Financial assistance

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In law, financial assistance refers to assistance given by a company for the purchase of its own shares or the shares of its holding companies. In many jursdictions such assistance is prohibited or restricted by law. For example all EU member states are required to prohibit financial assistance by public companies [1], although some members go further, for example, France, Belgium and The Netherlands prohibit financial assistance by all companies. Where such assistance is given in breach of applicable law it will render the relevant transaction void and may constitute a criminal offence.[2]

The assistance can be of a variety of different types. The most common type of assistance is a financial guarantee for a loan and/or third party security to allow a borrower to borrow money to buy shares which is routinely given (to the extent legally possible) after a leveraged buyout in support of the new owner's acquisition debt. It would also normally include a gift or loan from the company or any other act which reduces the net assets of the company to a material extent [3] where this is done for the purpose of the acquisition of shares in itself or its parent.

The rationale for such laws is purely economic; it is based upon the premise that if a company supports the purchase of its own shares, it causes a de facto diminution in the company's capital. Concerns have also been expressed that such financial assistance artificially inflates a share's price above its market level.

Although the authorities are unclear, it seems that financial assistance may also have been a crime at common law prior to its condification by statute.[4] If that is correct, then laws against financial assistance may be much more prevalent than is normally assumed.

Laws against financial assistance are sometimes controversial because of the difficulties they can cause in the context of a leveraged buyout, and some jurisdictions which have enacted them have later repealed them.[5] Some jurisdictions provide for so-called "whitewash" procedures[6], whereby the shareholders can authorise transactions that would otherwise be void for financial assistance. Most jurisdictions which prohibit financial assistance permit the company to purchase its own shares and hold them in treasury, and the company can then issue them again on terms that would have been prohibited if they had sought to provide financial assistance in an equivalent manner for a third party purchase.

[edit] References

  1. ^ Second Council Directive on Company Law 77/91/EEC Art 23
  2. ^ See for example section 151(3) of the Companies Act 1985 of the United Kingdom
  3. ^ See Companies Act 1985 s152(1)(a)
  4. ^ See R v Lorang (1931) 22 Cr App R 167; 75 Sol Jo 121
  5. ^ For example the United Kingdom Companies Act 2006, when it is comes into force in 2008, will revert English law to the minimum level of regulation required under EU directive 77/91/EEC by abolishising the prohibition for private (but not public) companies, see s677 et seq
  6. ^ See, for example, Companies Act 1985 ss155-158 for the procedure in the United Kingdom
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