In acquisitions, personal securities provided by shareholders or directors play an important role, such as guarantees, comfort letters and letters of support.
The reform of Book 9, Title 1 of the Civil Code modernizes the previously fragmented framework governing personal securities and introduces greater structure. For M&A-transactions, this results in increased legal certainty during due diligence and in the drafting of transaction documents: the validity, duration and scope of such securities may now be assessed differently, which has a direct impact on the allocation of risk and the valuation of the target company.
What has been amended, among other things?
The reform of Book 9, Title 1 of the Civil Code modernizes the previously fragmented framework governing personal securities and introduces greater structure. For M&A-transactions, this results in increased legal certainty during due diligence and in the drafting of transaction documents: the validity, duration and scope of such securities may now be assessed differently, which has a direct impact on the allocation of risk and the valuation of the target company.
1. Guarantees securing future debts
A guarantor may continue to secure future debts, but only if a clearly defined maximum amount has been agreed. In the absence of such a cap, the guarantee applies only to existing obligations.
2. Multiple providers of personal security = joint and several co-debtors
Where multiple persons provide personal security, they become joint and several co-debtors within the limits of their respective undertakings. This strengthens the creditor’s position, but in group structures it may unexpectedly expose group companies to liability.
3. Termination of guarantees of indefinite duration
Security arrangements of indefinite duration may be terminated by either party subject to a reasonable notice period (45 days, unless a shorter period has been agreed). This termination right cannot be contractually excluded. Under the previous law, a guarantor had no statutory right to terminate an indefinite-duration guarantee. As a result, historic guarantees within corporate groups may be less “permanent” than previously assumed.
4. Restructurings: no automatic extension
A guarantee does not automatically extend to the debts of legal successors in the event of a merger, demerger or transfer of undertaking, unless expressly agreed by the parties. This prevents any implicit broadening of the guarantee, but requires careful drafting of the documents establishing the security.
Conclusion and practical considerations for M&A
Due to the reform, the validity, scope, and duration of security interests may be assessed differently:
- A guarantee without a maximum amount may be challengeable or invalid.
- A guarantee of indefinite duration is terminable and therefore less valuable as security.
- A merger occurring before or after closing does not automatically imply that the guarantee covers new debts.
During due diligence, it is important to verify:
- Who has provided the guarantee, for which obligations, and under which law (former law or new Book 9, Title 1 of the Civil Code)?
- Whether a maximum amount is specified?
- Whether the guarantee is of a fixed or indefinite duration – and therefore terminable?
- Whether information and notification obligations have been properly fulfilled (such as formal notice of default to the principal debtor)?
- The impact of mergers or transfers on the scope of the guarantee?
Incomplete or non-compliant documents may affect the value of the target company or the enforceability of warranties.
Practical tips & tricks:
- Update standard clauses on guarantees and comfort letters in acquisition agreements.
- Explicitly define the duration, termination rights, and scope of existing security arrangements.
- Verify that group restructurings do not inadvertently expand or extinguish guarantees.
- Use the new rules as a negotiation lever: the buyer can demand greater transparency and stronger warranties, while the seller can better delimit liability.
The reform of Book 9, Title 1 of the Civil Code does not constitute a revolution, but it does introduce a new level of precision that can make the difference between certainty and uncertainty in M&A practice.
A thorough review of existing guarantees and smart contractual alignment are essential to avoid surprises – both before and after closing.
