New Rules On Financial Assistance

Before October 2008, it was unlawful for a company, or

its subsidiary, to give financial assistance for the purchase of

its own or any shares in its holding company.

This restriction was abolished with effect from 1 October 2008

for private companies.

The prohibition will continue to apply to public companies (and

to their private company subsidiaries) and, from 1 October 2009,

criminal liability for breach will extend to the company and every

officer of the company in default.

Rules on financial assistance apply only where shares are being

acquired; they do not apply to the sale and purchase of assets.

Why has the law changed?

Financial assistance provisions were ambiguous and, while the

issues did not arise on a daily basis, they would often become a

concern where a company was being sold or where a new shareholder

was being introduced.

Deals would often be structured in a convoluted way in order to

avoid the provisions altogether, or, where that was not possible,

the company concerned would have to expend additional time and

money going through the 'whitewash' procedure. It has been

estimated that legal advice relating to the financial assistance

provisions cost British companies approximately £20 million

per year.

So what now?

The prohibition has been removed in respect of private companies

where financial assistance was given on or after 1 October 2008,

even where the shares concerned were acquired, and the liability

incurred, before that date.

This should result in transactions becoming more straightforward

and in advisory fees being reduced accordingly. In addition,

company directors will no longer face the threat of criminal

liability and imprisonment should they get it wrong.

While the 'whitewash' procedure was both time consuming

and expensive, it did have the advantage of providing directors

with a framework for checking that they were acting in a proper

manner. With the framework removed, banks and other providers of

finance may be anxious to ascertain that all relevant concerns have

been adequately addressed and may require the board to confirm the

solvency of the company providing the assistance, supported, as

relevant, by auditors' reports.

In addition, the board will still need to satisfy itself that

the transaction is 'likely to promote the success of the

company for the benefit of the members as a whole'. It would be

advisable for relevant board minutes to identify the commercial

benefit of the transaction and directors...

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