When you agree to obtain a bond on behalf of the buyer or seller, you should determine who the bond principal will be. The bond principal must sign the bond. In order for the surety to issue the bond on behalf of a bond principal, they require their indemnity through a general indemnity agreement. A surety bond is a financial guarantee where the surety guarantees the performance or obligation of a bond principal to that of a third party or obligee. The obligee in this situation will be the Union Pension Fund. If you are obtaining a buyer’s bond, the bond principal will be the buyer. If a seller’s bond, the bond principal will be the seller. You might be able to negotiate with the Pension Fund to change the bond principal to another party, provided the underlying obligation does not change.
The reason I bring this up is that the surety normally requires the bond principal to indemnify them for the bond. If a Seller is posting a bond for the buyer, the buyer may refuse to sign the indemnity agreement or vice versa, which could be a problem. There are some workarounds in most cases, but not all.
I’ve seen situations where companies have a large number of unfunded liabilities in a plan, and are either unable to obtain the bond on favorable terms, or to move forward with the transaction because a lot of the purchase proceeds had to go to fund the bond. It’s good to know what the terms are for the bond before your client either agrees to assume the other person’s bond, indemnifies the bond, or does anything else around that transaction. You need to know what’s going to be required of your client.
One of the issues that arise is that you don’t have the exact amount of the bond, but you do have a good idea of how much is going to be required. With that being said, preset the bond, and apply for it. You can refer to my office for a free, no-cost obligation quote which would give you an idea of what you should and shouldn’t agree to, and will allow you to move forward with a very clear understanding of what is going to be required of your client if they need to post the buyer’s or the seller’s bond, or if they agree to post the other party’s bond because they have stronger financials and can maybe get a lower premium.
There are a lot of different things that can be negotiated in a transaction, especially when a buyer wants to acquire the seller’s assets, or when the seller wants to sell out. Having this conversation ahead of time just makes sense.
Give me a call or send me an email today to discuss the ERISA 4204 surety bond.
Sign up for Our Newsletters