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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