Is it possible for target companies to provide financial assistance?
Mergers & Acquisitions (2nd edition)
In an asset purchase situation where the business assets is bought from a target company and where such target is offering to finance the deal, there are no major obstacles in respect of such financing assistance.
In case of a share purchase transaction, a target company, both private and public, is as a main rule prohibited from providing upstream financial assistance in connection with the acquisition of shares in the target company (or its parent company). Nevertheless, from 1 July 2013, a target will now, subject to certain conditions have the opportunity to provide financial assistance to a potential buyer of shares in the target (or its parent company). The scope of financial assistance must be within the funds available for distribution of dividend. The financial assistance must also be granted on normal commercial terms and policies, and the buyer must deposit adequate security for his obligation to repay any financial assistance received from the target. Moreover, the financial assistance must be approved by the general meeting, resolved by at least two-thirds of the aggregate vote cast and the share capital represented at the meeting (unless otherwise required by the target company's articles of association).
In addition to the abovementioned conditions, the board must ensure that a credit rating report of the party receiving the financial assistance is obtained, and also that the general meeting’s approval is obtained prior to any financial assistance being actually granted by the board. The board shall also prepare and execute a statement, which must include (i) information on the background for the proposal of financial assistance, (ii) whether or not such financial assistance will be to the target’s corporate benefit, (iii) conditions for completing the transaction, (iv) an assessment of the effect on the target's liquidity and solvency; and (v) the price payable by the buyer for the shares (or any rights to the shares) in the target.
Even though the companies' law now permits financial assistance from a target company, it may be quite impractical to borrow funds from a target company at least in a typical leveraged buyout transaction. This is due to the fact that banks normally request extensive collateral packages in such leveraged transactions, which in practice entails that there in most situations will be no "adequate security" available from the buying company for securing financial assistance from the target group. However, in early 2016, the Ministry of Trade and Fishery has now proposed to abolish the requirement that a buyer (borrower) must deposit ‘adequate security’ towards the target if such buyer receives financial assistance from the target in the form of security for buyer’s acquisition financing. If this proposal is adopted in its current proposed form, Norway will finally have a type of “whitewash” procedure that could work also for leveraged buyout transactions. It is currently unclear when and whether the proposal will be implemented.
While the financial assistance provisions of the MCL are not clear, they appear to permit private companies to give financial assistance in connection with the acquisition of their shares without limitation and for public companies (whether listed or not) to provide such assistance, with the approval of the board of directors and shareholders.
SAs are prohibited to advance money, issue loans and grant guarantees to potential acquirers of their shares, unless such transactions are completed under the responsibility of the BoD in usual commercial terms, approved in advance by the GA with an increased quorum and majority, and the financial assistance granted does not result in equity being lower than a specific threshold. The same applies for financial assistance provided by subsidiary companies to third parties aiming to acquire shares of the parent company. However, transactions conducted by credit or financial institutions in the ordinary course of business are excluded from this rule.
For a German stock corporation, it is generally not possible to provide financial assistance because of the strict financial assistance rules under the German Stock Corporation Act. However, a few post-closing mechanisms can have a similar effect, including profit-pooling and loss-pooling agreements or debt-push-down mechanisms.
For a German limited liability company less restrictive capital maintenance rules apply. Under certain circumstances, the German limited liability company may provide security and guarantees, in particular if limitation language is in place.
Financial assistance by a target through the advance of funds, the granting of loans or securities for the acquisition of its shares is in principle (there are certain exemptions) possible when certain conditions are respected, amongst others:
- the transaction is carried out under the responsibility of the board of directors and at fair market conditions. The creditworthiness of each counterparty involved must be assessed;
- the transaction is subject to a prior resolution of the general meeting, taken with a qualified majority;
- the board of directors must draw up a report stating the reasons for the transaction, the interest of the company in entering into such a transaction, the conditions under which the transaction is entered into, the risks associated with the transaction for the liquidity and solvency of the company and the price at which the third party is deemed to acquire the shares;
- the amount set aside for that transaction must be available for distribution;
- the company must include in its balance sheet a reserve, unavailable for distribution, corresponding to the total financial assistance.
19.1 In the context of public companies, the law prohibits public companies from providing loan finance to shareholders or proposed shareholders, including for the purposes of financing acquisitions of shares in the charter capital of such public companies, except in very limited circumstances.
19.2 In the context of private companies, there are no express prohibitions against target companies providing any form of financial assistance in connection with acquisitions of shares in their equity capital.
Swiss law does not contain specific rules on financial assistance. However, there are limits on the use of the target company's assets to secure funding of the bidder re refinance the purchase price. As long as the target has minority shareholders, it is typically difficult for the board of the target to use its assets to fund a takeover bid in light of the board's fiduciary duties and the rules limiting up-stream and cross-stream security.
There is no general restriction applicable to financial assistance. In practice, subsidiaries are rather often issuing corporate guarantees to benefit their parents and are lending cash to parents.
However, where a parent is itself a company with several shareholders, such type of transactions may be qualified as interested party transactions for the parent company, requiring approval by non-interested directors or shareholders. The same will be applicable to subsidiaries rendering financial assistance if they are not fully controlled by the parent to which such assistance is being rendered. It should be noted as well that minority participants (shareholders) in a subsidiary company in certain cases are entitled to claim for compensation of damages caused to a subsidiary by a parent company.
Public limited companies are prohibited from providing financial assistance (although LBO mechanisms are used in practice). Private companies may provide financial assistance, as there are no specific legal restrictions (although legal scholars sometimes contest the legality of this practice).