Prohibition on Financial Assistance
The policy of capital maintenance and protection is supported by the prohibition on companies assisting in financing the acquisition of their own shares. The prohibition on financial assistance is wide-ranging and may apply to a wider range of transactions than might first appear.
It is unlawful for a company to give, either directly or indirectly, whether by means of a loan guarantee, the provision of security or otherwise, any financial assistance for the purpose of an acquisition made or to be made by any person of any shares in the company, or in its holding company. The prohibition applies whether the financial assistance is given directly or indirectly, or whether it is by means of a loan, guarantee or the provision of security or otherwise.
Contravention is a category 2 offence on the part of the company and of every officer in default.
A transaction entered in contravention of the prohibition is voidable at the instance of the company against any person whether a party to the transaction or not, who had notice of the facts which constituted the breach.
2014 Act Reforms
The 1963 Act rendered it unlawful for a company to give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company, or, where the company is a subsidiary company, in its holding company.
The 2014 Act re-enacted the prohibition with modifications which were intended to limit to some extent, the broad scope of the earlier wording. It omits the words “in connection with”. It confirms that the prohibition does not apply to the giving of such financial assistance, if
- the company’s principal purpose in giving the assistance is not to give it for the purpose of such acquisition; or
- the giving of the assistance for that purpose is only an incidental part of some larger purpose of the company,
provided that in each case, the assistance is given in good faith in the interests of the company.
2014 Act Reforms
A number of important exemptions exist The 2014 Act extended the list of exemptions and restated others in clearer terms. The extension of the exemptions was influenced by unintended difficulties that the former prohibition had caused in the financing of share purchase transactions.
The 2014 Act simplified the “whitewash” procedure. The prohibition may be circumvented by private limited companies in accordance with the summary approval procedure. Subject to compliance with its conditions and procedures (where possible), it validates financial assistance which would otherwise be in breach of the prohibition.
The prohibition on giving financial assistance, even in its reformed terms is in broad terms. It applies to direct and indirect assistance. The assistance may be by way of a loan, guarantee or security.
What constitutes financial assistance is itself broadly defined. The prohibition may invalidate an arrangement by which the purchaser is any way put in funds or supported, to enable him to purchase the shares.
Under the earlier legislation, the courts looked at the reality and substance of the transaction and they are likely to continue to do so. If the position in substance when looked at globally, discloses financial assistance, the prohibition applies. An exemption may or may not be available.
The English courts, in interpreting a similar provision have indicated that the court may look at the commercial reality of the transaction and consider in the round, whether it might be properly described as the giving of financial assistance by the company. Equally, the courts should not strain the provision to cover transactions that are not fairly within its scope.
Effect of Breach
A transaction which breaches the prohibition is voidable by the company against any person who had notice of the facts constituting the breach. This applies both to the original parties and to successor parties who had knowledge of the facts constituting the breach. It cannot be validated after the event.
In this context, it appears that the requirement is for actual knowledge of the relevant facts, rather than imputed or constructive knowledge. This is consistent with the general principle of commercial law that constructive notice should not apply, in ease of business transactions and relationships. They need not necessarily know that it is unlawful in itself.
Where there has been a breach, the security given by the company is voidable. Accordingly, a lender who has financed the acquisition of shares and has taken security over the company’s assets may loose the benefit of the security. A party, such as a lender may be deemed aware of the facts sufficient to constitute the breach through its agent’s or adviser’s knowledge.
Contravention is a category 2 offence on the part of the company and of every officer in default.
Former Whitewash Procedure
The former “whitewash” procedure applied prior to the commencement of the Companies Act 2014. A private company could give the requisite financial assistance, subject to strict compliance with the procedure. If the whitewash procedure was not complied with, the transaction might be invalidated with serious consequences, typically for the lending institution involved.
The whitewash procedure required that a special resolution be passed by the members. It was required to be passed in the 12 month period beforehand. A statutory declaration was required from the majority of the directors of the company stating the form of assistance, the persons to whom it was is given and the purpose for which it was intended. It was required to confirm that the directors making the declaration had made full enquiries into the affairs of the company and were of the opinion that the company, having carried out the transaction, would be able to pay its debts as they fell due.
The declaration was required to be completed at a director’s meeting within 24 days prior to the meeting at which the special resolution was to be considered. Copies of the declaration were required to be circulated with the notice. The making of a false declaration was an offence. If the company was wound up within 12 months of the declaration and the debts were not paid in full, it was presumed that the director did not have reasonable grounds for the opinion.
Notice of the meeting was required to be given to all shareholders. It could not be varied. Unless all members voted and approved, the resolution could not be carried into effect for 30 days. During a 28 day period, an application could be made to the court by not less than 10% of the holders of the nominal share capital (who had not consented to or voted for the resolution) for an order to cancel the resolution. If the application was made, the resolution was effective, only if and in so far as it was confirmed by the court.
Summary Approval Procedure I
The summary approval procedure was introduced by the 2014 Act. It allows the approval of certain restricted transactions, including the giving of financial assistance by a private limited company (an LTD), that would be otherwise prohibited.
The proposal must first be approved by the members by a special resolution. It must be passed within the 12 months before the transaction. A declaration is required to be given by the directors at a meeting held within 30 days prior to the shareholders’ meeting to approve the transaction concerned.
The declaration is made by the directors or by the sole director. Where there are more than two directors, a majority suffices.
Summary Approval Procedure II
The directors’ declaration must set out
- the circumstances in which the transaction or arrangement is to be entered into;
- the nature of the transaction or arrangement;
- the person or persons to or for whom the transaction or arrangement is to be made;
- the purpose for which the company is entering into the transaction or arrangement; and
- the nature of the benefit which will accrue to the company directly or indirectly from entering into the transaction or arrangement; and
- that the declarants have made a full inquiry into the affairs of the company and that having done so, they have formed the opinion that the company having entered into the transaction or arrangement, will be able to pay or discharge its debts and other liabilities in full as they fall due during the period of 12 months after the date of the relevant act.
In determining whether or not a company will be able to pay its debts and other liabilities in full, the directors are not required to assume (where relevant) that the company will be called upon to pay money on foot of a guarantee given or that any security given will be realised.
A copy of the declaration must be delivered to the CRO not later than 21 days after the date on which the financial assistance is given.
Summary Approval Procedure III
A copy of the declaration must be filed with the Companies Registration Office within 21 days. On application to it made by any interested party, the court may in any case where there has been a failure to file the requisite declaration within the applicable time limit, declare that the financial assistance is valid for all purposes provided that the court is satisfied that it would be just and equitable to do so.
In the case of several of the restricted activities, the summary approval procedure requires that the declaration be accompanied by a report by a person qualified to be auditor of the company, to the effect that the declaration is not unreasonable. There is no requirement for an expert’s report in the case of financial assistance.
A director who makes a declaration without reasonable grounds for his opinion that the company is solvent may be declared personally liable without limitation for all debts and liabilities of the company. The application to have the director declared personally liable may be made by a liquidator, creditor or shareholder. In the case of a successor, it may be made by the officers of that entity. It may be made by the ODCE.
Where the company is wound up within 12 months, it is presumed that the director did not have reasonable grounds for making the declaration.
If the resolution approving the financial assistance was not unanimous or was not approved by at least 90 percent of the shareholders, the activity may not be undertaken for 30 days after the special resolution. During this time, the dissenting minority may apply to the court for an order to cancel the special resolution. The giving of the financial assistance is suspended pending the court order.
Acquisition of Private Company Shares
The prohibition on financial assistance and the availability of the whitewash procedure commonly arise in the acquisition of (the shares of) companies. A company may not finance the acquisition of its own shares directly or indirectly.
The acquisition of shares in private companies is commonly undertaken by a specially formed company (SPV), which acquires the target company’s shares. It then becomes the holding company. The SPV may borrow to fund the purchase of the target company. The assets of the target company may be used as security to finance the purchase, typically by way of guarantee of the liabilities of the holding company, supported by a charge over its assets.
The use of the company’s own assets as security for lender would usually breach the prohibition and may be undertaken, only in compliance with the summary approval procedure, provided that this is possible in the circumstances. The “group” exception to the prohibitions of loans, guarantees and security to directors and persons connected to them is also employed.
Other Permitted Financial Assistance I
The prohibition does not apply to
- the giving of financial assistance in accordance with the Summary Approval Procedure;
- the payment of dividends out of profits available for distribution;
- the discharge by a company of a liability lawfully incurred by it;
- the purchase or redemption of shares or the giving of financial assistance for such purpose, where lawfully undertaken under the legislation;
- lending in the ordinary course of the company’s business
- the provision by a company, in accordance with any scheme for the time being in force, of money for fully paid up shares in the company or its holding company, to be held by or for the benefit of employees or former employees of the company or of any subsidiary of the company including any person who is or was a director holding a salaried employment or office in the company or any subsidiary of the company;
- by way of loans to persons other than directors, bona fide in the employment of the company or a subsidiary with a view to their subscribing for shares in the company or its holding company;
- the refinancing of a transaction which has been approved under the Summary Approval Procedure or under the previous whitewash procedure or a subsequent refinancing thereof;
- the giving by a company of representations, warranties or indemnities to a person who has purchased or subscribed for shares in the company or its holding company for the purpose of or in connection with such purchase or subscription;
- to the extent that provision of that kind is not authorised by the foregoing, the provision of financial assistance by a holding company or a subsidiary of it in connection with either of them purchasing or subscribing for shares in the holding company on behalf of present or former employees of the holding company or any subsidiary of it, by way of an employees’ share scheme or an approved employee share ownership trust
- the payment by the company of the fees and expenses of advisers to any subscriber or purchaser of shares incurred in connection with the subscription or purchase of shares of the company or holding company or the fees of advisers to the company or holding company for that purpose;
- incurring of expense in order to facilitate admission to a stock exchange or equivalent trading facility;
- incurring an expense in order to ensure compliance with obligations under the Takeover Rules;
- reimbursement by a private limited company subsidiary of an offeree of the expenses of the offeror pursuant to an agreement approved by the Irish Takeover Panel;
- in connection with the allotment of shares by a parent public company, the payment by a private limited subsidiary of that company of commissions, not exceeding 10% of the money received in respect of allotments.
Other Permitted Financial Assistance II
Some of the exemptions, in particular, the summary approval procedure are not available to a public limited company. A private limited company may not provide financial assistance under the Summary Approval Procedure for the purpose of acquisition of shares of its parent which is a public company, save to the extent that regulations (which may be made by the Minister), permit the Summary Approval Procedure to be availed of.
The exemptions under the pre-2014 Act legislation, were broadly as follows:
- payment of a lawful dividend;
- discharge of a liability incurred by the company
- lending of money in the ordinary course of business;
- provision of money in accordance with an employee share scheme;
- making of loans to persons other than directors bona fide in the employment of the company to assist them in acquiring shares in the company.
References and Sources
Companies Act 2014 s.82 (Irish Statute Book)
Companies Act 2014: An Annotation (2015) Conroy
Law of Companies 4th Ed. (2016) Ch. 10 Courtney
Keane on Company Law 5th Ed. (2016) Ch.15 Hutchinson
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Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury
Introduction to Irish Company Law 4th Ed. (2015) Callanan
Bloomsbury’s Guide to the Companies Act 2015 Courtney & Ors
Company Law in Ireland 2nd Ed. (2015) Thuillier
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Modern Irish Company Law 2nd Ed. (2001) Ellis
Cases & Materials Company Law 2nd Ed. (1998) Forde
Company Law 4th Ed. (2008) Forde & Kennedy
Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy
Companies Acts 1963-2012 (2012) MacCann & Courtney
Constitutional Rights of Companies (2007) O’Neill
Court Applications Under the Companies Act (2013) Samad
Company Law – Nutshell 3rd Ed. (2013) McConville
Questions & Answers on Company Law (2008) McGrath, N & Murphy
Make That Grade Irish Company Law 5th Ed. (2015) Murphy
Company Law BELR Series (2015) O’Mahony
Companies Act 2006 (UK) (Legilsation.gov.uk)
Statute books Blackstone’s statutes on company law (OUP)
Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington
Company Law in Context 2nd Ed. (2012) D Kershaw
Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam
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UK Practitioners Services
Tolley’s Company Law Handbook
Palmer’s Company Law