Dilution & Removing a Personal Guarantee

[Sean H.]

I am currently a 33% owner in a S-Corp that has loans on several properties. My partners and I have agreed to a stock issuance to allow an additional partner to join the company that will dilute me personally to about 17-18%.

The banks loan covenants state that any person with a greater than 20% ownership interest in the company will have to sign a personal guarantee, which as a 33% owner, I did. Now, being diluted down, how difficult will it be to have that personal guarantee removed? Has anyone gone through a similar situation?

[Account Closed]

Here's my .2 (perhaps a little more at my hourly rate), not legal advice, just brainstorming with you. Is your original guaranty for all of the debts or the corporation or limited in some fashion (ex: pro rata based on equity share)? The short answer is that it is nearly impossible to remove/limit a previously executed guaranty unless you provide with the bank with comparable substitute collateral, i.e. the new guy executes a guaranty as well, the company pledges additional assets, etc. Candidly, the bank doesn't care how much equity you currently own in the company, it just wanted to make sure the original control group was on the hook for the loans. If you are only a 17-18% partner, then I assume the new guy is less, meaning he won't have to sign a guaranty per the loan covenants. What is your agreement with him, is he still signing a guaranty? Doesn't mean you can't negotiate for it. Depending on your banking relationship, if the bank feels like it is otherwise adequately collateralized, you have a shot at getting your guaranty released or capped, but my guess is they will want a pound of flesh substituted from somewhere.

@Bill Gulley is dead on that you should push for an internal indemnity agreement to share the risk between the owners, but your real concern sounds like (and should be) your exposure to the bank.