Insider guarantees in corporate finance An economic analysis of Dutch, US and German law

Insider guarantees play a crucial role in both the structuring of lending transactions of small and medium enterprises (SMEs), in which situation a private person who is shareholder or director of the enterprise often guarantees business debts towards a professional creditor such as the main bank, and in the structuring of large corporate groups, in which group companies often guarantee each other’s debts towards a major lender. The dynamics involved in both situations are however underexposed in legal literature.
The guarantee relationship in corporate finance often leads to efficiency gains by influencing the behavior of guarantor and debtor. This function deserves close scrutiny as changing the behavior of debtor and guarantor is likely to have effect on outsiders to the guarantee relationship.
The guarantee relationship is prone to opportunistic use towards both insiders and outsiders of the relationship. This book especially breaks new ground in the analysis of opportunistic use towards outsiders of the relationship. Two main types of such opportunistic use are opaque priority structures and covert insider dealing. German, Dutch and US law regulate opaque priority structures only to a limited extent and need substantial improvement. Covert insider dealing through guarantees, of which the most obvious example is a shareholder or director who influences or represents the company in making payments on debts guaranteed by him or her or by a group company, is somewhat regulated under German and US law but both could do with improvement. Dutch law hardly regulates this and needs substantial improvement.