Ireland Financial Assistance IBA Corporate and M&A Law Committee 2013

Transcription

1 Ireland Financial Assistance IBA Corporate and M&A Law Committee 2013 Contact Maura McLaughlin (Partner) Arthur Cox

2 Contents Page INTRODUCTION 2 SCOPE OF THE PROHIBITION 2 EXCEPTIONS TO THE PROHIBITION 2 WHITEWASH PROCEDURE 3 CONSEQUENCES OF PROVIDING FINANCIAL ASSISTANCE IN BREACH OF IRISH LAW 4 LEGISLATIVE REFORM 5 Page 1

3 INTRODUCTION This note provides a guide to the prohibition in Irish law against a company providing financial assistance for the purchase of its own shares. It begins by setting out the scope of the prohibition before providing a list of transactions that are not prohibited. It explains the whitewash procedure that can be used to validate financial assistance given by a private company. Finally, it sets out the consequences of providing financial assistance in breach of the prohibition. SCOPE OF THE PROHIBITION Section 60 of the Companies Act 1963 prohibits any Irish company, public or private, from directly or indirectly providing financial assistance for the purpose of, or in connection with, a purchase or subscription made, or to be made, for shares in itself or shares in its holding company. Section 60 expressly provides that financial assistance may occur through the giving of a loan or a guarantee or through the giving of security. The prohibition is not confined to these forms of assistance. For example, the purchase by the company of an asset from the intended purchaser of shares at an inflated price will be classed as financial assistance (Eccles Hall Limited v Bank of Nova Scotia 3 February 1995 (HC)). A severance payment made by a company to one (1) of its former Directors where this severance payment is in fact consideration for the transfer of that Director s shares to another member of the company will also be seen as financial assistance (Re Greenore Trading [1980] ILRM 94). As the term "financial assistance" is not defined by legislation it is difficult to come up with a comprehensive list of the types of transactions that are covered. In considering whether a transaction is prohibited, one should look at the commercial realities of the situation and whether the only or main purpose behind the transaction is to help to purchaser to buy the shares (CH Ireland Inc (in liquidation) v Credit Suisse Canada [1999] 4 IR 542). EXCEPTIONS TO THE PROHIBITION The following transactions are excluded from the definition of financial assistance for both public limited companies ( plc ) and private companies: (i) (ii) (iii) the payment of a dividend or the distribution of profits available for distribution; the discharge of a liability lawfully incurred by the company; the provision of finance or of security in connection with the refinancing of an existing loan or of existing security which had previously been validated in accordance with the whitewash procedure explained at paragraph four below. Although the point is open to debate, it appears that this exception does not cover the giving of a guarantee in connection with the refinancing of a transaction that has previously been whitewashed; Page 2

4 (iv) (v) (vi) (vii) the lending of money by a company in the ordinary course of its business provided that, in the case of a plc, either the company s net assets are not reduced or the financial assistance is provided out of profits available for dividend; certain transactions involving the acquisition of shares by company employees provided that, in the case of a plc, either the company s net assets are not reduced or the financial assistance is provided out of profits available for dividend; the giving of representations, warranties or indemnities to a person who has purchased or subscribed for shares in the company or its holding company; the payment of fees and expenses of the advisers of any subscriber for shares in the company or its holding company; (viii) the incurring of expenses relating to the publication of a prospectus, or to the admission of shares to a regulated market or other securities market, or to the continuance of a facility afforded for the trading of such shares on a regulated market or other securities market; (ix) (x) (xi) the incurring of expenses to ensure compliance by the company or its holding company with the Irish Takeover Panel Act 1997 or the European Communities (Takeover Bids (Directive 2004/25/EC)) Regulations 2006; the reimbursement of expenses of an offeror by an offeree company or by the subsidiary of an offeree company pursuant to an agreement approved by, or on terms approved by, the Irish Takeover Panel; and the payment of professional fees and commission to intermediaries in connection with the allotment of shares. The commission paid must not exceed ten per cent (10%) of the money received from the allotment. WHITEWASH PROCEDURE Section 60 provides for a whitewash procedure that can be used to validate the giving of financial assistance. This procedure is not available to plcs or to the subsidiaries of such companies where the objective is to provide financial assistance for the purchase of shares in the parent plc. Neither is it available to a private company if a person subject to a restriction order under section 150 of the Companies Act 1990 acts as Director or Secretary of that company or is concerned in its formation or promotion. The whitewash procedure cannot be used to retrospectively validate a transaction that has already been carried out. The whitewash procedure involves the following steps: - Step 1: Statutory Declaration of Directors The Directors must hold a meeting where all the Directors of the company or, if there are more than two (2) Directors, a majority of them make a statutory declaration stating: (a) the form of the assistance; (b) the persons to whom assistance is to be given; Page 3

5 (c) the purpose for which the company intends those persons to use the assistance; and (d) that the declarants have made a full inquiry into the affairs of the company and that they have formed the opinion that the company, having carried out the transaction, will be able to pay its debts in full as they fall due. Any Director who makes this declaration without having reasonable grounds for believing that the company will be able to pay its debts as they fall due may be liable to criminal penalties, including a fine and imprisonment. If the company is wound up within twelve (12) months after the making of the declaration and it is unable to pay its debts it will be presumed until the contrary is shown that the Director did not have reasonable grounds for his belief. - Step 2: Special Resolution of the Members The members must pass a special resolution authorising the transaction within twenty four (24) days of the meeting of the Directors. If the special resolution is to be passed at an Extraordinary General Meeting of the members the statutory declaration of the Directors must be included with the notice for that meeting. Alternatively the Articles of Association of the company may allow the members to pass a written resolution without holding a General Meeting. This written resolution must be signed by all the members entitled to attend and vote at such a meeting. If this written resolution procedure is adopted, the statutory declaration of the Directors must be attached to the written resolution. If all of the members of the company do not vote in favour of the resolution, the company must wait thirty (30) days to allow time for any dissenting member or any member that did not vote to apply to court to challenge the transaction. This application must be made within twenty eight (28) days of the passing of the special resolution. The applicants must hold at least ten per cent (10%) of the nominal value of the company's issued share capital, or of any class of the company's issued share capital. - Step 3: Filing It is essential that a copy of the statutory declaration of the Directors be delivered to the Registrar of Companies within twenty one (21) days of the date on which the financial assistance is given. A copy of the special resolution of the members should also be filed with the Registrar of Companies within fifteen (15) days of the resolution being passed. CONSEQUENCES OF PROVIDING FINANCIAL ASSISTANCE IN BREACH OF IRISH LAW The following are potential consequences where a company provides financial assistance in breach of Section 60: (i) Criminal Liability for the Company Directors and the Company Secretary Any Director or Company Secretary who is in default may be liable to criminal penalties, including a fine and imprisonment. Page 4

6 (ii) Civil Liability for Company Directors The company may have a civil law claim against the Directors where funds have been misapplied in breach of section 60 (Selangor United Rubber Estates Ltd v Cradock (No. 3) [1986] 1 WLR 1555). (iii) Effect on the Validity of the Transaction Any transaction in breach of section 60 is voidable at the instance of the company against any person (whether a party to the transaction or not) with notice of the facts that constitute the breach. As the party asserting that a breach took place, the company must show that the person against whom relief is sought had actual notice of the breach before or at the time that the transaction took place (Re Cognotec Limited 30 July 2010 (HC)). (iv) Remedies for Aggrieved Members The transaction may be held by a court to be oppressive to and in disregard of the interests of some of the members of the company under section 205 of the Companies Act These members may obtain an order requiring the offending party to purchase their shares at a price that compensates them for funds unlawfully removed from the company in breach of the prohibition (Re Greenore Trading [1980] ILRM 94). LEGISLATIVE REFORM It is intended that a new consolidated Companies Act will be introduced in Ireland in the near future. A number of changes to the financial assistance regime have been proposed as part of this consolidation including: (i) a change in the definition of financial assistance so that, if giving assistance for the purpose of acquiring shares is only an incidental part of some larger purpose of the company and the assistance is given in good faith in the interests of the company, the prohibition will not apply; (ii) a plc may use the whitewash procedure to validate giving financial assistance provided certain conditions, including that the transaction is on an arm s length commercial basis, are met; and (iii) some changes to the technical requirements of the whitewash procedure including, for example, a requirement that the statutory declaration of the Directors state the nature of the benefit accruing to the company from entering into the transaction. It will be necessary to wait until the final text of the new Act has been agreed before drawing any definitive conclusions on the future state of the law in this area. Page 5