ABC Food Corporation, a food company with annual sales of more than $1 billion, had a paper division that supplied ABC with packaging for its food products. After ABC’s management decided that the company should concentrate on its core business of manufacturing food products, it was recommended that the assets of the paper division be sold.
Newcorp, Inc. is a newly formed corporation with two shareholders who have experience in the timber industry. The two shareholders also jointly own Lumber Corporation, which operates two lumber mills in the state of Washington. Newcorp was formed specifically to acquire the assets of ABC’s paper division. On February 1, 2008, ABC and Newcorp signed a letter of intent specifying a closing no later than July 1, 2008, subject to Newcorp obtaining the required financing. The letter of intent provided that ABC and Newcorp would enter into a long-term contract according to which Newcorp would supply specified quantities of paper packaging to ABC.
On February 15, 2008, Newcorp approached the Bank of Hope seeking a term loan to acquire the assets of ABC’s paper division and a revolving line of credit to meet its day-to-day working capital requirements. On March 31, 2008, the Bank of Hope delivered to Newcorp a letter stating that it would agree to extend a credit facility to Newcorp on specific terms and conditions, one of which was that the credit be secured by all fixed and current assets of Newcorp.
Carlos Banker, the account officer for the bank, gave the bank a valid first-priority lien on all collateral. A major source of revenue for Newcorp will be the long-term supply contract with ABC. The Bank of Hope requires an assignment of the supply contract that prohibits ABC and Newcorp from making any amendments to the contract without the bank’s consent. One of the terms of the Bank of Hope’s loan is a guaranty from each shareholder and from Lumber Corporation.
Based on the given case study, answer the following questions:
- As a manager at Newcorp, what could be your objections to such an assignment?
- As a manager at ABC, would you have any objections to such an assignment? Why or why not?
- Consider yourself the president of Newcorp who is involved in the company’s day-to-day operations. What would be your arguments against giving such a guaranty?
- You own 51 percent of Newcorp’s stock and you made loans to the company during its initial stages. However, you are no more involved in its daily operations. What arguments could you make against giving such a guaranty?
- You are an attorney working for the Bank of Hope. What would be your advice to the bank regarding accepting Lumber Corporation’s guaranty?