The Companies Act 1985 prohibits a company from giving financial assistance for the purposes of an acquisition of its own shares or those of its holding company. 

The definition of "financial assistance" is circular and has been interpreted broadly to include a series of activities from direct loans to a purchaser by the target company, to the target company reducing or discharging a liability incurred by a purchaser, or a subsidiary of the target company guaranteeing funds lent to the purchaser (and other similar arrangements). 

The "whitewash" process permits financial assistance to be given where the company giving the assistance has the capacity and net assets to do so and all of the directors of the company sign a statutory declaration confirming its solvency.

The existence of the financial assistance prohibition has often resulted in substantial adviser fees being incurred to identify whether a transaction falls foul of the restriction and complex structures being devised to permit the transaction to proceed. 

The 2006 Act financial assistance provisions will take effect on 1 October 2008 and replace in their entirety the 1985 Act provisions.  Section 678 of the 2006 Act continues the general prohibition on the giving of financial assistance by a public company. 

The main point of interest to directors and advisers of private companies however, is that the 2006 Act  restriction does not extend to private limited companies, except where the company is a subsidiary of a public company, giving the assistance for the acquisition of that public company, or a public company subsidiary giving assistance for the acquisition of its private holding company.

In addition, it is explained in the Explanatory Notes to the 2006 Act that the prohibition on a private company giving financial assistance for the acquisition of shares in its public holding company does not apply to the giving of assistance by a company incorporated in an overseas jurisdiction.

These changes have been welcomed as they will remove the requirement for advisers to consider the financial assistance regime and perform a "whitewash" in relation to many private company transactions however, companies and their advisers may still need to consider the financial assistance regime where there is a public company involved in the transaction.

Ian Mitchell is an associate specialising in corporate finance with UK law firm Shepherd and Wedderburn
0141 566 7238

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