October 2008

Financial Assistance and the 2006

BY KEITH WILSON AND ALPER DENIZ

With effect from 1 October 2008, the company. prohibition on financial assistance by English private companies will be repealed pursuant to There is an exception to the prohibition known the Companies Act 2006. The new provisions as the "whitewash" procedure whereby a do not remove the prohibition on financial private company is able to give financial assistance by public companies. assistance provided that a complicated and expensive statutory procedure is followed What is Financial Assistance? (section 155 to 158 ). This requires the company providing the Under the Companies Act 1985, it is unlawful financial assistance to have the and for an English company or any of its net assets to be able to do so and the directors subsidiaries to give financial assistance for the to swear to the solvency of the company. purpose of purchasing shares in itself (section 151 of the Companies Act 1985). The financial Reform of Financial Assistance prohibition: assistance is unlawful whether given at the time of the acquisition or following the With effect from 1 October 2008, the acquisition. prohibition on the giving of financial assistance by a private company for the purchase of The definition of financial assistance is broad shares in itself (or a private holding company) and can take many forms, including the and the whitewash procedure are being provision of loans, guarantees and security. In repealed. This change will apply to financial the context of a leveraged acquisition, this assistance given on or after 1 October 2008 typically meant that target companies could even if the shares were acquired before this not provide intra-group loans to the acquiring date. The repeal has been welcomed and entity for the purpose of repaying the debt leveraged acquisitions should now be simpler finance or give guarantees or security to the with reduced advisory fees. There existed lenders of the debt finance. considerable uncertainty as to the interpretation of the financial assistance The prohibition only applies to share purchases regime including the meaning of the term and not the acquisition of assets. A breach of “financial assistance”. the prohibition on financial assistance results in the transaction and any security or guarantee However, the prohibitions under the becoming void and unenforceable. There is Companies Act 1985 still remain in relation to also the prospect of fines and/or criminal financial assistance given by public companies liability for the directors of the offending or any subsidiary (public or private) of a public

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company and will do so until 1 October 2009 result in an unlawful reduction of capital when equivalent provisions under the by the company. Companies Act 2006 come into effect. This is particularly relevant in public to private • If a company with no (or insufficient) transactions and will require the public distributable reserves made a loan to a company to re-register as a private company shareholder in order for the shareholder before it can give financial assistance. This to purchase further shares in the many not always be practical or possible, company and the company was aware particularly where the consent of the when the loan was made that there was Panel is required. A further issue is that the no reasonable prospect of the existing uncertainties surrounding the financial shareholder being able to repay it (so assistance regime will continue for public that the company would be required to companies. make immediate provision in respect of the loan) this would also continue to be In addition it must be noted that in certain prohibited as it would give rise to situations it will still be unlawful for a private unlawful reduction in capital. company to give what may amount to financial assistance. Despite the repeal of the The change to the financial assistance prohibition, statutory rules relating to prohibition will mean that transactions for reductions and distributions of capital will private companies will become more continue to apply and existing straightforward and the cost of complying with rules would prohibit the following situations (as the whitewash procedure will be eliminated. set out in the Explanatory Memorandum to the However, lenders may now impose their own statutory implementing the new contractual requirements to ensure that legislation): directors focus on the benefit to their companies of giving "financial assistance" – • If a company with no (or insufficient) something that was often dealt with in the distributable reserves makes a gift of whitewash procedure. Directors of a company money to a shareholder to enable the have a duty to promote the success of their shareholder to purchase further shares company and lenders will want to ensure that in the company. This would still be that duty has been fulfilled when taking prohibited despite the repeal, as it would security or guarantees from subsidiary companies.

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If you have any questions concerning these developing issues, please do not hesitate to contact any of the following Paul Hastings lawyers:

London

Keith Wilson 44-20-3023-5141 [email protected]

Alper Deniz 44-20-3023-5173 [email protected]

Anthony Princi 44-20-3023-5154 [email protected]

18 Offices Worldwide Paul, Hastings, Janofsky & Walker LLP www.paulhastings.com

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