There is good news for those who have experience with the prohibition against companies incorporated in the United Kingdom giving financial assistance for the acquisition of their shares or those of their holding company. The prohibition was repealed in relation to private companies on October 1, 2008 as one of a number of provisions of the Companies Act 2006 that came into force on that date. We reported generally on the Companies Act 2006 in an earlier issue.
The financial assistance prohibition has complicated transactions involving the acquisition of shares of companies incorporated in the UK because of the ambiguities inherent in the application of the broad provisions and the draconian consequences of infringement ? which include making the offending transaction void and unenforceable and the offending company and its directors and officers subject to criminal sanctions. Structuring transactions so as to deal with or avoid these issues has inevitably resulted in increased legal and accounting costs and delay.
A common transactional situation that fell within the prohibition was the provision by a target company and/or its subsidiaries incorporated in the UK of a guarantee and security to lenders in relation to the purchaser’s acquisition finance. The provision of such a guarantee and security would generally only have been possible where the companies involved have been able to use the statutory “whitewash procedure.” This procedure was only available if the financial assistance did not reduce the net assets of the company giving the financial assistance or, to the extent it did so, was given out of distributable reserves. Key features of the procedure included the making of a statutory declaration by the directors as to the solvency of the company supported by an auditor’s certificate, a special resolution by the shareholders of the company approving the financial assistance, and certain requirements as to timing. Implementing the procedure was a time-consuming, document-intensive process that added cost and complexity to a transaction. However, if correctly followed, the process did provide clear comfort to all parties, including lenders, that the prohibition was not breached.
Following the repeal of the financial assistance prohibition for private companies, transactions that may have previously fallen afoul of the prohibition will now, on the face of it, only require approval by a resolution of the board of the relevant companies. Nonetheless, issues related to providing financial assistance have not disappeared for two reasons. First, the financial assistance prohibition still applies to the acquisition of shares of public companies (which may or may not be listed on a stock exchange). Moreover, the legislation does not allow for public companies to cure the financial assistance by way of the “whitewash procedure.” Second, in the case of acquisition finance security, companies and their lenders still need to bear in mind other corporate law issues, such as:
- the need for directors to be satisfied that their approval of a transaction is in accordance with their statutory duties, including a duty to promote the success of the company for the benefit of its members as a whole;
- the need for the transaction to be of commercial benefit to the company;
- insolvency legislation that prohibits transactions being carried out at less than fair market value and which confer preferences in certain circumstances; and
- common law rules relating to unlawful reductions of capital where net assets are reduced and the reduction is not covered by distributable profits.
Where purchasers had previously taken advantage of the financial assistance “whitewash procedure” to allow target companies to give security in relation to acquisition finance, lenders could take comfort from requirements of that procedure that companies had addressed these kinds of issues and the risk of the transaction being unlawful and their security void and unenforceable was significantly reduced. Now that the procedure is no longer available to private companies, lenders will have to determine what assurances they need that purchasers to whom they are lending ? and targets providing security ? are properly able to enter into the transactions. In Canada, the financial assistance rules in British Columbia, Alberta, Ontario, Québec and federally have also been simplified or eliminated in recent years.
- British Columbia — The Business Corporations Act (British Columbia) (BCBCA) (Section 195) contains a broadly permissive provision that allows British Columbia companies to provide financial assistance to “any person for any purpose.” A company must disclose any financial assistance that is material to the company that it gives to a shareholder, director, officer or employee of the company or of an affiliate of the company, an associate of any such persons or for the purpose of a purchase of shares of the company or an affiliate. Where disclosure is required, it can be provided in a written record deposited in the company’s records office, in a directors’ consent resolution or in minutes of a directors’ meeting. These provisions have replaced the financial assistance restrictions in the prior British Columbia Company Act (repealed in 2004 when the BCBCA was enacted), which included a solvency requirement.
- Alberta — The Business Corporations Act (Alberta) (ABCA) (Section 45) contains a broadly permissive provision that allows corporations to provide financial assistance to “any person for any purpose.” A corporation must disclose to its shareholders any financial assistance that it gives to a shareholder or director of the corporation or of an affiliate, an associate of a shareholder or director of the corporation or an affiliate, or in connection with the issuance of shares of the corporation or an affiliate. This section of the ABCA was amended in 2000, prior to which the ABCA contained a prohibition on financial assistance by corporations except in the ordinary course of business.
- Ontario — The financial assistance provisions of the Business Corporations Act (Ontario) were removed in 2006.
- Québec — A company incorporated under Part 1A of the Companies Act (Québec) (QCA) may not provide financial assistance to a shareholder unless a solvency test and liquidity test are met (Section 123.66). In December 2007, the Québec Minister of Finance and Government Services announced a consultation process to reform the QCA. The related consultation paper specifically contemplates changes to the financial assistance provisions of the QCA, but, to date, no proposed legislation has been released.
- Canada — The financial assistance provisions of the Canada Business Corporations Act were removed in 2001.