The Company Law Reform Bill (the "Bill") was published on 3 November 2005 with the aim of updating current company law and making it more accessible. One of the key themes of the new Bill is "think small first", addressing the Government's concern that existing company law is geared towards the issues affecting large public companies. The reality is that most companies in the UK (around 90%) have less than 5 shareholders.
In the second of our series highlighting the various changes proposed to existing company legislation, we focus on the issue of financial assistance and how the intended changes to the regime will affect private companies.
The current law prohibits a company or any of its subsidiaries from giving financial assistance (directly or indirectly) for the purposes of an acquisition by any person of its own shares or those of a private holding company. Financial assistance is a wide-ranging term and can include everything from direct loans to a prospective purchaser by the target company, to the target company reducing or discharging a liability incurred by a prospective purchaser or the target company guaranteeing funds lent to the purchaser (and a number of similar such arrangements).
An important relaxation of the prohibition is referred to within section 155 of the Companies Act and is available only to private companies. This is nicknamed the "whitewash procedure". To take advantage of this all of the directors of the company require to sign statutory declarations as to its solvency and obtain auditors' reports to support their declarations. The consequences of failing to recognise circumstances amounting to financial assistance or properly implementing the whitewash procedure can be severe and include potential criminal penalties and the rendering void of offending contracts.
In line with the drive towards de-regulation for smaller companies however, the new Bill proposes that the prohibition against giving financial assistance should be abolished in its entirety for private companies. This will have significant ramifications in relation to the financing of buy-outs and for private equity transactions in general. As a consequence of this abolition, the "whitewash procedure" will no longer be necessary for private companies. Thus, a common and inevitably complex element of the acquisition process will be eliminated. This is good news from the point of view of cost and time spent on a transaction as well as risk management.
A key point to note however is that the financial assistance prohibition will remain unchanged in relation to public companies. This issue may arise in situations where it is not immediately obvious. For example, it will continue to be unlawful for a public company that is a subsidiary of a private company whose shares are being acquired or any subsidiary of such a public company to give financial assistance for the purposes of the acquisition. In addition, in relation to "public to private" transactions, it will still be necessary to consider break fees (a payment agreed to be made if the deal does not proceed to signing or closing) and re-registration of the target company before it or any of its subsidiaries can give security for the debt.
Once the new regime is in place therefore, the proposed structure of the acquisition will still have to be scrutinised carefully to ascertain whether a public company is involved and financial assistance remains an issue. In this connection, it is perhaps unfortunate that the Bill does not go further and clarify for public companies the complexities that continue to dog the operation of the financial assistance rules.
In our next ebulletin we shall look at the measures aimed at simplifying the decision making process for companies including the new proposals regarding share capital, payment of dividends and allotment of shares.