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FINANCIAL ASSISTANCE FOR THE PURCHASE OF SHARES

Since superficially the provision of financial assistance to someone else to purchase a


company’s shares resembles a purchase by the company itself, the CA 1985 in s 151 contains
a prohibition on such financial assistance; besides, since the financial assistance (e.g. a loan
that is not repaid) may result in loss of money which forms a part of the company’s capital,
the maintenance of capital rule will have been infringed. Another reason for the prohibition is
that the practice can affect the interests of shareholders. The prohibition applies to private and
public companies, although the rule is relaxed for private companies by s 155 - 158 (i.e. the
private company whitewash).
Before the DTI Review, the DTI held a number of consultations on the reform of the
provisions on financial assistance. The DTI Review/White Paper now recommends the
abolition of the rule for private companies (paras.2.30, 10.6; para 6.5). But the EC Directive
requires us to retain the rule for public companies – although it will be simplified.

Reading:
E. Ferran, Company Law and Corporate Finance, (1999) 372 - 407

Lead cases:
‰ Arab Bank Plc v Merchantile Ltd [1994] Ch 871
‰ British and Commonwealth Holding Plc v Barclays Bank [1995] BCC 1059
‰ Brady v Brady [1989] AC 755
‰ Head (Henry) v O’Connor [1971] 1 WLR 497
‰ Carney v Herbert [1985] 1 All ER 438
‰ Belmont Finance Corp. Ltd v Williams Furniture Ltd [1979] Ch 250
‰ Robert Chaston v. SWP Group Plc [2002] EWCA Civ 1999
‰ MT Realisations Ltd (in liquidation) v. Digital Equipment Co. Ltd [2003] EWCA Civ
494

A. The General Prohibition


S 151(1) Subject to the following provisions of this Chapter, where a person is acquiring
or is proposing to acquire shares in a company, it is not lawful for the company or any of its
subsidiaries to give financial assistance directly or indirectly for the purpose of that
acquisition before or at the same time as the acquisition takes place.

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S 151(2) Subject to those provisions, where a person has acquired shares in a company
and any liability has been incurred (by that or any other person), for the purpose of that
acquisition, it is not lawful for the company or any of its subsidiaries to give financial
assistance directly or indirectly for the purpose of reducing or discharging the liability so
incurred.

See the interpretations in s 152(3)

B. The Meaning of Financial Assistance


Forms of Financial Assistance: s 152(1)(a)(i)-(iv)
Armour Hick Northern Ltd v Armour Hick Trust Ltd [1980] 3 All ER 833
Charterhouse Investment Trust Ltd v Tempest Diesels Ltd [1986] BCLC 1
Robert Chaston v. SWP Group Plc [2002] EWCA Civ 1999. (For a comment, see
Armour [2003] CLJ 266.
British and Commonwealth Holding Plc v Barclays Bank [1995] BCC 1059

Where the financial assistance does not fall within s 152(1)(a)(i),(ii) or (iii):
In that case, the financial assistance will be unlawful if the company has no net assets or if the
consequence of the assistance is to reduce its net assets “to a material extent”: see s 152(1)(iv)

C. The Exceptions

1. The “Purpose” exceptions


The general prohibition distinguishes between assistance given prior to the acquisition
and that given afterwards. For each, s 153 provides what is referred to as the
“purpose” exceptions.
• Assistance Prior to the Acquisition: s 151(1)
The “Purpose” Exception: s 153(1)
• Assistance after the Acquisition: s 151(2)
The “Purpose” Exception: s 153(2)

See Brady v Brady [1989] AC 755 for an analysis of the purpose


exception created by ss 153(1)(a), 153(2)(a).

2. Dividends, bonus shares, reduction of capital, redemption or purchase of shares,


anything done under an arrangement with creditors or members under any of the
statutory schemes: s 153(3)

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3. Lending money in the ordinary course of business and contributions to employees’
share schemes. Such financial assistance will be lawfully given by a public company if
the company has net assets which are not thereby reduced or, to the extent that those
assets are thereby reduced, if the assistance is provided out of distributable profits: s
154(4)

D. The Special Relaxation for Private Companies (the Whitewash Procedure)


Apart from the above exceptions, a private company can give financial assistance if it has net
assets which are not thereby reduced or, to the extent that they are reduced, if the assistance is
provided out of distributable profits and it complies with the s 155 procedural requirements.
To use the whitewash procedure a plc would have to re-register as a private company in
accordance with s 53.

Procedural Requirements
Step I – Check that the company giving the financial assistance has the capacity to give
the assistance
Step II – Check that the company has the net assets (as shown in the accounts, that is, its
assets must exceed its liabilities including contingent and prospective liabilities) which are
not reduced by the financial assistance or, to the extent that they are, that there is
sufficient distributable profits
Step III – Directors make a statutory declaration of solvency complying with s 156 which must
have annexed to it a report of the company’s auditors identifying the person to whom
assistance is to be given and the nature of the assistance and stating that they have
enquired into the state of affairs of the company and that they are not aware of anything
to indicate that the directors’ opinion is unreasonable in the circumstances;
Step IV – the approval of the shareholders of the company giving the financial assistance
should be obtained by a special resolution (or written resolution under s 381A): This
requirement does not apply where a wholly owned subsidiary is giving the assistance (s
155(4). Note that objecting members have a right to apply to court for its cancellation: s
157(2)
Step V – the financial assistance must be given within 8 weeks of the date of the
directors’ statutory declaration
Step VI – the company giving the financial assistance shall comply with its filing
requirements by delivering to the registrar a copy of each statutory declaration and annexed
auditors’ report: s 156(5)

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E. Consequences of a breach of the general prohibition on financial assistance:

Criminal sanctions:
S 151(3), see s 744 for the definition of “officer” and s 730(5) which identifies the
officers that will be liable

For civil law effects:


Head (Henry) v O’Connor [1971] 1 WLR 497;
Carney v Herbert [1985] 1 All ER 438.

Directors’ and Recipient’s Liability


Belmont Finance Corp. Ltd v Williams Furniture Ltd [1979] Ch 250
Royal Brunei Airlines v Tan [1995] 3 All ER 97
Twinsectra Ltd v Yardley [2002] 2 All ER 377
CDDA 1986
S 212 IA 1986

Articles
Cabrelli, “In Dire Need of Assistance?: Companies Act 1985 revisited” (2002) JBL 272
Pettet “Developments in the Law of Financial Assistance for the Purchase of Shares” (1988) 3
JIBL 96;
Pettet “Financial Assistance for the Acquisition of Shares: Further Developments (1995) 10
JIBL 388.

POINTS FOR DISCUSSION:


1. Considering that foreign subsidiaries are outside the prohibition contained in s 151, it
would seem that a coach and horses could be driven through the section by the simple
expedient of taking the precaution of always interposing a wholly owned foreign
subsidiary between a company and its assets.
2. The Companies Act 1985, s. 226(2), requires the directors of a company to prepare,
for each financial year, a balance sheet which gives a “true and fair view” of the state
of affairs of the company as at the end of the financial year. If a company makes a loan
in breach of s 151, should its balance sheet treat such a loan as an asset of the
company?
3. Consider the validity of the following transactions:
A venture capital company invests in a company on terms that the company:

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(i) acquires for cash immediately before the investment by the venture
capitalist a plot of land owned by the venture capitalist.
(ii) immediately before the investment pays a debt owed to a subsidiary of the
venture capitalist to enable the venture capitalist to raise the necessary funds.

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