Financial Assistance

Question 1

WHEN DO YOU NEED TO CONSIDER THIS?

Answer 1

ACQUISITION OF SHARES (e.g. in a share sale)

TARGET OR ITS SUBSIDIARY giving financial assistance?

(B not prohibited from giving FA over own assets!)

Question 2

consequences of breach of f.a. (s.680)

Answer 2

offence can lead to penalties for:

• company (fine)
• officers (fine/imprisonment)

Under case law, transaction amounting to prohibited F.A. (and possibly wider transaction, e.g. share acquisition itself) may be VOID AND UNENFORCEABLE

Question 3

F.a. exam structure

Answer 3

1. There is a proposed acquisition of shares in X company
2. Establish identity of company in which shares are being acquired + state which statute applies (public s.678/private s.679)
3. Identify prohibition on financial assistance - “Company is doing X, this falls within X prohibition in statute” (plc = F.A. from target comp and subsidiary of target, ltd = F.A. from public company subsidiary of Target)
4. within exclusions?
5. Nature of F.A. (is it FA, is it direct/indirect, is it for the purpose of acquisition)
6. statutory exception? all purpose, unconditional, conditional)
7. consequences of breach

Question 4

“Identify nature of financial assistance”

Answer 4

1. gift/guarentee/security given
2. financial in nature
3. …clearly amounts to direct/indirect financial assistance given before acquisition for the purpose of acquisition
4. This therefore involves prohibited f.a. under [statute]

Question 5

statutory exceptions - ALL PURPOSE exceptions

Answer 5

in the sections
- if PRINCIPAL PURPOSE is NOT for purpose of acquisition (or if purpose of acquisition is only incidental part of some larger purpose)

• NARROW application
• very SERIOUS consequences if give unlawful F.A. so this exception not usually relied upon

Question 6

statutory exceptions - UNCONDITIONAL EXCEPTIONS

Answer 6

• s.681
• dividend payments
• share buy-backs

Question 7

statutory exceptions - CONDITIONAL EXCEPTIONS

Answer 7

• money lending in ord. course of business
• assistance in respect of employee share scheme

conditions:

• private company
• public company + net assets of company are not reduce by giving assistance (or if reduce assistance is out of DP)

Question 8

historic financial assistance?

Answer 8

look out for historic financial assistance that may have been unlawful

consequence

• void assistance
• void wider transaction? (so B didn’t get valid title?)

CA 1985 repealed in relation to private companies 1 OCTOBER 2008 (2009 for public companies) because CA 06 came into force

Question 9

LOOK AT DATE OF TRANSACTION

Answer 9

BEFORE 1 OCT 2008 = CA 1985

Question 10

STATUTORY RULES UNDER CA 1985

Answer 10

Statutory prohibition under s.151(1), (2) = very similar to CA 2006
BUT s.151 prohibition applied to:
• Target Company (Plc or Ltd) and
• ANY of its subsidiaries (Plc or Ltd)

Exceptions broadly similar too

Question 11

whitewash procedure

Answer 11

prima facie unlawful

possible to make transaction lawful by following the ‘whitewash’ procedure set out in CA 1985 (only available for ltd)

REQUIRES: SR and Director’s statutory declaration of solvency

• make enquiries
• was WW procedure followed correctly?
• request copies of relevant documentation to ensure it was

Question 12

consequences of breach of 1985

Answer 12

same as CA 06

• company and officers = commit criminal offence
• transaction itself (i.e. security) and possibly wider transaction (i.e. share purchase) = void and unenforceable

IF WIDER TRANSACTION HELD VOID = RISK BUYER DOES NOT HAVE GOOD TITLE TO TARGET SHARES