Ashfords Solicitors - Corporate Update Companies Act 2006

Financial assistance for the acquisition of shares in private companies

The position pre 1 October 2008

Under the Companies Act 1985, it is unlawful for a company or any of its subsidiaries to provide any financial assistance for the purchase of its own or its holding company's shares. The penalties for breaching these prohibitions include a fine for the company and fines and/or criminal liability for directors.

Private companies have been able to avoid these prohibitions by relying on the statutory "whitewash" procedure.

The position post 1 October 2008

From 1 October 2008 private companies will no longer be prohibited from providing financial assistance for the purchase of their own shares or shares in their subsidiary companies, provided these subsidiaries are private companies. The "whitewash" procedure will also be made redundant.

The prohibitions will still remain for public companies and their subsidiaries, regardless of whether such subsidiaries are public or private companies. In addition, the prohibitions will extend to post-acquisition assistance. From 1 October 2009 the company and any officer of the company will also become criminally liable in the event of a breach.

The changes will only affect financial assistance given on or after 1 October 2008 and are intended to resolve any existing confusion in the law, thus simplifying transactions.

How does it work in practice?

The following points are the key principles to consider:

· The abolition of the whitewash procedure removes any assurances that the debt assumed by the target company is supportable. It is still unclear how such assurances will be provided in the future.

· Although financial assistance will no longer be prohibited it may still be possible for companies to be in breach of company law, e.g. by unlawfully reducing their capital. Companies should take extra caution to ensure that they are not in breach of other legislation when they provide financial assistance under the new regulations.

Conclusion

This update has highlighted the main changes brought in by the Act with specific emphasis on the abolishment of financial assistance prohibition for private companies.

Should you have any queries on these changes or more generally on the applicability of the Act in your sector, please do not hesitate to contact Andrew Betteridge who will be able to assist.

Corporate Update Companies Act 2006 - Financial Assistance

Introduction

Key Contacts

Corporate Update Companies Act 2006 - Financial Assistance

Introduction