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Provision Of Assistance For Purchase Of Shares - A New Regime From October 2008


By Mark Ellis

The provision of assistance by a company for the purchase of its shares has long been a difficult area of law. The practice was prohibited until the 1981 Companies Act came into force, when a ‘whitewash’ procedure was introduced which allowed private companies to give financial assistance for the purchase of their shares provided that a number of requirements were met.

The problem with the provision by a company of financial assistance (e.g. a loan) for the purchase of its shares has rested in the possibility that this can, when used without...

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...sufficient scruples, undermine the interests of other shareholders or creditors of the company.

The downside of the equation is that the prevention of such assistance sometimes makes it difficult for shares to be issued and this could be to the detriment of the company. For example, it might be considered to be in the company’s interests to offer shares to an executive as an incentive, but the person concerned might be unable to raise the money to buy them. Without setting up a rather complex (and sometimes expensive and/or inappropriate) mechanism, the company’s wish to have the executive obtain an interest in its shares might be frustrated. It could also prevent corporate acquisitions and investments from being structured as the parties would wish.

The whitewash procedure, where available, required a declaration of solvency from the company’s directors and effectively an audit of the company to be carried out. In many cases a large amount of additional paperwork was also required to enable the transaction in question to proceed.

Relief is now to hand in the form of the Companies Act 2006 which, from October 2008, will allow a private company to provide financial assistance for the purchase of... continued on page two >

 

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