Is it possible for target companies to provide financial assistance?
Mergers & Acquisitions (3rd edition)
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.
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.
Although there is no express rule in Colombia according to which a target company could not provide financial assistance, it is not a common practice nor advisable for companies with minority shareholders due to the risks that such decision may trigger for the management of the company and even for the shareholders. The foregoing considering that the management members and shareholders may be held personally liable for acts that are not in the best interest of the company or that represent a conflict of interest.
In the acquisition of privately-owned companies by private equity funds, it is becoming common that the target company at closing guarantees the acquisition finance obligations and that a merger between the acquisition vehicle and the target company is completed 6 to 12 months after the completion of the deal.
For a Croatian joint stock corporation, it is generally not possible to provide financial assistance because of the strict financial assistance rules under the Croatian Companies 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 Croatian limited liability company less restrictive capital maintenance rules apply. Under certain circumstances, the Croatian limited liability company may provide security and guarantees, in particular if limitation language is in place.
No. It is not common, mainly because the management of the Target company can be held responsible and because a conflict of interest may arise.
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.
Regulation of financial assistance in the Czech Republic is based on EU legislation. In addition to joint-stock companies, Czech law also regulates financial assistance in relation to limited liabilities companies and allows to provide financial assistance subject to the fulfilment of certain conditions and the completion of the whitewash procedure. The requirements are different for the joint-stock companies and limited liabilities companies.
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.
Yes - there are no financial assistance limitations applicable under Cayman Islands law.
It is prohibited for the target companies to provide financial assistance to the buyer.
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.
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.
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).
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.
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.
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.
Article 106 of the Corporations Law establishes that in no case, the company can grant loans or guaranties, with the guaranty of its own shares or for the acquisition of its own shares.
A survey of the Corporation Code, BSP manuals, PCA, SRC, and respective IRRs would reveal that there is no prohibition against target companies providing financial assistance, provided that such is done in the best interest of the company and is performed in accordance with the fiduciary duties of the directors and officers of the company.
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.
No, under Portuguese law a target may not grant loans or in any other way provide funds or give guarantees to a third party for it to subscribe and/or acquire shares in the target’s share capital.
This rule is not applicable to ordinary course transactions carried out by financial institutions or transactions which intention is to acquire shares by or for the employees of the target company or of a company related to the target. These exceptions also require passing a “financial test” according to which, as a result of these transactions, the company’s net assets shall remain above the sum of the company’s share capital and legal and any contractual non-distributable reserves.
Any contract or act in breach of the rules set out in the previous paragraphs is null and void.
These rules are also applicable to subsidiaries of the parent company considered to be in a group or control relationship even if the registered office of the former is outside Portugal, provided that the parent company is subject to Portuguese law.
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 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.
The Companies Act prohibits a target company from providing financial assistance, however, under sections 44 and 45 of the Companies Act financial assistance may be authorised by special resolution and subject to compliance with the other requirements of those sections which include the company being solvent and liquid after the provision of the financial assistance.
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 refinance 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.
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 or 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.
Financial assistance is generally not restricted except in the case of a listed target company where the financial assistance constitutes a connected party transaction due to the fact that it is a transaction between the target company and its related persons. Shareholder approval by special resolution is required if the amount of the financial assistance equals or exceeds 3 percent of the net tangible asset value of the target company.
Article 222 of the Companies Law makes it unlawful for a joint stock company (or any subsidiary company of that company) whose shares are being acquired to give financial assistance for the purpose of that acquisition. Article 104 of the Companies Law states that all provisions relating to joint-stock companies will apply to private limited liability companies unless there are express provisions to the contrary and there is no such provision. However, on April 28 2016, the Ministry of Economy issued Ministerial Resolution 272/2016 which clarifies that article 222 of the Companies Law does not apply to limited liability companies.
A private target company may provide financial assistance. However, for public companies, even if unlisted, providing financial assistance is prohibited subject to certain exceptions such as in connection with an employee stock option scheme or the giving of loans to employees for an amount not exceeding their salaries for a period of six months.
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.
There is no general prohibition on target companies providing financial assistance to buyers.
In a private M&A transaction, there is generally no prohibition of such financial assistance. However, in a public acquisition, the target company is not allowed to provide financial assistance.
The concept of “financial assistance” is not recognized under Egyptian law. However, a target company may not provide financing to any of its shareholders, in the form of loans or guarantees, unless a general shareholders assembly, in which the relevant shareholder is not permitted to vote, authorizes such transaction. Dissenting shareholders have the right under the Companies Law to claim nullity of such a resolution, within one year from its approval by the general assembly, if it has been passed to favor a certain group of shareholders or to their detriment. Moreover, a target company is generally prohibited from granting cash loans of any type to any of its board members or providing any guarantee for any loan entered into by its board member with third parties.
Although pursuant to CML, a potential acquirer is required to confirm in his offering memorandum whether any guarantee or settlement of financing for the MTO is dependent in any form on the Publicly Traded Company’s financial resources and the effect of such financing on its assets and activities.
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.
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.
Under the Companies Act 2006, it is prohibited (save for limited exceptions) for a UK public company (or for any of that company's subsidiaries) to provide financial assistance, directly or indirectly, to a person acquiring or seeking to acquire shares in that public company before or at the same time of the acquisition of such shares or after the acquisition of shares where the purpose is to reduce or discharge the liability incurred for such acquisition. These prohibitions also apply equally to a UK public company providing financial assistance for the acquisition of shares in its private holding company. 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.
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 case of private companies, Hungarian law is silent on target companies providing financial assistance for the acquisition of their shares. Consequently, such assistance is not prohibited or restricted in case of private companies.
However, in accordance with EU regulations, in case the target company is a public company limited by shares (Nyrt.), such financial assistance is restricted: the company may provide financial assistance to a third party for the acquisition of its shares only on market terms (i.e. for appropriate consideration) and from the funds available for payment of dividends, and provided that this was based on a detailed proposal by the management board of the target company and approved by the target company’s shareholders’ meeting with a majority of at least 75% of the votes. Such proposal must explain, amongst others, the reasons for, the risks of, and the advantages (for the target company) of the financial assistance, and it must be submitted to the court of registry. These rules serve the protection of the target company’s creditors and the interests of the target company, and as a guarantee that financial assistance is provided upon the agreement of most shareholders and the management of the target company.
In case the target company is a public limited company such company is not allowed to secure advance payments or loans for acquisition of its shares. Such financial assistance is namely limited by the Companies Act (ZGD-1) in Article 248, which sets forth that a legal transaction by which a company secures an advance payment or a loan for the acquisition of its own shares or any other transaction with a comparable effect shall be void. Article 227 of ZGD-1 further limits such financial assistance with the provision prohibiting the refunding of equity contributions or payment of interest on equity contributions, which includes the prohibition of concealed payments of profits. Furthermore, according to Article 32 of the Takeovers Act (ZPre-1) the Securities Market Agency (ATVP) only issues the authorisation for a takeover bid if the offeror provides evidence that for the payment of securities that are subject of the bid he did not, directly or indirectly, give or pledge as collateral or insurance securities, or other form of property of the offeree company that are not the property of the offeror.
In case the target company is a private limited company the limitations for financial assistance are less strict, as Article 495 of ZGD-1 only provides for the maintenance of share capital and tied-up reserves.