The prohibition on the giving of financial assistance by private companies was (other than in limited circumstances) repealed with effect from 1 October 2008 under the Companies Act 2006. The repeal resulted in there no longer being a requirement for private companies to follow the statutory “whitewash” procedure where financial assistance for the acquisition of shares is given by a company as part of a transaction.

However, even though the statutory rules have been repealed, it is important that certain company law principles (and certain other factors) continue to be taken into account in relation to a transaction which might once have constituted unlawful financial assistance. In summary:

• the transaction must be in the best interests of the company i.e., likely to promote the success of the company for the benefit of its members - this should be addressed through carefully thought out and worded board minutes recording the directors’ approval of the transaction and concluding that the transaction promotes the company’s success.
• the transaction must not breach the rules on distributions or otherwise constitute an illegal reduction in the capital of the company – again, the board minutes of the meeting at which the directors consider the transaction should record that the directors have considered these issues (they may also wish to consult with the relevant company’s auditors for these purposes); and
• the validity of the transaction must not be vulnerable to challenge as a transaction at an undervalue (for the purposes of section 238 of the Insolvency Act 1986).

It is also worth mentioning that lenders (who had previously relied on the whitewash procedure with respect to transactions in which they are involved) have been dealing with the repeal (where appropriate) by altering the requirements/conditions in their facility documentation to specifically address the above points.

It should be stressed that this note is intended as a general update only and further legal advice should be sought on the matters raised.

Posted: November 19th, 2008 under Corporate Finance.
Comments: none