CANADA Law and Practice Contributed by: Scott Hyman, Anthony Spadaro and David Wilson, Davies Ward Phillips & Vineberg LLP
ers. It allows the lenders to obtain a payment covenant from a person other than the person to whom credit is advanced, and can serve as an additional source of payment where the underly- ing debtor is unwilling or unable to pay, or is not legally obligated to pay. In the context of a typical acquisition financing, guarantees will be provided by other entities in the purchaser’s corporate group – usually sub- sidiaries if the purchaser is the top-tier entity in the corporate group, or the parent company if the purchaser is a subsidiary of the parent. For a sub-investment grade purchaser, guarantees are generally provided by all entities in the purchas- er’s corporate group, if these entities are legally permitted to provide such guarantees. For an investment grade purchaser, guarantees would typically only be provided if the provision of such guarantee were required to meet a covenant or economic threshold. For example, guaran- tees may be provided to ensure that the assets and revenues of the purchaser and its guaran- tors constitute a designated percentage of the overall assets and revenues of the purchaser, determined on a consolidated basis. Guarantees may also be provided in such context to avoid lenders to a parent company being structurally subordinated to indebtedness incurred by sub- sidiaries of the parent company. Guarantees are typically given on a joint and several basis, in the absence of legal prohibi- tions on the ability of guarantors to do so and tax considerations leading to increased tax liability arising from the provision of guarantees, typically on a cross-border basis. In addition, the terms of most guarantees require the guarantor to accept primary liability for the underlying debt obliga- tions, affording the beneficiary of the guarantee the right to demand payment and exercise its remedies against the guarantor independent of
and concurrently with the exercise of remedies against the principal debtor. Guarantors are also customarily required to waive all legal defences to payment, to the maximum extent permitted by law, and to waive rights of subrogation, so as to suspend their rights to claim reimbursement against the underlying debtor until such time as the lenders are paid in full. 6.2 Restrictions There are no meaningful restrictions under Cana- dian federal or provincial corporate statutes on the ability of Canadian federally or provincially incorporated companies to provide guarantees of the debts of others, including other members of the same corporate group. However, there is federal and provincial legislation regarding undervalue transfers, fraudulent conveyances and fraudulent preferences that may be impli- cated in the context of related party guarantees (see 5.6 Other Restrictions ). 6.3 Requirement for Guarantee Fees There is no legal requirement to pay a guaran- tee fee in Canada in order for the guarantee to be enforceable (but see 5.6 Other Restrictions ). However, under Canadian tax rules, transactions between affiliates must generally occur on arm’s length terms. Therefore, if a parent company has transferred value to a subsidiary as a result of providing a guarantee of the subsidiary’s indebt- edness, the parent should be appropriately com- pensated by the subsidiary for that transfer of value. For this reason, if it is determined that a parent guarantee has value, the subsidiary will often pay a guarantee fee to the parent that is roughly equal in value to the lower borrowing costs received by the subsidiary as a result of receiving the guarantee.
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