Financial assistance and company acquisitions

Broadly speaking, “financial assistance” is any help given by a company to assist a third party to acquire shares in itself or in its holding company or companies. 

Before October 2008, private companies could not offer financial assistance for the purpose of acquisition or for the discharge of a liability, unless a pre-approval process (known as the whitewash procedure) had been followed. Although this requirement has now been lifted, corporate transactions have to consider, and approve if necessary, the giving of financial assistance by private companies. The rules relating to unlawful reductions of share capital also continue to be relevant.

Current position

The directors of a private company must follow certain procedures when considering authorising a transaction involving financial assistance. As a minimum, the Buyer will be keen to ensure that the directors of the target company (and/or members of the target group) have considered the following:

• Does the target company (and/or members of the target group) have the power to give financial assistance?
• Are the directors of the target company (and/or members of the target group) complying with their duties under the Companies Act 2006 in sanctioning the giving of financial assistance?
• Does the target company (and/or members of the target group) have any insolvency issues? 

Unlawful reduction of share capital

The common law principle that a company must retain its capital still remains, notwithstanding the removal of the prohibition on the giving of financial assistance.  Therefore, it is still unlawful for a company to return assets to shareholders other than through permitted methods such as: dividends, reductions of share capital approved by the solvency statement procedure and court approved reductions.
If by virtue of the financial assistance there is an effect on the net assets of the target company (and/or members of the target group), then this must be met out of distributable reserves. In considering whether the giving of financial assistance reduces the company’s net assets the directors should take clear minutes of any decisions reached and, where necessary, record the matter by way of a provision in the company’s accounts.
Please note that this article relates to private companies only.

For more information, please contact Mark Lewis.

December 2011