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Headache remains despite financial assistance go-ahead

19 August 2008

Private companies are to be freed from restrictions preventing them from helping others buy their shares.

But banking specialists at national law firm Shoosmiths fear that far from simplifying matters, the new laws could still give company directors a headache.

On 1 October the long-awaited prohibition on the giving of financial assistance by a private company for the purchase of shares in itself will be abolished.

Birmingham-based Shoosmiths finance lawyer Debra Mitchell said: “The current procedure – known as the ‘whitewash’ to get around the problem – is document intensive, time consuming and expensive to implement.

“Detailed advice from lawyers and accountants is required, and every director of an assisting company must make a statutory declaration in front of an independent solicitor in support of the financial assistance.

“The whole system is administratively burdensome, and completion meetings can become tedious affairs.”

The impact of the repeal will be most noticeable on the acquisition of private companies, because target security will now be readily available on or shortly after completion.

“This sounds like music to directors’ ears,” said Mitchell, “but sadly it isn’t. The Government has issued somewhat uncertain and complex rules which private companies must comply with if they want to give upstream guarantees and security to support the acquisition debt of a purchaser after October 2008.


“The rules are detailed, but essentially resurrect the obligations on directors to consider their fiduciary duties, insolvency issues and capital maintenance principles when giving financial assistance.

“Transactions must not breach the rules on dividends or other distributions, or amount to an illegal reduction of capital.”  

Mitchell believes the new process could be just as costly and protracted as before, as directors will need to go through several hoops to determine whether or not there has been an unlawful reduction of capital.

”The changes should, in theory, soothe the experience of all parties involved in leveraged finance transactions, but in practice directors and advisors could still be reaching for the aspirin.”

Under the Act, public companies will continue to be prohibited from giving financial assistance.

Mitchell is part of Shoosmiths’ Midlands finance team, headed by partner Helen Wilson.

For further information please contact:
Name: Alastair Gray
Phone: 08700 864096
Email: Alastair.Gray@shoosmiths.co.uk

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