We set out below our memo regarding IPCo’s upstream security/guarantee in which we did not review the financial model and any IPCo’s constitutional documents that might have particular requirements. Thus, the explanation under this memo is prepared solely based on the prevailing law in Ruritania.

Under Ruritanian law, IPCo is permitted to provide upstream security/guarantee provided the following conditions are met:

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(1)  Guarantee limitation language

·         By inserting this language, the guarantee that is provided by IPCo is restricted to the amount that is less than the value of its reserve at the time the guarantee is given.

·         This effectively limits the Lender’s security interest and enforcement rights against IPCo.  In addition, the financial obligation which is guaranteed is proportionate to IPCo’s financial capacity.

·         Given the limitation of the upstream guarantee, IPCo can minimize its liability regardless the amount of BidCo’s unpaid debt.  By this limitation, IPCo’s director can also maintain the company’s liquidity in the event of enforcement scenario.

·         Accordingly, the purpose of including limitation language is to protect the director’s exposure against his potential liability.

(2)  IPCo’s best interest

·         The upstream security/guarantee provided to Lender derives from the director’s action which is conducted in good faith and in the best interests of the company.  The director must be satisfied (by way of example) that there is a corporate benefit of doing so and that this will not result in any unlawful distribution.

·         It is important for the director to be able to show that he is acting to promote the success of IPCo as a result of entering into the security/guarantee.

·         While this may expose him to potential liability, there are several significant substantive protections available:

o   Opinions and reports

The opinions and reports from professional advisors (e.g. attorney, accountant, auditor) could support the fact that such guarantee serves the IPCo’s interest.  The financial report and opinion could indicate whether BidCo conditions impact the strength of IPCo’s current and projected financial position. Those documents can determine the commercial benefit that IPCo potentially get and the relationship between them.  Similarly, legal opinion could establish the fact that the director’s act is valid and complied with the prevailing laws and regulations. Accordingly, these documents constitute a justification of the director’s act of granting the upstream security/guarantee.

o   Shareholders resolutions

Obtaining shareholders resolution can reduce or eliminate director’s risk exposure to its liability. The shareholders which in principle hide behind the veil can be drawn to be liable due to its resolution which instruct and approve the upstream security/guarantee. Thus, this also provides buffer protection to IPCo’s director in the event of granting upstream security/guarantee. 

o   Corporate benefit

The corporate benefit could be demonstrated, for instance, in respect of the guarantee is given for acquisition debt to the extent that such debt is intended to be on-lent to IPCo (for restructuring its existing debt, if any) or to fund IPCo’s working capital needs. Those circumstances can demonstrate the real corporate benefit which supports the ground of granting upstream security/guarantee by IPCo.