This has been a very important area in practice because it has frequently arisen in corporate transactions. Previously the rules prohibiting financial assistance applied to assistance given by all companies.
Since 1 October 2008, the prohibition on private companies from giving financial assistance for the purpose of the acquisition of their shares, or the shares of their private holding company, has been removed. A process commonly known as the ‘whitewash’ procedure was also abolished on that date.
Public companies giving financial assistance for the acquisition of their shares or their parent company’s shares or private companies giving financial assistance for the acquisition of the shares of their public holding company continue to be caught by the financial assistance restrictions in ss.677-683 CA 2006.
Financial assistance has been given a wide interpretation by the courts and can cover any help of a financial nature given by a company for the share acquisition. For example, when an individual wishes to purchase shares in a company, but is having trouble raising finance, the company may consider giving a guarantee to a bank so that it lends the money to that individual to enable the individual to proceed with the share purchase. However, the directors need to be aware that the proposed guarantee may constitute financial assistance in accordance with the CA 2006 and thus be illegal.
The protections in relation to financial assistance in the CA 2006 are another good example of the doctrine of maintenance of share capital. In essence, the money invested by shareholders should boost the net assets of a company and therefore swell the shareholders’ funds and further protect creditors due to the restrictions on releasing those sums during the life of the company. If, however, a company uses its own resources to help a shareholder to buy shares in it, then it is offending the principle of maintenance of share capital.
Hence, the legislation is designed to protect the company’s assets representing share capital. It is therefore vital to be able to identify financial assistance before it occurs and to be able to determine whether or not it is possible to make it lawful (and how to do so). For instance, where financial assistance is proposed to be given by a public company for the acquisition of its own shares, if that company is re-registered as a private company, it will then fall outside the prohibition on the giving of that assistance.