Financial Assistance Flashcards
What is financial assistance?
When shares are being acquired in a company, there are statutory rules prohibiting certain companies involved in the acquisition from giving assistance for the purpose of the acquisition. The statutory rules are relevant to public and private companies in groups which contain public companies.
Which transactions are the rules on financial assistance applicable.
Acquisition or sale of shares and issue of shares.
What is the prohibition relating to a target that is a public company?
The prohibition on giving financial assistance applies to the target and any subsidiary of the target whether private or public.
What is the prohibition relating to a target that is a private company?
The prohibition on giving financial assistance relates to any public company subsidiary to the target.
What amounts to financial assistance?
Assistance given by way of gift.
Given by way of guarantee, security or indemnity, release or waiver.
Given by way of loan or similar agreement.
Any other financial assistance.
Are there any exceptions to the prohibition?
Yes, there is a purpose exception. This means the giving of financial assistance will not be prohibited if the principal purpose of giving it is not for the acquisition or the acquisition is a incidental to some larger purpose.
Unconditional exceptions: specific types of transactions that will be exempt e.g. dividend payments.
Conditional exceptions: specific types of transactions are exempt e.g. money lending in ordinary course of business and assistance in respect of employee share schemes AND the company giving assistance is private or it is a public company and by providing that assistance it does not reduce the company’s net assets or if it does, it is out of distributable profits.
What are the consequences of carrying out prohibited financial assistance?
The company could be fined and the officers of the company could be fined/imprisoned.
Additionally, the transaction amounting to prohibited financial assistance would be void and the wider transaction may be void as well.
Where do the statutory provisions on financial assistance derive from?
The doctrine of maintenance of capital and the legislation is designed to protect public companies’ assets representing share capital.
