Contributed By Winston & Strawn London LLP
Under English law, the board of directors of an English company must act in the best interests of the company of which they are directors, rather than in the interests of its associated companies or the group as a whole.
Issues of corporate benefit often arise in the context of upstream and cross-stream guarantees.
In essence, an upstream guarantee will be acceptable if the guarantor company’s board of directors reaches the conclusion that the giving of the guarantee will bring real benefit to the company or their actions are ratified by a resolution of all the shareholders of the company. Such benefit could consist of the group as a whole receiving financing that would otherwise not be available to it on favourable terms and the parent or other group member agreeing to share the benefit of that financing to the guarantor company in consideration of the guarantee given by it. Transfer pricing rules may lead to guarantee fees being payable between members of the group. In all circumstances, the question of whether there is sufficient corporate benefit will depend on the specific facts of the transaction which the directors must carefully consider.
The position is more complicated if there is a risk that the proposed guarantor is insolvent and a shareholder resolution will be insufficient to protect against creditors seeking to set the guarantee aside on the insolvency of the guarantor.