76. Company financing dealings in its shares, etc. Flashcards
- Company financing dealings in its shares, etc.
General overview
[76.01] The prohibition of companies against providing financial assistance to anyone for the purpose of acquiring or purchasing their own shares or shares of their holding company has its roots in the capital maintenance rule. As a corollary, it also prevented corporate raiders from taking loans or other sources of finance to acquire control of a company and subsequently, use the company’s assets to pay off those loans. There is no real accretion to the share capital but the company’s assets are round-tripped back into the company. Secondly, a company cannot acquire its own shares or those of its holding companies: s 76(1A)(a). Thirdly, a company cannot lend money on the security of its own shares or shares in its holding company: s 76(1A)(b).
[76.02] As s 76 may be easily breached in some corporate finance transactions, e.g. a debt-equity swap, the previous law which applied to all companies was amended to make a distinction between private companies and “a public company or a company whose holding company or ultimate holding company is a public company”. Private companies may enter into arrangements to provide financial assistance for the purpose of, or in connection with, the acquiring and purchasing of their own shares or those of their holding company. However, they are still proscribed from acquiring their own shares or the shares of their holding company (s 76(1A)(a)) or lending money on the security of their own shares or shares of their holding company (s 76(1A)(b)).
Financing dealing in its shares
[76.03] The statutory predecessor of s 76 was based on s 54 of the Companies Act 1948 (UK), vide the Greene Committee to address the widespread practice of syndicates purchasing a controlling stake in a company from borrowed moneys and subsequently using company funds to repay those moneys: Report of the Company law Amendment Committee, Cmd 2657 (1926), chaired by Lord Greene. Such practice offends the rule on capital maintenance: Trevor v Whitworth (1887) 12 App Cas 409 ; and see 3(1) Mallal’s Digest (4th edn, 2013 Reissue) paras 991–995; Ford’s Principles of Corporations Law (10th edn) (2001, Butterworths, Sydney) para 24.710, p 1213.
[76.04] Generally, the section prohibits the company from: (a) giving, whether directly or indirectly, any financial assistance for the purpose of, or in connection with, the acquisition or the proposed acquisition by any person of shares or units of shares in the company, its holding company or ultimate holding company: s 76(1)(a) and (b); or (b) whether directly or indirectly, in any way, acquire or purport to acquire shares or units of shares in the company, its holding company or ultimate holding company: s 76(1A)(a); or (c) whether directly or indirectly, lend money on the security of shares or units of shares in the company, its holding company or its ultimate holding company: s 76(1A)(b). The acquisition of shares in a company by application and allotment is not a “purchase” within the section, which, accordingly, does not cover a transaction by which a company provides money to assist a subscription for its own shares
Meaning of “subsidiary”
[76.05] The phrase “any of its subsidiaries” in s 151 of the Companies Act 1985 (UK) was to be construed as limited to such subsidiaries as were companies incorporated in England; that s 151 therefore did not prohibit a foreign subsidiary of an English parent company giving financial assistance for the acquisition of the latter’s shares
Meaning of “financial assistance”
[76.06] The test of financial assistance is one of commercial substance or reality. The words “financial assistance” have no technical meaning and their frame of reference is the language of ordinary commerce: Chaston v SWP Group plc [2002] EWCA Civ 1999; [2003] 1 BCLC 675 ; applying Charterhouse v Tempest Diesels [1986] BCLC 1 ; approved by Barclays Bank plc v British & Commonwealth Holdings plc [1996] 1 BCLC 1 . It is prohibited financial assistance where the company lends its money to someone who then uses the money to finance his acquisition of the company’s shares release of a debt or obligation may amount to financial assistance if the effect of that release is to reduce the price payable for the shares: EH Dey Pty Ltd v Dey [1966] VR 464, SC . It could also be financial assistance where the company guarantees or gives security for a loan made to a person in order to enable him to acquire the company’s shares, or where the payment of the purchase price is secured by a charge over the company’s assets: Heald v O’Connor [1971] 2 All ER 1105, HC ; Carney v Herbert [1985] AC 301, PC ; Yap Sing Hock v PP [1991] 2 MLJ 334, HC ; affirmed by the Supreme Court in [1992] 2 MLJ 714; Chung Khiaw Bank Ltd v Hotel Rasa Sayang Sdn Bhd [1990] 1 MLJ 356, SC ; South Western Mineral Water Co Ltd v Ashmore [1967] 2 All ER 953, HC .
[76.07] The sale of the company’s property at fair value can be described as financial assistance if the effect is to provide the purchaser of its shares with the cash needed to pay for them: Belmont Finance Corp Ltd v Williams Furniture Ltd [1979] Ch 250, CA . A company’s assets used to create the consideration for the transfer of shares in the company may be illegal financial assistance: Kidurong Land Sdn Bhd v Lim Gaik Hua [1990] 1 MLJ 485, SC. Financial assistance provided to the vendor of the shares may constitute a breach of the prohibition
“relevant purpose”
[76.08] The relevant purpose is the substantial purpose of the commercial transaction
In connection, depletion of assets or risk of depletion of assets
[76.09] Financial assistance in connection with the acquisition of shares takes place where the company’s assets were either depleted or were at risk of being depleted: Burton v Palmer [1980] 2 NZWLR 878 ; applied in Simmah Timber Industries Sdn Bhd v David Low See Keat [1999] 5 MLJ 421 ; and Lipschitz No v UDC Bank [1979] 1 SA 789. Burton v Palmer (above) was applied in PP v Lew Syn Pau [2006] 4 SLR 210 , per Menon JC: “‘Direct assistance’ refers to putting the company’s assets directly in the hands of the intended purchaser of the company’s shares. ‘Indirect assistance’ refers to the ‘routing of the company’s assets through another vehicle, such as the foreign subsidiary of such company’”. Loan from an overseas subsidiary to its director who lends it to the intending purchaser to acquire the shares of the company is not financial assistance within the meaning of s 76: PP v Lew Syn Pau (above). The circumstances in which financial assistance is given in connection with an acquisition are not exhaustive: Darvall v North Sydney Brick & Tile Co Ltd (1987) 16 NSWLR 212. In New Zealand, the provision is for protection of creditors and contributories: Skelton v South Auckland Blue Metals Ltd [1969] NZLR 955 ; cf Australia where the provision is to protect the public interest: Re Ferguson, Ex p Thome (In Liq) [1969] 14 FLR 311 at 316.
Bona fide commercial transaction
[76.10] PP v Lew Syn Pau was applied in Wu Yang Construction Group v Zhejiang Jinyi Group Co Ltd [2006] 4 SLR 451 , where a bona fide commercial transaction of issuing new shares to the holding company in payment for a subsidiary did not contravene s 76: s 76(8)(c); disapproving Intraco v Multi-pak Singapore [1995] 1 SLR 313, CA. Per Andrew Phang J at [para 58] in Wu Yang’s case (above), In our opinion, the fact that a transaction, by which the target company has provided financial assistance to the intended purchaser to acquire shares in the target company, is in the interests of the target company does not, by itself, lead to the conclusion that the transaction therefore cannot offend s 76; a commercial transaction where one of the purposes was to assist in the acquisition of shares in a company breaches s 76: Chaston v SWP Group plc [2002] EWCA Civ 1999; [2003] 1 BCLC 675 . Whether the acquisition was merely “an incidental part of a larger purpose” requires proof of something more than an alternative reason as to why the transaction was entered into: Brady v Brady & Anor [1989] AC 755, HL . The court had to examine the facts of each case to see whether an impugned transaction materially prejudiced the interests of shareholders and creditors
Reforms vide Act No 36 of 2014
[76.11] The prohibition against giving financial assistance for the acquisition of a company’s own shares has been reformed in leading jurisdictions. The UK has abolished financial assistance prohibitions with respect to private companies but retained them for public companies (as required by an EU directive) with limited exceptions. Australia reformed this area in 1998 by substituting prohibitions with authorisations. New Zealand abolished financial assistance altogether by allowing distributions back to shareholders subject to a solvency test (note: Report of the Steering Committee for the Review of the Companies Act, April 2011, Chapter 3, paras 89–99). The purpose of financial assistance prohibitions is to ensure that the capital of a company is preserved intact and not eroded by deliberate acts that are not carried out in the ordinary course of a company’s business such as market manipulation and using the company’s assets or resources for selected purchasers only. Hence, the Steering Committee recommended the abolition of the rule for private companies (unless they are subsidiaries of public companies) but retained it for public companies, following the UK’s position.
Exceptions
[76.12] Exceptions to the rule against financial assistance are found in s 76(8) and (9). In the UK, where the lending of money is part of the ordinary business of a company, the lending by a company of money in the ordinary course of its business to purchase shares does not contravene the section: Louis Steen & Anor v Charles Allen Law, Liquidator of International Vending Machines Pty Ltd [1963] 3 WLR 802, PC . In Singapore, the exception in s 76(9) extends to companies whose activities are regulated by any written law relating to banking, finance companies or insurance or are subject to supervision by the Monetary Authority of Singapore.
Odd-lots
[76.13] The Act was amended by s 41 of Act No 36 of 2014 to allow the buyback of odd-lots through a discriminatory repurchase offer: see the Report of the Steering Committee for the Review of the Companies Act, April 2011, Chapter 3, paras 81–85.
“Whitewash” provisions
[76.14] Subsections (9A), (9B), (9BA), (9C), (9CA) and (10) are safe-harbour provisions in which the company may render financial assistance in the acquisition of its own shares without contravening s 76. Subsections (9A) and (9B) were introduced to allow financial assistance when a solvency statement is given by the directors, the directors agree that the financial assistance should be given, and it is in the best interest of the company to do so and lastly, the terms and conditions of the financial assistance are fair and reasonable. Where the financial assistance is valued at less than 10% of the company’s paid-up capital and reserves, a directors’ resolution is required. If the transaction involves more than 10%, then it requires both a directors’ resolution and shareholders’ approval. Subsection (10) provides that financial assistance may be given where: (a) a company, by special resolution, resolves to give financial assistance for the purpose of or in connection with, the acquisition; or (b) a subsidiary of a listed corporation, or a subsidiary whose ultimate holding company is incorporated in Singapore, has approved of the financial assistance by special resolution. A member, a trustee for debenture holders, a debenture holder or creditor or the registrar may apply to court under subsection (12) to oppose the special resolution that has been passed by the company under subsection (10). The court’s powers are spelt out in subsection (13).
[76.15] To enable public companies or their subsidiaries to carry on transactions which are beneficial for the companies, a new s 76(9BA) was introduced to enable these companies to give financial assistance if the giving of assistance does not materially prejudice the interest of the company or its shareholders or the company’s ability to pay its creditors: s 76(9BA)(a).
Directors are not relieved from liability
[76.16] Subsections (9D) and (15) provide that complying with the whitewash provisions does not absolve the directors from liability under s 157 or any common law duty on fiduciaries.
Company acquiring own shares
[76.17] The rule against share buybacks is also rooted in the capital maintenance rule: Trevor v Whitworth (1887) 12 App Cas 409, HL ; Mookapillai v Liquidator, Sri Saringgit Sdn Bhd [1981] 2 MLJ 114. A company acquiring the shares of its holding company contravenes s 21(1). Section 76(1A)(a) is not infringed where the company pays no consideration for the shares: see s 259A(b) of the Corporations Act 2001 (Australia) and s 659(1) of the Companies Act 2006 (UK). See further, Kirby v Wilkins [1929] 2 Ch 444 . Under s 76A, such a contract or transaction is void: s 76A(1)(a).
Excepted share buyback
[76.18] See ss 76B, 76C, 76D, 76DA and 76E below.
Lending money on the security of shares
[76.19] Only the lending is void and not the security, so that the company will have a lien over the shares pledged, which will not be affected by this provision: Batu Pahat Bank v Official Assignee [1933] 2 MLJ 237.
