (and
          direct and indirect parents) of the Principal Obligor as well as an organization chart
          showing the relationship to the Principal Obligor of each subsidiary (and other affiliate)
          that is to be a Guarantor. The schedule should include (1) nature of entity, (2) jurisdiction
          of organization or formation and (3) percentage of equity interest directly or indirectly
          owned by each affiliated entity by type, e.g., common, preferred, etc.

E.        Records

          1.         The following documents should be reviewed for each Guarantor:

                     a.         Constituent Documents and evidence of authorization to determine entity
                                power and authority and authorization:

                                (1)        If a corporation

                                           (a)        its articles or certificate of incorporation to determine if in
                                                      the context of the transaction, the Guaranty fulfills the
                                                      Guarantor’s corporate purposes as set forth in the charter;
                                                      e.g., the guaranteed obligations bear a reasonable
                                                      relationship to the corporate purposes of the Guarantor.

TPMC\VI Transactions Including Affiliate Guaranties

                                           (b)        its bylaws to verify that the officer executing the Guaranty
                                                      is acting within the scope of his or her authority, and
                                                      whether two or more officers are required to execute the

                                           (c)        resolutions authorizing the Guaranty. Since a Guaranty
                                                      executed by a corporation must further the purposes of that
                                                      corporation, the resolution should specifically authorize the
                                                      issuance of the Guaranty, authorize and direct one or more
                                                      specified officers to execute it and either make reference to
                                                      the relationship between the Guarantor and the Principal
                                                      Obligor or otherwise describe the economic benefit to the
                                                      Guarantor from the underlying transaction. The resolutions
                                                      should be certified by the corporate Guarantor’s secretary
                                                      as a true and correct copy of the resolutions adopted by the
                                                      Board of Directors of the corporate Guarantor.

                                           (d)        since in certain states approval of a Guaranty by a certain
                                                      percentage of a corporation’s shareholders will validate a
                                                      Guaranty that is not in furtherance of its corporate
                                                      purposes, shareholder approval of a Guaranty should be
                                                      obtained if (i) shareholder approval is easily obtained or
                                                      (ii) it is not clear the Guaranty will further the corporation’s
                                                      corporate purpose.

                                (2)        If a general partnership, the partnership agreement, and, if a limited
                                           partnership, the partnership agreement and certificate of limited

                                (3)        If a limited liability company, articles of organization, certificate of
                                           organization or formation and operating or member agreement.
                                           The articles of organization or formation and operating or member
                                           agreement should be reviewed to determine the powers of the
                                           limited liability company and the authority of those acting for it.
                                           This authority may reside in a board, similar to a corporate Board
                                           of Directors, or a management committee, or a manager or
                                           managers or the members themselves. If authorization purports to
                                           consist of action of a board or the members, resolutions similar to
                                           those required in the case of a corporation should be obtained.

TPMC\VI Transactions Including Affiliate Guaranties

                                (4)        If an entity whose general partner(s) or managing member(s) is
                                           (are) entities of the type described in items (1), (2), or (3) above,
                                           documents described in items (1), (2), or (3) above relating to such
                                           entity should be obtained.

                     b.         Good Standing Certificates

                                An entity can lose good standing in its state of organization or formation
                                or in states in which it has qualified to do business for many reasons,
                                among which are failure to file annual reports, non-payment of franchise
                                taxes and failure to maintain a registered agent or office for service of
                                process. Loss of good standing may result in liens on the entity’s property
                                for unpaid franchise taxes and penalties, loss of the entity’s access to the
                                courts or involuntary dissolution. If there has been a gap in the good
                                standing of an entity in a jurisdiction material to its operation, the adverse
                                consequences, if any, to the entity should be determined by reference to
                                the applicable law of its jurisdiction of organization/formation.

                     c.         Agreements

                                All documents or agreements evidencing borrowings or other financing
                                arrangements, whether secured or unsecured, including all indentures, loan
                                and credit agreements, promissory notes and other evidences of
                                indebtedness and all mortgages, security agreements, and Guaranties with
                                respect to the foregoing; also any Constituent Document provisions
                                relating to (and perhaps containing restrictions protecting holders of)
                                preferred stock. These documents and agreements should be reviewed for

                                (1)        limitations on the incurrence of indebtedness (including guaranties)
                                           or liens securing such indebtedness;

                                (2)        restrictions on investments (a Guaranty being a commitment to
                                           make a “bad” investment and, as such, often being treated in
                                           covenants as a present investment);

                                (3)        cross defaults and accreditation to other indebtedness;

                                (4)        others?

TPMC\VI Transactions Including Affiliate Guaranties

                     d.         All documents or other evidence of inter-company indebtedness of the
                                Principal Obligor to the Guarantor or the Guarantor to the Principal
                                Obligor and a list of the balances as at a recent date. This inter-company
                                indebtedness may be evidenced by a note, but often is evidenced only by
                                book entries relating to inter-company accounts.

                     e.         Tax-sharing agreements to which the Guarantor is a party.

          2.         The local law of the jurisdiction of organization or formation of the Guarantor
                     should be reviewed to determine:

                     a.         any limitation on the power of the Guarantor to guarantee the obligations
                                of the Principal Obligor.

                     b.         procedural limitations.

                     c.         if the Guarantor is or may be a public utility or otherwise affected by a
                                Federal or state regulatory scheme, whether prior Federal or state agency
                                approval is required. In addition to being a separate “security” for the
                                purposes of the Securities Act of 1933 and certain other Federal regulatory
                                statutes, a Guaranty also may be a security requiring approval of certain
                                state agencies if the Guarantor is a utility regulated by any such agency.
                                Depending upon the jurisdiction(s) whose law(s) apply, the wages of sin –
                                failure to obtain a required agency approval – may range from inability to
                                include the obligations in the Guarantor’s rate base to voidness of the

F.        Defenses to Guaranties

          1.         Fraudulent Conveyance and Fraudulent Transfers

                     a.         In a bankruptcy proceeding involving a Guarantor, and particularly if the
                                Guaranty is upstream or cross-stream, the Guaranty may be attacked and
                                avoided as a fraudulent conveyance under Section 548(a) of the
                                Bankruptcy Code, 11 U.S.C. §548(a). The elements of such a fraudulent
                                conveyance involve a transfer by a debtor (or an obligation incurred by a
                                debtor) within one year before the bankruptcy case is filed if (1) (a) made
                                with the actual intent to hinder, delay or defraud the creditor or (b) made
                                for less than reasonably equivalent value accruing to the Guarantor and
                                (2) (a) the debtor either was “insolvent” or became “insolvent” as a result

TPMC\VI Transactions Including Affiliate Guaranties

                                of the transaction, or (b) will be left with an unreasonably small amount of
                                capital for its business purposes, or (c) intended to incur debts beyond its
                                ability to pay as such debts matured. Unfortunately for the Creditor, these
                                issues are typically examined by courts in the light of hindsight, after the
                                Guarantor has encountered financial difficulty, and in a given case the
                                burden of proof required of the party attacking a guaranty may be
                                relatively light.

                     b.         All states have some kind of fraudulent conveyance statute and a majority
                                of the states have now adopted the Uniform Fraudulent Conveyance Act or
                                its successor, the Uniform Fraudulent Transfer Act. These laws provide
                                that any conveyance, including a Guaranty and supporting grant of
                                collateral security, may be avoided by a Guarantor’s creditors if the
                                Guaranty is given by a Guarantor that either is or will be thereby rendered
                                insolvent and if the Guaranty obligation is incurred without the
                                Guarantor’s receiving “fair consideration” or “a reasonably equivalent

                     c.         “Fair consideration” and “reasonably equivalent value” go beyond both
                                legal consideration necessary to support a contract and the benefit
                                necessary to withstand a claim of ultra vires. “Downstream” guaranties
                                by a parent of a subsidiary’s obligations are generally not susceptible to
                                attack since a loan to a subsidiary benefits the parent, as owner, to about
                                the same degree as the subsidiary, although there is some case law to the
                                contrary.5/ “Upstream” and “cross-stream” guaranties, as well as
                                Guaranties from entities unaffiliated with the Principal Obligor, however,
                                require a substantial benefit from the transaction guaranteed to
                                successfully defend against fraudulent conveyance and fraudulent transfer

                     d.         Certain steps can be taken to mitigate fraudulent transfer and fraudulent
                                conveyance exposure, among which are:

                See In Re: Rodriguez, 895 F.2d 725 (11th Cir 1990) in which payments made by a corporate parent on
                behalf of an insolvent wholly-owned subsidiary within one year of the parent’s bankruptcy were held to be
                voidable fraudulent transfers. If solvent, the parent would have realized a dollar for dollar benefit from the
                improvement in the subsidiary’s net worth. Since the subsidiary was insolvent even after the parent’s
                payments, the payments merely reduced the losses of the subsidiary’s creditors, without creating a positive
                value in the parent’s investment in the subsidiary.

TPMC\VI Transactions Including Affiliate Guaranties

                                (1)        limiting any “upstream” or “cross-stream” Guaranty to an amount
                                           that is at least $1.00 less than the Guarantor’s net worth excluding
                                           the Guaranty. While such a limitation may mitigate the possibility
                                           that the Guaranty will be held to be a fraudulent transfer or
                                           conveyance, it also may reduce the Creditor’s recovery from that to
                                           which it would otherwise be entitled, and it does not address the
                                           presence or absence of an actual intent to hinder, delay or defraud

                                (2)        not requiring the Guarantor to waive absolutely its rights of
                                           subrogation and contribution, but only requiring that exercise of
                                           such rights be deferred until the guaranteed obligations are paid in
                                           full. A Guarantor’s right to “step into the shoes” of the Creditor
                                           and recoup payments made to the Creditor by other Guarantors is
                                           an “asset” that can be used to counter a claim that the Guaranty or
                                           payments thereunder rendered the Guarantor insolvent.

                                (3)        requiring the Principal Obligor to record and report at the time
                                           financial statements are delivered, the balance of loans and
                                           advances made by the Principal Obligor to the Guarantor. The
                                           Guaranty could then be limited to the greater of (a) the amount of
                                           outstanding loans and advances made to the Guarantor and (b) such
                                           amount as would not render the Guarantor “insolvent” for
                                           fraudulent transfer and fraudulent conveyance purposes.

                                (4)        requiring, as a condition to extending the loan to the Principal
                                           Obligor, an expert’s solvency letter or report with respect to the
                                           Guarantor. Such letters are obtained to support a so-called “good
                                           faith” defense asserted by the Creditor under Bankruptcy Code
                                           §548(c), 11. U.S.C. §548(c). Unfortunately, however, such a letter
                                           or report would address the Guarantor’s solvency at the time the
                                           Guaranty is issued, not at any later time when payments may be

          2.         Ultra Vires

                     Because a legal entity derives power from the state statute under which it is
                     organized or formed and, to the extent not inconsistent with such statute, its
                     Constituent Documents, when such an entity exceeds the limits of such powers, it
                     is said to act “ultra vires”. As noted in Sections E2 and E1a above, the state

TPMC\VI Transactions Including Affiliate Guaranties

                     statutes of organization or formation and the Constituent Documents of any entity
                     considered as a potential Guarantor should be scrutinized to determine that the
                     entity has the power to guarantee the obligations of the Principal Obligor. The
                     analysis as to ultra vires is a “benefit/furtherance of corporate purposes” analysis
                     somewhat similar to that in the fraudulent conveyance area, although a given
                     Guaranty that is not ultra vires the Guarantor may nonetheless constitute a
                     fraudulent conveyance. As in the fraudulent conveyance case, the ultra vires
                     doctrine is not likely to be much of a problem in the case of a “downstream”
                     Guaranty since a parent’s equity ownership of its subsidiary generally means that
                     parental action benefitting the subsidiary -- giving a Guaranty to enable the
                     subsidiary to borrow from the Creditor -- will redound to the benefit, and further
                     the corporate purposes, of the parent as well. The issue, if any, will normally arise
                     in the context of an “upstream” or “cross-stream” Guaranty. In this context, the
                     benefit to the Principal Obligor and (in the case of the “cross-stream” Guaranty)
                     the benefit to the common parent -- may be clear but the extent of the benefit, if
                     any, to the Guarantor itself – and thus the extent, if any, to which the Guaranty
                     furthers its corporate purposes – may not be readily apparent. The corporation
                     statutes of some states (e.g., Delaware GCL § 122(13)) have resolved the issue, at
                     least in part, by expressly (if somewhat arbitrarily) conferring upon wholly-
                     owned subsidiaries the power to guarantee the obligations of their direct or
                     indirect wholly-owning parents (“upstream” Guaranties), and of other wholly-
                     owned subsidiaries of such parents (“cross-stream” Guaranties).

G.        Items to be Considered in Drafting an Absolute, Unconditional, Irrevocable and
          Continuing Guaranty

          1.         Title. The document should say “GUARANTY” at the top in bold letters or better

          2.         Introduction

                     a.         The Guaranty should contain the proper legal name and jurisdiction of
                                organization or formation of the Guarantor as well as its address, and be
                                addressed to the Creditor.

                     b.         The Guaranty should begin “In order to induce Creditor to enter into [the
                                Note Purchase Agreement and purchase the Notes . . .]”. This recitation
                                shows consideration and establishes acceptance as soon as the Note
                                Purchase Agreement is signed and the Notes issued. In certain

TPMC\VI Transactions Including Affiliate Guaranties

                                jurisdictions a recital of nominal purported consideration and a seal may
                                satisfy the consideration requirement.

          3.         Benefit

                     The Guaranty should contain a recitation that the Guarantor reasonably expects to
                     benefit from the extension of credit to the Principal Obligor.

          4.         Words of Guaranty

                     The words of guaranty should be clear and unambiguous, such as “absolutely,
                     unconditionally and unrevocably guaranties the payment and performance of . .

                     If a Guaranty is to be irrevocable, it should state that it cannot be revoked while
                     the Principal Obligor has any obligation to the Creditor. If, however, for any
                     reason the Guarantor has a right to revoke the Guaranty, the document should
                     clearly say so, establish a time period for notice of revocation and provide that any
                     revocation will not be effective with respect to any guaranteed obligations existing
                     at the time of revocation.

          5.         Guaranteed Obligations

                     The obligations guarantied should be clearly stated to include present and future
                     obligations of the Principal Obligor to the Creditor under the Note Purchase
                     Agreement and the Notes as well as any security documents. To the extent
                     reference is made to documents or notes, the reference should be to such
                     documents as amended from time to time and to such notes together with all
                     modifications, extensions, renewals and refinancings thereof.

          6.         Unconditional

                     The Guaranty should state that it is unconditional and will continue to be in effect
                     regardless, for example, of (a) the unenforceability of the obligations guarantied,
                     (b) any modification, extension, waiver or release of the guarantied obligations,
                     (c) any release or impairment of any security or the failure of any lien securing the
                     guarantied obligations or the Guaranty to be perfected, or (d) the release,
                     discharge or bankruptcy of any Co-Guarantor or the Principal Obligor. The
                     Guaranty should be clear that the Guarantor waives any defense of any kind which
                     it might have including all defenses available under the law of suretyship. The

TPMC\VI Transactions Including Affiliate Guaranties

                     waiver by the Guarantor also should include waivers of any notice of acceptance
                     of the Guaranty, notice of default by the Principal Obligor and demand for
                     payment, presentment, protest and notice of protest.

          7.         Absolute

                     A Guaranty should not just say it is absolute, it should expressly provide that there
                     is no condition that the Creditor first proceed against the Principal Obligor or any
                     Co-Guarantor. Further, the obligations of the Guarantor to pay the guarantied
                     obligation should be stated to be effective as soon as the Principal Obligor fails to
                     pay the Creditor or there is a default in the guarantied obligations.
          8.         Limitations

                     If the Guaranty is to be limited in amount to mitigate any fraudulent transfer or
                     fraudulent conveyance attack, or for any other reason, the limitation should be
                     clearly stated.

          9.         Subrogation; Contribution

                     Provisions limiting the Guarantor’s rights of subrogation and contribution should
                     be included, but see Section F1d(2) above, as to the possible inadvisability, in
                     certain circumstances, of employing absolute waivers (as distinct from deferring
                     exercise of rights until the guarantied obligations have been paid in full).

          10.        Reinstatement

                     It is customary for a Guaranty to provide that if any payment by the Guarantor
                     under the Guaranty or the Principal Obligor on the guarantied obligations has to
                     be returned for any reason, the Guaranty is pro tanto reinstated.

          11.        Acceleration

                     The Guaranty should provide that as to the Guarantor the guarantied obligations
                     may be accelerated upon non-payment by the Principal Obligor or the occurrence
                     of any other default. This permits the Creditor to avoid suing the Guarantor each
                     time the Principal Obligor defaults and, if the Principal Obligor, but not the
                     Guarantor, is in bankruptcy, affords a contractual basis for acceleration of the
                     obligations vis à vis the Guarantor.

TPMC\VI Transactions Including Affiliate Guaranties

          12.        Assignability

                     The Guaranty should provide that it is assignable and is for the benefit of each
                     holder from time to time of any of the guarantied obligations.

          13.        Waivers

                     Any waiver of jury trial, appointment of an agent for service of process and
                     provisions submitting to any jurisdiction for suit should be conspicuous.

          14.        Costs

                     The Guaranty should provide that the Guarantor is liable for costs of collection
                     and enforcement of the Guaranty, including reasonable attorneys fees.

          15.        International

                     If the transaction guarantied is international, the currency of payment should be
                     specified. If the primary obligation is denominated in a currency that is other than
                     the Guarantor’s normal medium of exchange, are its assets likely to include
                     sufficient foreign currency to discharge its obligations? If not, is the Guaranty
                     drafted to ensure that the Guarantor and not the Creditor assumes any currency
                     exchange risk? Moreover, if the Guarantor is a sovereign, or quasi-sovereign or is
                     owned by any such entity, a waiver of sovereign immunity should be included. If
                     the Guarantor is a foreign entity subject to withholding tax in its home country,
                     the Guaranty should require the Guarantor to gross-up its payments by including
                     such additional amount as will, after tax, result in the Creditor’s receiving the
                     amount it would have received if no tax had been withheld.

          16.        Representations; Warranties and Covenants

                     A Creditor may require representations, warranties and covenants of the
                     Guarantor similar to those of the Principal Obligor contained in the Note Purchase
                     Agreement. This especially may be the case if the Guarantor is the parent of the
                     Principal Obligor. If, however, the Guarantor is a subsidiary of the Principal
                     Obligor, the Principal Obligor may have made representations, warranties and
                     covenants as to its subsidiaries in the Note Purchase Agreement. In this case, it
                     may suffice to have the subsidiary Guarantor confirm the representations,
                     warranties and covenants as to itself.

TPMC\VI Transactions Including Affiliate Guaranties

          17.        Standard Provisions

                     Finally, the Guaranty should contain provisions standard to all agreements for
                     notices, no waivers or modifications unless in writing, choice of governing law,
                     severability, binding effect, etc.

TPMC\VI Transactions Including Affiliate Guaranties


To top