A parent company guarantee is a declaration issued by a parent company in regard to one or more of its subsidiaries. Often, the guarantee is aimed at providing assurance to a potential client or partner of the subsidiary that the business is capable of honoring all obligations that are connected with the proposed business relationship. Unlike some other type of assurances, this guarantee commits the parent to stepping in and honoring the terms of the contract if the subsidiary should fail to do so for any reason.
There are a number of situations where obtaining a parent company guarantee may be a good idea. One has to do with the authorization of a line of credit or the extension of a business loan. Should the lender have some concerns about the ability of the subsidiary to manage the line of credit properly, or to repay the loan according to terms, the lender may solicit a guarantee from the parent company. This guarantee affirms to the lender that the parent is aware of and approves the actions of the subsidiary, and that the parent believes the subsidiary is capable of honoring the obligation. Along with supporting the actions of the subsidiary, the parent is also entering into a covenant to honor the debt even if the subsidiary ultimately cannot comply with the contractual provisions that govern the extension of credit.
In most jurisdictions, the declaration must be in the form of an authorized letter of guarantee. This means the letter must be on the official letterhead stationery of the parent company, and the body of the letter must specifically address the concerns of the party who requested the transaction guarantee. The document must be signed by an authorized officer of the parent, and in some jurisdictions, it must be notarized before it is considered legally binding.
Since there is some variance in what constitutes a legal parent company guarantee from one jurisdiction to another, it is important for companies to consult legal professionals when drafting this type of document. Attorneys and similar professionals can provide guidelines to ensure the guarantee is structured in the exact manner required by local laws. Taking the time to make sure the format and content of the guarantee is in compliance with relevant laws and statutes will minimize the chances of any delays in its processing, and allow the subsidiary to move forward with its project sooner rather than later.