M&A Update: Financial Assistance in Corporate Transactions

Using the target to assist with the financing of an acquisition

Prior to the Companies Act 2006, “Financial assistance” i.e. a target company using its own funds to purchase its own shares, was prohibited in both public and private company mergers and acquisitions, unless a “whitewash” procedure followed.

In order to carry out the whitewash procedure a bidder will effectively have to control 75% or more of the shares of the target company to pass the necessary shareholders’ resolutions (which, in the case of a public limited company (plc) will include a resolution to convert from a plc to a private limited company, as only a private limited company is eligible to carry out the whitewash procedure).

Under the provisions of the Companies Act 2006 (ss 677-683), which came into force on 1 October 2008, a private company is no longer prevented from providing financial assistance for the purchase of its own shares or shares in its private holding company. There is therefore no longer any need for the whitewash procedure.

Target public companies and their public or private company subsidiaries are still prohibited from providing financial assistance for the acquisition of shares in the target public company (s678).

A public company is also still prohibited from providing financial assistance in connection with the acquisition of shares in its private holding company (s679).

Breach of the financial assistance prohibition remains a criminal offence, but the penalty has been increased to imprisonment for up to 12 months (s680).

Although the “whitewash” procedure made it unlikely that financial assistance by a private company would later be challenged, directors must still ensure that the proposed transaction is in the best interests of the company and that it does not constitute an unlawful distribution. It is important that board minutes are drafted to reflect this.

Should you wish to discuss a company or business sale or purchase that you are involved with then please contact Jonathan Abrams, Corporate Partner, on 020 7979 2066 or jabrams@gadllp.co.uk