Financial assistance (share purchase) Options and Implications

Financial assistance through share purchase can be a complex and nuanced topic.

There are various options available to companies, including issuing new shares, buying back shares, or using a combination of both.

Issuing new shares can be an attractive option for companies looking to raise capital, as it allows them to increase their equity and reduce debt.

However, buying back shares can be a more cost-effective way to return value to shareholders, especially for companies with a large number of outstanding shares.

The implications of these options can be significant, with issuing new shares potentially diluting existing shareholders' control and buying back shares reducing the company's cash reserves.

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Financial assistance is a term defined by the Companies Act 2006, and it refers to any form of assistance given by a company to purchase shares in that company, where finance is given to facilitate that purchase.

In many jurisdictions, such assistance is prohibited or restricted by law, and in the EU, all member states are required to restrict financial assistance by public companies up to the limit of the company's distributable reserves.

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The rules apply to public companies in the EU, although some member states, like Belgium, Bulgaria, France, and The Netherlands, restrict financial assistance by all companies.

Financial assistance doesn't necessarily have to cost the person providing it anything, but it does involve some form of money or something of monetary value.

The financial assistance rules are in place to prevent companies from providing unfair assistance to certain individuals or groups, and the consequences of contravening these rules can be severe.

For more insights, see: Companies Act 1993

In the UK, the law prohibits companies from giving financial assistance for share purchases. Specifically, section 151 of the Companies Act, 1985, prohibits companies from providing financial assistance for the acquisition of shares.

Financial assistance is defined broadly, as seen in a 1989 House of Lords decision. The law aims to prevent companies from using their financial resources to facilitate share purchases.

If a company gives financial assistance in contravention of section 151, it can face a fine. Additionally, officers involved in the transaction may be liable to imprisonment or a fine, or both.

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The policy behind financial assistance prohibition dates back to 1929, when it was deemed that companies shouldn't buy back their own shares as it would constitute an unauthorized reduction of share capital.

Companies can now buy back stock, a significant shift from the past. The era of highly leveraged buyouts has challenged the notion that company law should discourage "asset stripping."

The law was amended in 1981 to define "financial assistance" more accurately and relax the prohibition, making it clear that honest transactions shouldn't be affected. The rules are still complex, creating a minefield of technicalities that can ruin fundamentally honest deals.

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The policy behind prohibiting financial assistance dates back to 1929, when it was considered an unauthorized reduction of share capital.

This policy aimed to prevent asset stripping, where potential bidders would borrow money to acquire a company and use its assets to finance their borrowings.

The law was amended in 1981 to define financial assistance more accurately and relax the prohibition, so it wouldn't affect honest transactions.

Companies can now buy back stock, and the era of highly leveraged buyouts has raised questions about the law's discouragement of asset stripping.

The prevailing rules are still considered a minefield of technicalities that can create problems in fundamentally honest deals.

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Territorial Reach is a crucial aspect of the Companies Act, particularly section 151, which prohibits financial assistance for share acquisitions. The law is complex, and its territorial reach has sparked debate.

Millett J, in the case of Arab Bank plc v. Mercantile Holdings Limited (1994), concluded that subsidiaries for the purposes of section 151 are limited to subsidiary English companies. This interpretation has been questioned by some, who argue that the reasoning behind it is flawed.

The context of the financial assistance prohibition is key to understanding the territorial reach of section 151. It's primarily concerned with capital reduction, protection of shareholders' rights, and creditors' rights – matters typically dealt with under the law of the place of incorporation.

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Fees can be a complex issue in share purchases. Some lawyers believe that transaction fees, such as valuation fees for auditors, can be met by the company if the net assets are not reduced to a material extent.

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The Department of Trade and Industry proposes to introduce a specific exemption for lawful fees and indemnities. This would provide clarity on this issue.

Companies can provide financial assistance by way of dividend, which is an important exemption under Section 153. This allows operating profits to be distributed to shareholders.

Dividend payments are a common method of financial assistance, and companies often use this exemption.

Fees are a common aspect of financial assistance, and understanding how they work is crucial. The Department of Trade and Industry proposes to introduce a specific exemption for lawful fees and indemnities.

Companies may be liable for fees associated with the acquisition of their shares, such as valuation fees for auditors. The parties may agree that the target will bear these costs.

Lawyers take the view that costs falling outside the rules may be met by the company if the net assets of the company are not reduced to a material extent.

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Dividends and Exemptions can be a complex area of fees and exemptions. The "dividending up" exemption is the most important exemption used by companies, apart from the relaxation procedure.

Section 153 of the law contains numerous exemptions, including the ability to provide financial assistance by way of dividend. This is one method in which operating profits may be distributed to shareholders.

Reducing capital confirmed by the court, redemptions or purchases by the target of its own shares, and schemes of arrangement approved by the court are also exempted. These exemptions can provide a way out for companies in certain situations.

However, one condition for these exemptions to apply is that the company giving assistance must have net assets that are not reduced. This condition is difficult to comply with in practice.

The company must also provide financial assistance out of distributable profits. This means that the financial assistance is not provided out of the company's net assets, but rather from its profits.

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Banks are concerned that providing financial assistance in contravention of the statute will lead to illegality of any contract given in respect of that assistance.

The consequence of this illegality can be severe, including the voiding of contracts such as guarantees or securities.

Criminal sanctions also apply to lenders who provide financial assistance in contravention of the statute.

The DTI has previously proposed a change to the law to avoid voiding transactions solely because they constitute unlawful financial assistance.

Other civil law remedies, such as constructive trust breaches, would still be available.

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