Deal Point is a regular briefing on issues relevant to corporate transactions, notably M & A and reconstructions. Each edition of Deal Point will focus in detail on one area of law and practice which may be of interest to principals and practitioners in the corporate transactions area.

Financial Assistance Re-Visited

The rules prohibiting a company from giving financial assistance for the acquisition of its own shares are being abolished, for private companies, with effect from 1 October 2008 and now is the time for financiers and those who advise them to start considering what their procedures should be under the new regime.

Directors of companies which are making acquisitions (or being acquired) should also be considering how the changes may impact on them.

Key Principles

Although financial assistance transactions will no longer be automatically unlawful, there are certain general company law principles which will need to be taken into account:-

	The transaction (ie the transaction which would previously have amounted to financial assistance) must be in the best interests of the company and its members
	The transaction must not breach the rules on dividends and other distributions or amount to an illegal reduction of capital
	The transaction must not be open to challenge as a transaction at an undervalue or a preference under Insolvency Law

Practical Implications

	Always prepare Board Minutes which show that the Board has considered the matter and which identify the "commercial benefit" in entering into the transaction in question
	Have the transaction approved by Special Resolution (to sanction any alleged breach of the directors' duties)
	If the transaction amounts to a distribution, the Company must comply with the statutory rules on distribution - notably the requirement for distributable reserves. More complex rules apply to public companies.
	If it involves a transfer of an asset at less than fair market value to an associated company, consider the implications of Section 845 of the Companies Act 2006 (which will treat the transfer as a distribution in kind equal to the difference between the value at which the transaction takes place and the market value, unless the Company has distributable profits)
	In the case of loans, guarantees and the like, consider whether it will reduce the Company's net assets (for example, by considering the likelihood of the loan not being repaid or (as the case may be) the Guarantee being called and whether a provision is therefore needed
	If the Directors conclude that there would be a reduction in net assets, make sure that it is covered by distributable profits (so that there will be no erosion of the Company's capital base) and constitute an unlawful resolution of capital.
	Consider whether the Company is at risk of becoming insolvent or if the transaction may cause it to become insolvent (consideration of the likelihood of a guarantee being called or a loan not being repaid may be helpful for this purpose). Cashflow projections will evidence the Board's view that the transaction will not cause the company to become insolvent but, if that is not the case, it would be unwise to proceed with the transaction
	Where there is a real risk of insolvency, it may be appropriate to arrange for cash-flows and projections to be reviewed by the auditors

The Whitewash Procedure is Dead: Long live the whitewash procedure?

It will not be lost on our readers that the practical implications listed above point to something which begins to look remarkably like the financial assistance "whitewash" procedure by another name. The principal differences, however, are the absence of a statutory declaration of solvency from the directors and the absence of a report from the auditors.

In practice, where there are concerns over solvency, it is very likely that financiers will insist upon comfort from the auditors and, as suggested above, the directors may be well-advised to make sure that they do have independent comfort from the auditors in such circumstances.

We hope that that will be the exception rather than the rule.

More than anything else, it is the requirement for an auditor's report that has made the whitewash procedure so expensive and time-consuming and the new regime is therefore to be welcomed.