Article 23(1) EU Directive 2006/68/EC (of September 6, 2006) enables EU member States to implement new provisions on financial assistance. Each EU member State has an option whether to maintain the existing general ban on financial assistance or to introduce the new EU rules. Those member States accepting the new regime should adopt the new rules in the next few years.
Based on the new rules, there should no longer exist a general ban on financial assistance, but rather financial assistance may be allowed if certain conditions are met (such as transactions at "fair market conditions," shareholders’ approval is obtained, etc.).
Under the previously existing general ban on financial assistance, instead, a company could not provide "financial assistance" for the purchase of its own shares. In addition, in an acquisition financed also with debt, a target could have been recognized to provide financial assistance to purchaser even when after the merger of purchaser and target, the target’s assets became security of the loan of purchaser to fund the acquisition. This was the case, for example, in Italy)
The regulation on financial assistance is aimed at protecting the target’s shareholders’ creditors and third parties, so as to avoid that the interests of the shareholders, unsecured creditors of the target may be jeopardized.
The definition of "financial assistance" is rather vague and, in different EU member states, it has been interpreted broadly.
In certain cases, for example in Italy, LBO transactions have been challenged on the basis of being in breach of financial assistance restrictions. Although such cases have been few and far apart, they did at the time generate much press attention and, in turn, raised the concern of operators, in particular private equity investors, which typically favor investments effected through debt/equity leverage.
Financial Assistance and LBOs
Under the existing regulations on financial assistance in Italy, a company may not provide "financial assistance" for the purchase of its own shares and in addition, a company (the target) is recognized to provide financial assistance, if after the merger of purchaser and target, the target’s assets become security of the loan of purchaser to fund the acquisition.
A new set of corporate rules is effective in Italy since January 1, 2004 and these rules include new rules on merger LBOs. These rules apply to transactions where purchaser has financed the acquisition of target also through debt and no specific guarantees on the assets of target are available. This is a significant improvement since these new Italian rules should be deemed to offer new clear guidance on how to structure and document LBO transactions. Purchasers and targets may try to reduce the risks of an LBO transaction being challenged by complying with the new requirements of the Italian law.
Disclosure Requirements and Simplified Procedure
Under the new Italian rules, in case of merger LBOs certain requirements must be satisfied:
- The Boards of Directors of both purchaser and target must indicate on merger documents: (i) Information regarding the funding; (ii) Sources of the funding; and (iii) reasons and objectives of the transaction;
- An independent expert must verify the reasonableness of the information on the financial resources;
- if either purchaser or target is required by law to appoint auditors to certify their financial statements, then a report by the auditors is mandatory.
And Non-Merger LBOs?
As we said above, the new rules apply only to certain types of merger LBOs. The new rules do not specify how other LBOs (with or without a merger) should be treated. Probably Courts will have a role in the future on this issue and we should look carefully to these developments. Courts might also extend the existing rules to other types of LBOs.
In the meanwhile, the new rules might be followed as guidance for LBOs which do not fall strictly into the regulation of merger LBOs described above so to take advantage of the new favorable approach towards merger LBOs.
In this case the parties can show their "good faith" and reduce the chances of the transaction being successfully challenged.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.