Is it possible for target companies to provide financial assistance?
Mergers & Acquisitions
Although there are no restrictions for a company to provide 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).
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.
Yes - There are no financial assistance limitations applicable under Cayman Islands law.
ZL: In pursuance of the Administrative Measures for the Takeover of Listed Companies, listed companies are not allowed to provide financial assistance of any forms to its acquirers in order to protect the rights of the listed company and minority investors. Beyond that, non-listed target companies are not prohibited from providing financial assistance to acquirers conditioned that it’s not in violation of the constitutional documents of the target company. Nonetheless, it’s not common for target companies to provide financial assistance for acquirers in current acquisition practices.
The Limited Liability Companies Act currently prohibits the target companies from providing financial assistance for the acquisition of its own shares. This includes both direct funding and the provision of any assets or collateral for this purpose and, consequently, any finance documents executed in connection with the transaction customarily include required limitation language whereby possible acquisition financing is separated from other (e.g. working capital) financing, and the target companies do not guarantee or provide securities for the part of the financing package that is used for the acquisition of the target companies’ shares.
If the assets of the target are used to finance the acquisition of the target the principal of capital maintenance (Grundsatz der Kapitalerhaltung) under the stock corporation act or the limited liability company act have to be respected. According to the principal of capital maintenance under stock corporation law stipulated in Sections 57, 58 et seq of the German Stock Corporation Act , the entire capital (Eigenkapital) may in principle not be repaid to the shareholders. For limited liability companies, the rules are not as strict: Pursuant to Sections 30, 31 of the Limited Liability Companies Act only the sated capital (Nominalwert) is protected.
It is common opinion that the provision of collateral in the target can be regarded as a repayment pursuant to Section 57 of the German Stock Corporation Act and Section 30, 31 of the Limited Liability Companies Act. Nevertheless, pursuant to Section 57 para 1 subpara 2 of the German Stock Corporation Act and Section 30 para 1 subpara 2 of the Limited Liability Companies Act repayment is legitimated if it is covered by an entitlement (e.g. a claim for dividend payments) or if a domination or profit transfer agreement has been entered into. Under such circumstances, provision of credit as well as collateral is allowed. Legal risks may be reduced by incorporation of so called limitation language into the collateral agreements, limiting the enforcement of collateral to any free assets beyond the protected capital.
Greek legislation regulates the terms and conditions under which target companies may provide financial assistance, the overall regime being restrictive. In a nutshell, pursuant to art. 16a of Law 2190/1920, a Greek company limited by shares is prohibited to proceed to any prepayments or to grant loans or securities which have as an objective to facilitate the purchase of its own shares by third parties unless the following specific conditions exist: a) the aforementioned transactions are materialised with the responsibility of the Board of Directors of the target company and are made with reasonable terms, specifically in relation to the interest received by the company and the securities that it receives for securing its claims; b) the transactions are decided by the General Meeting of the Shareholders with an increased quorum and majority following a written report by the Board explaining the reasons for such transactions, the interest for the company, the relevant terms and risks in relation to the solvency of the company etc. and c) the total financial assistance that is provided to third parties cannot in any case have as a result the reduction of the own funds of the target company in an amount lower than the amount prescribed in Art. 44a of same law (i.e. share capital as adjusted after having taken into account the reserves whose distribution is now allowed by law or Articles of Association). There are specific cases where the aforementioned Board report must be also accompanied with a report by the auditor of the company confirming that the transaction is not result in a conflict of interest with the company. There is an exemption for transactions in the ordinary course of business from credit or financing institutions as well as for transactions made for the purposes of acquiring shares from or for the personnel of the company or an affiliated entity. Moreover, Article 23a of Law 2190/1920 prohibits any kind of financial assistance provided by an entity to another entity which directly or indirectly controls it, save where specific conditions are met, such as in cases where financial assistance is provided for the benefit of companies which are subject to consolidation as per the accounting legislation.
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.
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.
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 too early to conclude if the proposal will be adopted by the Parliament in its current form.
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-interest 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.
Article 73 of the NCL prohibits a JSC from granting a loan to, or providing security in respect of the financial obligations of, its shareholders. The NCL does not impose a similar restriction on LLCs. However, under the NCL, distributions are only permitted by any Saudi company insofar as they are paid out of the net profits of a company. As a result, any upstream loans or guarantees to shareholders are generally prohibited if the company does not have sufficient net profits to support such undertaking, on the basis that if such loan or guarantee was called the company would not be able to meet its obligations without being in breach of the law on distributions.
Unlike some other jurisdictions, Japan does not have any so-called financial assistance regulations, which means that target companies are not specifically prohibited by law or regulation from providing financial assistance such as security rights or a guarantee to the buyer for the acquisition.
However, if there are still minority shareholders of the target company remaining at the time of the first step of the acquisition when financing is made, as is often the case in two-step acquisitions, financial assistance would be considered to be for the benefit of the majority shareholders only, which would raise the issue of breach of duty of care/duty of loyalty of the directors of the target company.
Therefore, in practice, unless the minority shareholders consent to the financial assistance, a target company would commonly only give such financial assistance after the second step of the acquisition (the squeeze-out) has been completed.
Financial assistance is generally not restricted except in the case of a listed target company where the financial assistance constitutes a connected party transaction as 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 to or exceeds 3 per cent of the net tangible assets value of the target company.
No, target companies are in principle prohibited from financing or providing assistance in the financing of the acquisition of its 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 Joint 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.
Article 110 of the CA sets down the legislative framework within which target companies, so long as they are registered as private companies, can provide financial assistance. For the purposes of the CA, financial assistance refers to that assistance granted by an undertaking for the purpose of an acquisition or subscription for its own or its parent company’s shares.
A private company may grant financial assistance if:
- The board of directors of the company, having taken account of their obligations and of the company’s financial positon has authorized the granting of the financial assistance in relation to a specific transaction;
- Such board resolution has been confirmed by a shareholder’s extraordinary resolution;
- The company has confirmed, by means of a written declaration that both its shareholders and board of directors have approved the granting of the assistance.
These provisions are not applicable to public companies, which remain precluded from providing financial assistance.
There is no general prohibition on target companies providing financial assistance to buyers.
As a general proposition, Vietnamese law does not prohibit the provision by target companies of financial assistance, except in the case of securities or fund management companies licensed to conduct business under the Law on Securities.
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.
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).
As a rule, no, target companies are not permitted to provide advances or guarantees for the acquisition of their own shares.
Technically, yes – but it would be uncommon in a public M&A context (and would likely require target shareholder approval).
There are various facets to the English financial assistance regime, however the core rule is that public companies are generally prohibited from giving direct or indirect financial assistance for the acquisition of their shares or for reducing or discharging any liability incurred in connection with such acquisition. There are exceptions to this general prohibition but they are very restricted. The prohibition covers any gifts, guarantees, securities, indemnities or loans. Breach of this provision is an offence by the company and any officer in default and is punishable by imprisonment and/or a fine.
In contrast, a private company is generally not prohibited from giving financial assistance (either directly or indirectly) for the acquisition of its own shares. However, this does not apply to a private subsidiary of a public holding company, which would be prohibited from providing financial assistance in connection with an acquisition of the holding company.
Public companies may re-register as private companies in order to facilitate the provision of financial assistance, however the financial assistance could only be provided once the reregistration of the company has occurred.
No, as a general rule. Financial assistance regulations are slightly different depending on the legal form of entity but, in general, they are not permitted.
Limited Liability Companies (Sociedad Limitada) cannot accept as guarantee their own shares (or shares of companies belonging to their group). As well, they cannot advance funds, grant credits or loans, give guarantees or facilitate financial assistance for the acquisition of their shares (or shares of companies belonging to their group).
Private Companies (Sociedades Anónima) cannot advance funds, grant credits or loans, give guarantees or facilitate financial assistance for the acquisition of their shares (or shares of their parent companies). These limitations do not apply: (i) when these transactions pursue that employees acquire shares of the company (or of the parent company); or (ii) to banks, in certain events. On the contrary, Private Companies (Sociedades Anónima) can accept as guarantee their own shares (or shares of their parent companies) in limited and listed events imposed by law and with certain limits.
As per the Turkish Commercial Code, a legal transaction involving the grant of an advance, loan or security by the company to a third party for the acquisition of its shares is invalid. This rule applies to both private companies and listed companies. Although some alternative structuring solutions may be considered depending on the contemplated scope of the transaction, it is worth mentioning that the financial assistance prohibition of the Turkish Commercial Code remains untested before Turkish courts and there is no secondary legislation clarifying the scope of its implementation.