Financial assistance
Encyclopedia
Financial assistance in law
refers to assistance given by a company for the purchase of its own shares
or the shares of its holding companies
. In many jurisdictions such assistance is prohibited or restricted by law. For example all EU member states are required to restrict financial assistance by public companies up to the limit of the company's distributable reserves, although some members go further, for example, Belgium
, Bulgaria
, France
, and The Netherlands restrict financial assistance by all companies. Where such assistance is given in breach of applicable law it will render the relevant transaction void
and may constitute a criminal offence
.
for a loan and/or third party security
to allow a borrower to borrow money to buy shares which is routinely given (to the extent legally possible) after a leveraged buyout
in support of the new owner's acquisition debt. It would also normally include a gift or loan from the company or any other act which reduces the net assets of the company to a material extent where this is done for the purpose of the acquisition of shares in itself or its parent.
The rationale for such laws is purely economic; it is based upon the premise that if a company supports the purchase of its own shares, it causes a de facto diminution in the company's value. Concerns have also been expressed that such financial assistance artificially inflates a share's price above its market level.
Although the authorities are unclear, it seems that financial assistance may also have been a crime under the English common law
prior to its codification by statute. If that is correct, then laws against financial assistance may be much more prevalent than is normally assumed, and would also apply in many of the English speaking Commonwealth countries
.
Laws against financial assistance are sometimes controversial because of the difficulties they can cause in the context of a leveraged buyout
, and some jurisdictions which have enacted them have later repealed them. Some jurisdictions provide for so-called "whitewash" procedures, whereby the shareholders can authorise transactions that would otherwise be void for financial assistance. Most jurisdictions which prohibit financial assistance permit the company to purchase its own shares and hold them in treasury
, and the company can then issue them again on terms that would have been prohibited if they had sought to provide financial assistance in an equivalent manner for a third party purchase.
Law
Law is a system of rules and guidelines which are enforced through social institutions to govern behavior, wherever possible. It shapes politics, economics and society in numerous ways and serves as a social mediator of relations between people. Contract law regulates everything from buying a bus...
refers to assistance given by a company for the purchase of its own shares
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
or the shares of its holding companies
Holding company
A holding company is a company or firm that owns other companies' outstanding stock. It usually refers to a company which does not produce goods or services itself; rather, its purpose is to own shares of other companies. Holding companies allow the reduction of risk for the owners and can allow...
. In many jurisdictions such assistance is prohibited or restricted by law. For example all EU member states are required to restrict financial assistance by public companies up to the limit of the company's distributable reserves, although some members go further, for example, Belgium
Belgium
Belgium , officially the Kingdom of Belgium, is a federal state in Western Europe. It is a founding member of the European Union and hosts the EU's headquarters, and those of several other major international organisations such as NATO.Belgium is also a member of, or affiliated to, many...
, Bulgaria
Bulgaria
Bulgaria , officially the Republic of Bulgaria , is a parliamentary democracy within a unitary constitutional republic in Southeast Europe. The country borders Romania to the north, Serbia and Macedonia to the west, Greece and Turkey to the south, as well as the Black Sea to the east...
, France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
, and The Netherlands restrict financial assistance by all companies. Where such assistance is given in breach of applicable law it will render the relevant transaction void
Void (law)
In law, void means of no legal effect. An action, document or transaction which is void is of no legal effect whatsoever: an absolute nullity - the law treats it as if it had never existed or happened....
and may constitute a criminal offence
Crime
Crime is the breach of rules or laws for which some governing authority can ultimately prescribe a conviction...
.
Outline
The assistance can be of a variety of different types. The most common type of assistance is a financial guaranteeSurety
A surety or guarantee, in finance, is a promise by one party to assume responsibility for the debt obligation of a borrower if that borrower defaults...
for a loan and/or third party security
Security interest
A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt. It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets...
to allow a borrower to borrow money to buy shares which is routinely given (to the extent legally possible) after a leveraged buyout
Leveraged buyout
A leveraged buyout occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage...
in support of the new owner's acquisition debt. It would also normally include a gift or loan from the company or any other act which reduces the net assets of the company to a material extent where this is done for the purpose of the acquisition of shares in itself or its parent.
The rationale for such laws is purely economic; it is based upon the premise that if a company supports the purchase of its own shares, it causes a de facto diminution in the company's value. Concerns have also been expressed that such financial assistance artificially inflates a share's price above its market level.
Although the authorities are unclear, it seems that financial assistance may also have been a crime under the English common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
prior to its codification by statute. If that is correct, then laws against financial assistance may be much more prevalent than is normally assumed, and would also apply in many of the English speaking Commonwealth countries
Commonwealth of Nations
The Commonwealth of Nations, normally referred to as the Commonwealth and formerly known as the British Commonwealth, is an intergovernmental organisation of fifty-four independent member states...
.
Laws against financial assistance are sometimes controversial because of the difficulties they can cause in the context of a leveraged buyout
Leveraged buyout
A leveraged buyout occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage...
, and some jurisdictions which have enacted them have later repealed them. Some jurisdictions provide for so-called "whitewash" procedures, whereby the shareholders can authorise transactions that would otherwise be void for financial assistance. Most jurisdictions which prohibit financial assistance permit the company to purchase its own shares and hold them in treasury
Treasury stock
A treasury stock or reacquired stock is stock which is bought back by the issuing company, reducing the amount of outstanding stock on the open market ....
, and the company can then issue them again on terms that would have been prohibited if they had sought to provide financial assistance in an equivalent manner for a third party purchase.