Is it possible for target companies to provide financial assistance?
Mergers & Acquisitions (2nd edition)
An Offshore Listing Vehicle is subject to the Listing Rules which regulate the provision of financial assistance. In particular, financial assistance provided or received by an Offshore Listing Vehicle’s group , from a commonly held entity is a connected transaction and will be subject to, amongst others, shareholder approval and disclosure requirements.
Please refer to the relevant Offshore Chapter for detail regarding each offshore jurisdiction.
No, target companies are in principle prohibited from financing or providing assistance in the financing of the acquisition of their own shares. Austrian law has strict rules on capital maintenance and therefore generally prohibits the return of equity to shareholders outside arm’s length transactions (Verbot der Einlagenrückgewähr), except for the distribution of the balance sheet profit, in the course of a formal reduction of the registered share capital or for the surplus paid to shareholders following liquidation.
Furthermore, the Stock Corporations Act explicitly states in Section 66a that a target company is prohibited from financing or providing assistance in the financing of the acquisition of its own shares or the shares of a parent company.
Under the Companies Act 2006, it is generally unlawful for a UK public company whose shares are being, or have been, acquired (or for any of that company's subsidiaries) to give financial assistance for the purpose of that acquisition except in certain limited circumstances. Financial assistance given to reduce or discharge any liability incurred by the buyer or any other person for the purpose of the acquisition is also prohibited.
The prohibition also extends to the giving of financial assistance by a UK public subsidiary for the purpose of an acquisition of shares in its private holding company except in certain limited circumstances. Similarly, any post-acquisition financial assistance given by the public subsidiary to reduce or discharge any liability incurred by the buyer or any other person for the purpose of the acquisition is also prohibited.
The prohibition on financial assistance is not limited in time and it does not matter how long the time period is between the acquisition and the giving of financial assistance.
Financial assistance is not defined in the Companies Act 2006 but examples are gifts, loans, guarantees, security or indemnities (but not in respect of the indemnifier’s own default), release or waiver.
Private companies (other than private subsidiaries of public companies which would be prohibited from giving financial assistance for the acquisition of the public company) are generally not prohibited from giving financial assistance for the acquisition of its own shares whether directly or indirectly. However, directors of a private company contemplating giving financial assistance should consider whether the company has the power to do so in its constitutional documents and should be aware of and comply with their fiduciary duties as well as insolvency issues.
Public companies may re-register as a private company in order to provide financial assistance but the assistance must only be given after the re-registration has been completed.
The Bulgarian Commercial Act prohibits joint-stock companies from granting loans or providing security for acquisition of their own shares by a third party. The Commercial Act does not impose similar explicit prohibitions with respect to limited liability companies.
Provision of financial assistance is also regulated at the EU level through the Second Company Law Directive 2012/30/EU, which imposes a stricter prohibition regime and offers an avenue for domestic courts to take a more conservative approach to financial assistance.
Target companies generally do not provide financial assistance, as such activity can entail negative consequences to the management of the company (board of directors and legal representatives), especially if there are minority shareholders. The above considering that the shareholders and the management of the company may be held personally liable for acts that are not in the best interest of the company or that represent a conflict of interest. Nevertheless, there are not express rules restricting financial assistance as it happens in other jurisdictions. In leveraged acquisitions it is frequent that the financial entities provide the funding to the acquisition vehicle, and some months after the closing the acquisition vehicle and the target company are merged, so the debt and the underlying acquired business are held by the same entity.
Under French law, it is prohibited for the target companies to provide financial assistance to the buyer.
Yes, financial assistance may be provided by a target company. Financial assistance would be uncommon in a takeover transaction, but is more common in a private M&A transaction or scheme of arrangement where the target company often provides security or other credit support in relation to a bidder’s acquisition funding arrangements.
Financial assistance under Egyptian law restricts companies from providing loans to any of its Board members or guaranteeing the obligations of any its Board members.
Yes - There are no financial assistance limitations applicable under Cayman Islands law.
Financial assistance is generally forbidden. However, Art. 2358 of the Italian Civil Code sets forth the conditions under which it can be pursued for joint-stock companies (società per azioni).
In no circumstances is financial assistance permitted with respect to acquisitions of limited liability companies (società a responsabilità limitata (Art. 2474).
Art. 2358 provides that directors must prepare a report explaining the reasons and risks connected with the transaction, which can be enforced only by resolution of an extraordinary shareholders’ meeting. Furthermore, the amount of the transaction may not exceed the distributable profits and available reserves (as recorded in the most recently approved financial statements). A legal reserve of the same amount of the financial assistance granted, unavailable until the loan or guarantee is due, must be established.
A target is prohibited from providing financial assistance while it remains a public company. Once it is re-registered as a private company, it may provide financial assistance. This will be particularly relevant where there is deal financing and a financial assistance whitewash is required.
Although there are no restrictions for a company to financial assistance, companies usually do not perform such activities, as there can be negative consequences in such case. This is because the shareholders and the management of the company may be held personally liable, as per Brazilian law, for acts that are not in the best interest of the companies (in the case of the managers, for abuse of controlling shareholder rights).
Section 53 of the Companies Law prohibits the provision of financial assistance by a company for the purchase of its own shares. In particular it provides that it shall not be lawful for a company to give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company, or, where the company is a subsidiary company, in its holding company.
The Companies Law allows, however:
(a) the lending of money by the company in the ordinary course of its business, where the lending of money is part of the ordinary business of a company;
(b) the provision by a company, in accordance with any scheme for the time being in force, of money for the purchase of, or subscription for, fully paid shares in the company or its holding company, being a purchase or subscription by trustees of or for shares to be held by or for the benefit of employees of the company, including any director holding a salaried employment or office in the company;
(c) the making by a company of loans to persons, other than directors, bona fide in the employment of the company with a view to enabling those persons to purchase or subscribe for fully paid shares in the company or its holding company to be held by themselves by way of beneficial ownership.
Following a recent amendment of the Companies Law, it is now provided that, as regards private companies, the prohibition in relation to the provision of financial assistance shall not apply if:
a) the private company is not a subsidiary company of any public company; and
b) the act of providing financial assistance has been approved by a 90% majority of the shareholders in a general meeting.
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).
There is no general prohibition on target companies providing financial assistance to buyers.
The Swedish Companies Act prohibits Swedish limited liability companies from providing financial assistance for the acquisition of its own shares or shares of companies further up in the same group. The prohibition covers direct funding as well as any provision of security/collateral for such financing. In light hereof, transaction financing documentation normally includes limitation language whereby it is clear that the security provided by a Swedish limited liability company in the target group only refers to what is permissible under Swedish company law. It is also quite common to re-finance the acquisition group after 60 – 90 days after closing at which time it is generally considered that the prohibition for the “target companies” to participate in the financing no longer applies.
There is no general prohibition on the target companies providing financial assistance.
Where a person is acquiring or is proposing to acquire shares in a Guernsey company, section 329 of the Guernsey Companies Law permits a company and any of its subsidiaries to give financial assistance directly or indirectly for the purpose of or in connection with that acquisition before or at the same time as the acquisition takes place. In addition, where a person has acquired shares in a Guernsey company and any liability has been incurred (by that or any other person) for the purpose of or in connection with that acquisition, the company and any of its subsidiaries may give financial assistance directly or indirectly for the purpose of or in connection with reducing or discharging the liability incurred.
Financial assistance is defined as, and may be given by way of, gift, guarantee, security, indemnity, release or waiver, loan or similar or any other assistance which reduces the net assets of the company to a material extent. It is considered to be a distribution for the purposes of the Guernsey Companies Law and the solvency process set out in section 303 of the Guernsey Companies Law in relation to distributions must be followed.
There is no general prohibition under the laws of Japan on target companies providing financial assistance to acquirers. However, if there are minority shareholders of the target company when financing is made, providing financial assistance to an acquirer would be considered to be for the benefit of the majority shareholders only, which would raise the issue of breach of duties of the directors of the target company. Accordingly, the provision of a guarantee or the grant of a security interest by the target company is usually suspended until target company becomes wholly-owned by the acquirer.
Isle of Man
There is no prohibition of financial assistance for companies incorporated under the 2006 Act.
With respect to 1931 Act Companies, it is unlawful for a public company or its subsidiaries to give financial assistance for the acquisition of shares in that public company. Equally it is unlawful for a public company to give financial assistance for the acquisition of shares in its private holding company. However there is no prohibition against a private company giving financial assistance for the acquisition of shares in itself or its private holding company.
Where a person is acquiring or is proposing to acquire shares in a Mauritian company, the Companies Act 2001 permits the target company and any of its subsidiaries to give financial assistance directly or indirectly for the purpose of or in connection with that acquisition subject to certain conditions.
Financial assistance includes giving of a loan or guarantee or the provision of security.
Financial assistance was formally generally prohibited in Bermuda, however this was removed following a 2011 amendment to the Companies Act.
Given the historical prohibition, the bye-laws of any company formed prior to the amendment should be reviewed to confirming that no provisions still remain which would, notwithstanding the general ability to provide financial assistance under Bermuda law, act to prevent a target from being able to do so without taking steps to have such bye-laws amended.
British Virgin Islands
Yes. There are no financial assistance limitations applicable under BVI law, again subject to fiduciary duties and acting in the company’s best interests in accordance with the Act.
There is no prohibition on the giving of financial assistance by a Jersey target company (although the target directors will still need to consider corporate benefit and obtain any necessary shareholder approvals).
The TCC restricts certain companies (i.e. joint stock corporations) from entering into transactions that involve advancing funds, lending, or providing security for the purpose of facilitating the acquisition of their own shares by third parties. This provision makes it difficult to structure a leveraged buyout in instances where the acquisition finance scheme in place for sourcing share purchase payments is secured by the target company’s assets.
There are two exceptions in relation to this financial assistance restriction. The first exception is provided for transactions made in the ordinary course of business by banks and financial institutions. The second exception is applicable when the employees of the target company, or those of a subsidiary, use the target company’s resources in an otherwise restricted manner to support the leveraged buyout of their employer’s shares (e.g. a management buyout).