Companies Financing Briefing Act 2006

Transcription

1 slaughter and may Companies Financing Briefing Act 2006 August 2008 Whitewash no more: the partial repeal of the Companies Act 1985 restrictions on financial assistance comes into force on 1st October 2008 Financial assistance by private companies in relation to the acquisition of their own shares or shares in their private holding companies will no longer be subject to the restrictions contained in sections 151 to 158 of the Companies Act 1985 ( CA85 ) where such assistance is given on or after 1st October, This will have positive cost and timing implications for acquisition financing transactions involving the provision of upstream credit support and funding by UK target group companies. Whilst, following the repeal, financial assistance within the scope of the repeal will no longer be unlawful as such, certain residual legal issues (which were previously largely swept up in the whitewash procedure) remain. This Briefing considers how these residual legal issues will be addressed in acquisition financing transactions in the light of this important legislative change. The current position Acquisition financing structures involving English companies may involve an element of financial assistance within the meaning of sections of the CA85. For example, intra-group lending arrangements put into place for the purpose of directing group cashflows up to the borrowing entity and the provision of guarantees and security for such facilities by members of the target group must all be considered in the context of these statutory rules. The main exception to the rules for private companies is the whitewash procedure set out in sections The whitewash procedure is only available if specific conditions are satisfied. The assistance must be given by a private company for the purpose of an acquisition of shares in itself or its private holding company (s155(1)). There must be no negative impact on the assisting company s net assets: either its net assets must not be reduced by the financial assistance, or if its net assets are reduced, the assistance must be provided out of distributable profits (s155(2)). The assistance must not have a negative impact on the assisting company s solvency: the directors are required to provide a statutory declaration to the effect that the company, following provision of the financial assistance, will not be unable to pay its debts, and will be able to pay its debts during the following twelve months (s155(4) and s156). This declaration is also required from the directors of the target company and any immediate holding company where the assistance is given by a subsidiary. The statutory procedure requires the company s auditors to confirm the directors solvency declaration and it is customary also to request confirmation of the company s net asset position from the auditors. Finally, unless the assisting company is a wholly owned subsidiary, shareholder approval of the assistance is required.

2 The whitewash procedure involves costs in terms of professional fees. It also has an impact on the timeframe for finalising credit support arrangements in that where shareholder approval is required and is not unanimous, the company must wait for four weeks before the whitewashed assistance can be given (s158 CA85). What is changing on 1st October? The CA85 restrictions on financial assistance by private companies in relation to the acquisition of their own shares or shares in a private company parent are to be repealed with effect from 1 October The operative provisions are contained in the Companies Act 2006 (Commencement No.5, Transitional Provisions and Savings) Order 2007 (the Fifth Commencement Order ). The effect of the repeal is that compliance with the whitewash procedure will no longer be statutorily required in transactions involving financial assistance by private companies. The repeal applies to financial assistance given on or after 1st October 2008 even (in the case of financial assistance given after such time as the relevant shares are acquired) if the shares in question were acquired, and the liability in respect of which the assistance is given incurred, before that date. Borrowers may wish to consider, in relation to transactions closing prior to the date of the repeal, whether there is any possibility of persuading lenders to defer putting upstream credit support into place until 1st October 2008 in order to avoid the costs of the statutory whitewash. Revival of the common law and the savings provision During the passage of the Companies Bill and during the consultation process on implementation of the Companies Act 2006 ( CA06 ), concern was expressed by some that in the absence of statutory restrictions, financial assistance by private companies might remain problematic under the common law. The financial assistance provisions are just one aspect of the common law rules on maintenance of capital 1. There is no specific body of caselaw on financial assistance outside the statutory provisions. Therefore the common law rules on maintenance of capital should not operate to render unlawful as financial assistance, financial assistance which is lawful under ss once the repeal comes into force. In any event, generally, where the common law contains rules which are within the scope of a statutory provision, the common law will cease to apply unless Parliament decides otherwise. Section 16(1)(a) of the Interpretation Act 1978 provides that where an Act repeals an enactment, the repeal does not, unless the contrary intention appears, (a) revive anything not in force or existing at the time at which the repeal takes effect. Nonetheless, it was thought necessary to make clear in the implementing legislation that financial assistance which, after 1st October 2008 will no longer be prohibited under the CA85 will not be prohibited as such under the common law. Hence, the Fifth Commencement Order (paragraph 52 of Schedule 4) contains a savings provision to the effect that the repeal shall not cause anything within the scope of the repeal to be rendered unlawful by reason of any rule of law that had so ceased to have effect or been modified whilst the provisions were in force. 1 E.g. Trevor v Whitworth (1887) 12 App Cas slaugh ter and may

3 However, the savings provision does not automatically mean that any transaction which previously might have been whitewashed is now lawful. There are a number of legal considerations relevant to such transactions outside of the statutory financial assistance rules which will continue to require attention. Residual legal issues The statutory restrictions on financial assistance grew out of the common law rules on maintenance of capital and were enacted in order to restrict one method by means of which companies might put assets out of reach of creditors. They are part of a larger body of English company law which exists for the purpose of protecting a company s capital for the benefit of its creditors. Other rules with similar intentions include those on distributions other than out of distributable profits 2 and the conditions for reduction of capital 3. Further, all corporate transactions must be in the best interests of the company, and a consideration of the company s solvency will always be relevant. These considerations remain unaffected by the partial repeal of ss , a point which is made by the BERR in the explanatory notes to the Fifth Commencement Order. The impact of these other rules on any acquisition financing structure involving financial assistance by private companies will continue to require consideration after 1st October. Reductions of capital Any transaction with or for the benefit of shareholders which has the effect of reducing a company s accounting net assets will constitute a reduction of capital, which will be unlawful unless the company has distributable reserves sufficient to cover the amount of the reduction or the statutory requirements for effecting such a reduction are complied with. The directors of the company in question will have to direct their minds to whether the assistance has an impact on the company s net assets, and if so, whether sufficient distributable reserves are available to cover any shortfall. The board minutes relating to the assisting company s entry into the transaction should contain an indication that the directors have applied their minds to this issue and document their conclusions. Whether such a transaction has an impact on the relevant company s accounting net asset position will depend on the circumstances. The provision of security to lenders in support of a holding company s financing obligations or the advance of an intra-group loan for the purposes of enabling acquisition debt service should not have an immediate negative impact on the target group company s net asset position unless at the time such assistance is provided, a provision is required in the books of the company. The latter is only likely to be required in the event that it is likely that the security will be enforced or there is no reasonable prospect of the loan being repaid. 2 See CA06 Part See CA85 ss and CA06 Part 17, Chapter 10, expected to come into force in October 2009, save for the provisions enabling private companies to reduce their capital without court sanction based on a solvency statement, in force on 1st October slaugh ter and may

4 Unlawful distributions A distribution to shareholders must comply with the restrictions contained in Part 23 CA06. A transfer of assets to or for the benefit of shareholders may constitute a distribution if it is gratuitous or if it involves a transfer at less than fair market value (or book value, if the company has distributable reserves 4 ). Again, the directors should consider, as a matter of due diligence, whether any element of the company s involvement in the proposed transaction might involve a distribution. Corporate benefit and directors duties The directors of the company entering into any transaction will need to consider their duties and the corporate benefit to the company of entry into the transaction. Directors of assisting companies must therefore ensure that they are satisfied that any proposed transaction is in the best interests or likely to promote the success of the company (see s172 CA06). Shareholder approval (a special resolution) is also usually obtained in relation to the transaction in order to avoid the possibility of the transaction being challenged by a shareholder on the basis that the directors have breached their duties. Shareholder approval, however, will not eliminate the risk of challenge in the event that the company is insolvent or is threatened by insolvency. Solvency If the company concerned is insolvent or at risk of becoming insolvent (or if the transaction causes the company to become insolvent), the transaction may be at risk of challenge on the basis of the directors having breached their duties or as a transaction at an undervalue under s238 of the Insolvency Act An analysis of each relevant target company s solvency will be part of the due diligence conducted by lenders when assessing the creditworthiness of the transaction. A consideration of the company s solvency position (and that of the borrower) will also be part of the directors analysis in determining whether the transaction is in the best interests of the company. This will involve looking at the company s net asset position both before and after entry in to the transaction and the sufficiency of its cashflows going forward. Auditor involvement Any consideration of the residual legal issues outlined above involves an analysis of the solvency position of the company and a consideration of the impact (if any) of the transaction on the net asset position of the company. The company s future cashflows will also need to be taken into account in determining its future solvency. In other words, the issues to be considered by the directors are very similar to the issues to be taken into account and confirmed as part of the whitewash procedure. In terms of documentation, even in the absence of the whitewash, board and shareholder resolutions plus due diligence and legal advice will be required in order to determine whether the proposed 4 S845 CA06. 4 slaugh ter and may

5 transaction is lawful. However, the statutory filings, declarations and perhaps most notably, auditors reports will no longer be required by law so the documentary and procedural burden should be much less. Is there any reason why input from auditors should be sought into this process going forward? Generally speaking, there is no reason why creditors or directors should need input from auditors on these issues in an acquisition financing transaction to any greater extent than needed for other types of secured or guaranteed financing. An auditors report is not usually required where a subsidiary guarantees its parent company s working capital facilities, for example. Accepted wisdom is that no whitewash is required in respect of upstream support for leveraged acquisition debt when refinanced for the second time. Both examples illustrate that the whitewash documentation, and in particular, the requirement for input from auditors, is a legal requirement for the validity of a credit support package rather than a necessity from the directors or lenders perspective. There may, however, be exceptional circumstances where lenders and/or directors may feel that they require the auditors to confirm the company s net asset or cashflow position (perhaps if the lawfulness or otherwise of the transaction appears to be on the borderline, for example as a result of solvency concerns), but we expect that to be the case only in rare circumstances. The future The 1st October repeal is welcome but it is only partial. Sections of the CA85 will continue to restrict financial assistance by and in relation to acquisitions of public companies, and this will continue to be the case when sections of the CA06 come into force (which is expected to be in October 2009). The financial assistance rules will still therefore need to be considered in the context of public to private transactions for the foreseeable future (i.e. public companies will still have to be taken private prior to any financial assistance being given). The restrictions on financial assistance by or in relation to shares in public companies are rooted in European law and as such, must remain in the CA06 for the time being. The Second Company Law Directive (77/91/EEC) was amended in 2006 by Directive 2006/68/EEC, which amongst other things, permits member states, optionally, to relax further the financial assistance rules as applicable to public companies. In its February 2007 consultation paper on the implementation of the CA06, the BERR indicated that in the light of the ongoing EU feasibility study into alternatives to the capital maintenance regime 5, it is not currently proposed to take any further action based on the amending directive. It is however, possible that the financial assistance rules may be further reformed in the future, and the government has expressly reserved the power to do so by secondary legislation in s737 of the CA06. 5 KPMG Germany was tasked by the EU with conducting the feasibility study: its report was published in January 2008 and is currently being evaluated. Please note that this Financing Briefing is published to provide general information and not as legal advice. For further information please contact your usual adviser at Slaughter and May.