Are there any restrictions against providing guarantees and/or security to support borrowings incurred for the purposes of acquiring directly or indirectly: (i) shares of the company; (ii) shares of any company which directly or indirectly owns shares in the company; or (iii) shares in a related company?

Lending & Secured Finance

Croatia Small Flag Croatia

In accordance with the Croatian Companies Act a legal transaction under which a company grants financial assistance in the form of advance payment, loan or security for the acquisition of its own shares is null and void. These restrictions do not apply to operations of credit and financial institutions and in cases where the financial assistance is given in order to enable the employees of the company or of its subsidiary to acquire the shares but only under condition that the company can set up the prescribed reserves for these shares without reducing the company’s share capital.

A legal transaction under which a company grants financial assistance in the form of advance payment, loan or security for the acquisition of its shares by the controlling company shall be also null and void if it is not in the best interest of the company.

Czech Republic Small Flag Czech Republic

The first two cases are covered by Czech statutory rules on financial assistance. Financial assistance means that a company provides advance payment, loan or security for the purpose of acquisition of the shares in the same company. Provision of loans/security in order to acquire a related company falls outside of these rules unless such related entity owns (directly/indirectly) shares in the company providing the loan/security.

Finland Small Flag Finland

Yes. Please see question 11 above regarding financial assistance.

Germany Small Flag Germany

A stock corporation may not provide financial assistance with respect to the purchase of its own stock. No such restriction, however, applies to limited liability companies (GmbHs) or partnerships, subject to the above mentioned restrictions on the granting of up-stream/side-stream security.

Spain Small Flag Spain

The financial assistance prohibition states that a company may not advance payments, grant credit or loans, give any kind of security or personal guarantee or provide financial assistance for the acquisition of its own shares or: (i) shares in its controlling companies by third parties (in the case of a SA); or (ii) shares in any of its group companies (in the case of a SL).

Philippines Small Flag Philippines

To the extent that the guaranty or security contract is executed between the company and any of its directors, trustees, officers or their spouses and relatives within the fourth civil degree of consanguinity or affinity, all of the following conditions are required to prevent the contract from being voidable at the option of the company:

(a) The presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting;
(b) The vote of such director or trustee was not necessary for the approval of the contract;
(c) The contract is fair and reasonable under the circumstances;
(d) In case of corporations vested with public interest, material contracts are approved by at least 2/3 of the entire membership of the board, with at least a majority of the independent directors voting to approve the material contract; and
(e) In case of an officer, the contract has been previously authorized by the board of directors.

To the extent that the guaranty or security contract involves interlocking directors, i.e., those who sit in the boards of two or more corporations that transact business with one another or contract with each other, the contract can be invalidated in cases of fraud or where the terms thereof are not fair and reasonable under the circumstances. Where an interlocking director owns 20% or less of the outstanding capital stock of one of the contracting companies, and more than 20% of the outstanding capital stock of the other contracting company, the law further requires that (a) the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting and (b) the vote of such director or trustee was not necessary for the approval of the contract.

Other than the foregoing and the limitations on providing a guaranty in general as discussed in item 10, there are no other restrictions against providing guarantees and/or security to support borrowings incurred for the purposes of acquiring directly or indirectly: (i) shares of the company; (ii) shares of any company which directly or indirectly owns shares in the company; or (iii) shares in a related company.

Sweden Small Flag Sweden

A Swedish limited liability company (Sw: aktiebolag) is prohibited from providing guarantees, and/or security to support borrowings incurred for the purpose of acquiring shares in the company or in any superior company in the same corporate group. The same prohibition applies to loans and advance payments. There are however opportunities under Swedish law to provide such financial assistance after the acquisition has been completed (e.g. if sufficient time have lapsed).

A prohibited loan and advance payment must be returned by the recipient. A prohibited guarantee or security may be declared void if the company that provided the guarantee or security shows that the recipient knew or should have known that the guarantee or security was prohibited. A violation of this prohibition may also cause criminal liability.

Turkey Small Flag Turkey

A target cannot provide financing or security for the acquisition of its shares by a third party. Any such transaction will be null and void. This restriction stems from the prohibition regarding acquisition of a company of its own shares. Providing financing or security for acquisition of its own shares is considered as a way to circumvent the referred prohibition and this restriction is introduced mainly to avoid such circumvention. It is sufficient that the intention of the restricted transactions is to acquire the shares and no written agreements are necessary for this restriction to apply. The timing of the acquisition is (whether completed before or after such restricted transactions) is also irrelevant as long as the intention of transactions is to acquire the shares. The rule also applies to a company which directly or indirectly owns shares in the company or to an affiliate company.

United States Small Flag United States

As a matter of general corporation law of most states, there are no affirmative restrictions on guarantees to support borrowings for the purposes of acquiring shares of the borrower, its parent or any related company – although there may be certain regulatory and other restrictions for specialized entities that go beyond the scope of this memorandum. However, the constructive fraudulent issues discussed in response to Question 11 are particularly acute when the proceeds are being used to acquire shares in other entities, as courts are likely to determine that there is no per se “reasonably equivalent value” for the making of the guarantee. As a result, lenders will need to assess carefully the solvency of the various guarantors. Indeed, a significant body of constructive fraudulent transfer case law has developed in the context of failed leveraged buyouts where subsidiary or affiliate assets were pledged to support a buyout transaction.

Switzerland Small Flag Switzerland

Except for the restrictions related to the granting of up-/cross-stream guarantees or security interests (see 11 above), there is no restriction under Swiss law. Accordingly, a company’s ability to secure the purchase of its own shares is limited.

United Kingdom Small Flag United Kingdom

(i) Shares of the company
Public companies (which throughout this paragraph 12 includes all public companies, whether listed or not) - a public company, and any subsidiary of a public company, is prohibited from giving financial assistance, either directly or indirectly, (including by giving a guarantee, indemnity or security) for the purpose of the acquisition of its own shares.
Private companies – a private company is not prohibited from giving financial assistance (including by giving a guarantee, indemnity or security) for the purpose of the acquisition of its own shares

(ii) Shares of any company which directly or indirectly owns shares in the company
Public companies - a public company is prohibited from giving financial assistance, directly or indirectly, (including giving a guarantee, indemnity or security) (i) for the purpose of the acquisition of the shares of its private holding company or (ii) for the purpose of reducing or discharging a liability incurred for the purpose of the acquisition of the shares of its private holding company.
Private companies – a private company which is a subsidiary of a public company is prohibited from giving financial assistance, directly or indirectly, (including giving a guarantee, indemnity or security) (i) for the purpose of the acquisition of the shares of its public direct or indirect holding company or (ii) for the purpose of reducing or discharging a liability incurred for the purpose of the acquisition of the shares of its public holding company

(iii) Shares in a related company
Save in relation to the prohibition in relation to a private company subsidiary in respect of the purchase of shares in a public direct or indirect parent company (as noted, above), there are no restrictions against giving financial assistance to a related company.

Jersey Small Flag Jersey

No, subject to our comments above.

Hong Kong Small Flag Hong Kong

Please refer to the "Financial Assistance" sub-section of our response to Question 11 above.

Austria Small Flag Austria

As discussed in question 10 above, Austrian companies must comply with strict capital maintenance rules. Therefore, any upstream or side-stream guarantee or security may violate these capital maintenance rules, in particular if the “arms-length principle” is violated. Consequently, the acquisition of shares in a company must not be collateralised by guarantees or other securities of the target company itself. This also applies to shares of any company, which directly or indirectly owns shares in the company, as well as to shares in a related company.

However, there are no such restrictions with respect to downstream guarantees or any other securities granted to a subsidiary company.

Mexico Small Flag Mexico

No. In general, other than statutory minority rights (applicable in absence of corporate documents governing such rights) there are no restrictions for the provision of guarantees and or security interests when acquiring shares of a company.

Transfer of shares and other equity interests are generally subject to the specific provisions set forth in shareholder agreements, bylaws and other organizational documents. Rights of first refusal, preferential rights, drag-along and tag-along provision are all common in these documents.

Bosnia & Herzegovina Small Flag Bosnia & Herzegovina

The corporate laws in BH provide for financial assistance rules, according to which the company cannot provide guarantees, take loans, or provide other form of financial support for the purpose of purchase of its shares.

Updated: June 5, 2019