Equity Finance - Financial Assistance Flashcards
(18 cards)
What is financial assistance in the context of company law?
A company giving aid (direct or indirect) to help someone acquire shares in that company or its holding company. Includes loans, guarantees, gifts, indemnities and other financial support
When do the prohibitions on financial assistance apply?
When there is an acquisition of shares, either by share transfer(sale) or by issue of new shares
To which companies do the prohibitions apply?
- A public company whose shares are being acquired
- Any subsidiary of that public company (whether public or private)
- Where the target company is private, the prohibitions applies only to its public company subsidiaries
If B Plc is being sold and has a subsidiary C Ltd, can C Ltd give a loan to help fund the purchase?
No - B Plc is a public company and C Ltd (its subsidiary) is prohibited from giving financial assistance
If E Ltd (Private Company) issues shares and its subsidiary F Plc gives financial assistance, is this prohibited?
Yes, F Plc (a public company subsidiary) of private company E Ltd is prohibited from giving financial assistance
What types of transactions are also considered financial assistance?
- Gifts,
- Guarantees, indemnities, or waivers
- Loans or similar agreements
- Any transaction materially reducing net assets - catch-all clause
Must a transaction be both financial and assistance to fall under the provisions?
Yes - it must involve actual assistance, and the assistance must be financial in nature
What is direct financial assistance?
When company directly provides funds or support to the person acquiring its shares (eg. loan)
What is indirect financial assistance?
Where the company guarantees or supports a 3rd party that is funding the share acquisition (eg. bank loan guarantee)
Does timing of financial assistance matter?
No - financial assistance is prohibited whether given before, at the time of, or after the acquisition
What purpose test must be satisfied for the prohibitions to apply?
The assistance must be given for the purpose of the acquisition, or (if after the acquisition) to reduce or discharge a liability incurred for that purpose
Is a loan from I Plc to J Ltd to fund J Ltd’s purchase of H Ltd (a public company) prohibited?
Yes:
- The transaction is a loan
- The target group includes a public company
- the loan is for the purpose of the acquisition
- the subsidiary giving the loan (I Plc) is public, and so is caught by the prohibition
What is ‘principal purpose’ exception?
Financial assistance is not prohibited if:
- The main purpose of the assistance is not to facilitate the share acquisition, or
- The purpose is only incidental to a larger, legitimate purpose
Examples of unconditional exceptions to financial assistance?
- Lawful dividend payments
- Payments made during share buybacks or reductions of capital conducted in accordance with CA
What are examples of conditional exceptions?
- Money lending in the ordinary course of business
- employee share schemes
What conditions must be met for an exception to apply?
- If the company is private, the condition is met automatically
- If the company is public, its net assets must not be reduce, or the assistance must be provided out of distributable profits
What are the criminal consequences of giving prohibited financial assistance?
- the company may be fined
- defaulting officers (e.g. directors) may face a fine and/or up to 2 years’ imprisonment
What are the civil consequences of prohibited financial assistance?
- the transaction is void
- the entire acquisition may also be void under case law
