Financial assistance in

law Law is a set of rules that are created and are enforceable by social or governmental institutions to regulate behavior, with its precise definition a matter of longstanding debate. It has been variously described as a science and as the ar ...

refers to assistance given by a

company A company, abbreviated as co., is a Legal personality, legal entity representing an association of legal people, whether Natural person, natural, Juridical person, juridical or a mixture of both, with a specific objective. Company members ...

for the purchase of its own

shares In financial markets, a share (sometimes referred to as stock or equity) is a unit of equity ownership in the capital stock of a corporation. It can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Sha ...

or the shares of its

holding companies A holding company is a company whose primary business is holding a controlling interest in the securities of other companies. A holding company usually does not produce goods or services itself. Its purpose is to own stock of other companies ...

. In many jurisdictions such assistance is prohibited or restricted by law. For example, all EU member states are required to restrict financial assistance by public companies up to the limit of the company's distributable reserves, although some members go further, for example,

Belgium Belgium, officially the Kingdom of Belgium, is a country in Northwestern Europe. Situated in a coastal lowland region known as the Low Countries, it is bordered by the Netherlands to the north, Germany to the east, Luxembourg to the southeas ...

Bulgaria Bulgaria, officially the Republic of Bulgaria, is a country in Southeast Europe. It is situated on the eastern portion of the Balkans directly south of the Danube river and west of the Black Sea. Bulgaria is bordered by Greece and Turkey t ...

France France, officially the French Republic, is a country located primarily in Western Europe. Overseas France, Its overseas regions and territories include French Guiana in South America, Saint Pierre and Miquelon in the Atlantic Ocean#North Atlan ...

, and

The Netherlands , Terminology of the Low Countries, informally Holland, is a country in Northwestern Europe, with Caribbean Netherlands, overseas territories in the Caribbean. It is the largest of the four constituent countries of the Kingdom of the Nether ...

restrict financial assistance by all companies. Where such assistance is given in breach of applicable law it will render the relevant transaction void and may constitute a

criminal offence In ordinary language, a crime is an unlawful act punishable by a state or other authority. The term ''crime'' does not, in modern criminal law, have any simple and universally accepted definition,Farmer, Lindsay: "Crime, definitions of", in Ca ...

Outline

The assistance can be of a variety of different types. The most common type of assistance is a financial

guarantee A guarantee is a form of transaction in which one person, to obtain some trust, confidence or credit for another, agrees to be answerable for them. It may also designate a treaty through which claims, rights or possessions are secured. It is to ...

for a loan and/or third party

security Security is protection from, or resilience against, potential harm (or other unwanted coercion). Beneficiaries (technically referents) of security may be persons and social groups, objects and institutions, ecosystems, or any other entity or ...

to allow a borrower to borrow money to buy shares which is routinely given (to the extent legally possible) after a

leveraged buyout A leveraged buyout (LBO) is the acquisition of a company using a significant proportion of borrowed money (Leverage (finance), leverage) to fund the acquisition with the remainder of the purchase price funded with private equity. The assets of t ...

in support of the new owner's acquisition debt. It would also normally include a gift or loan from the company or any other act which reduces the net assets of the company to a material extent where this is done for the purpose of the acquisition of shares in itself or its parent. The rationale for such laws is purely economic; it is based upon the premise that if a company supports the purchase of its own shares, it causes a ''de facto'' diminution in the company's value in the hands of other shareholders (who are assumed to continue their ownership following the transaction). Conflicting concerns have also been expressed, namely that such financial assistance artificially inflates a share's price above its market level. Although the authorities are unclear, it seems that financial assistance may also have been a crime under the English

common law Common law (also known as judicial precedent, judge-made law, or case law) is the body of law primarily developed through judicial decisions rather than statutes. Although common law may incorporate certain statutes, it is largely based on prece ...

prior to its codification by statute. If that is correct, then laws against financial assistance may be much more prevalent than is normally assumed, and would also apply in many of the English speaking

Commonwealth countries The Commonwealth of Nations, often referred to as the British Commonwealth or simply the Commonwealth, is an international association of 56 member states, the vast majority of which are former territories of the British Empire from which i ...

. Laws against financial assistance are sometimes controversial because of the difficulties they can cause in the context of a

, and some jurisdictions which have enacted them have later repealed them. Some jurisdictions provide for so-called "whitewash" procedures,See, for example,

Companies Act 1985 The Companies Act 1985 (c. 6) is an Act of the Parliament of the United Kingdom of Great Britain and Northern Ireland, enacted in 1985, which enabled companies to be formed by registration, and set out the responsibilities of companies, their ...

ss155-158 for the procedure in the United Kingdom whereby the shareholders can authorise transactions that would otherwise be void for financial assistance. Most jurisdictions which prohibit financial assistance permit the company to purchase its own shares and hold them in

treasury A treasury is either *A government department related to finance and taxation, a finance ministry; in a business context, corporate treasury. *A place or location where treasure, such as currency or precious items are kept. These can be ...

, and the company can then issue them again on terms that would have been prohibited if they had sought to provide financial assistance in an equivalent manner for a third party purchase.

Notes

{{Reflist, 2 Corporate law Debt Assistance