20.4 Financial Assistance 557In practice, it can be particularly difficult to define what financial assistance
means and apply financial assistance rules to chain transactions.
Prohibited forms of financial assistance under the Second Directive. The Sec-
ond Directive restricts the provision of various forms of financial assistance.
Member States are permitted to adopt more stringent rules.
According to the wording of the Directive, the main rule is that a company may
not advance funds, make loans, or provide security, with a view to the acquisition
of its shares by a third party.^26
It is clear that the restrictions will not apply unless the company is the target
(see above).
However, two fundamental problems remain. Do the restrictions apply when
the third party (the acquirer) is not the direct recipient of financial assistance?
When does the company “advance funds”, “make loans”, or “provide security”
(financial assistance).
The wording of the Directive is very broad. It could ban many leveraged buy-
outs just because the assets of the acquired company will be used as security in the
economic sense.
The wording of the Second Directive covers: all forms of advancing funds,
making loans, or providing security;^27 transactions before the takeover and after
the takeover;^28 and even the merger of the acquisition vehicle and the target com-
pany after the completion of the takeover (for exceptions, see below).
Furthermore, the broad wording of the Directive covers circular transactions
and chains of transactions where the target company subscribes for shares in,
makes loans to, or advances funds otherwise to another legal entity for the purpose
that the latter advances funds to a third party that will buy or subscribe for the tar-
get’s shares (for chain transactions, see below).
Interestingly, the original rationale for the prohibition of financial assistance in England
was the prevention of “asset-stripping” takeovers or leveraged buy-outs.^29
(^26) Article 23(1) of Directive 77/91/EEC (Second Company Law Directive).
(^27) For English law, the starting point is Charterhouse Investment Trust v Tempest Diesels
Ltd 1986 BCLC 1 in which Hoffmann J said: “There is no definition of giving financial
assistance in the section [that preceded section 151 of the Companies Act 1985], al-
though some examples are given. The words have no technical meaning and their frame
of reference is ... the language of ordinary commerce. One must examine the commer-
cial realities of the transaction ...”
(^28) For German law, see § 71a AktG and § 30 GmbHG. See also Riegger B, Kapitalgesell-
schaftsrechtliche Grenzen der Finanzierung von Unternehmensübernahmen durch Fi-
nanzinvestoren, ZGR 2008 p 237; Weitnauer W, Die Acquisitionsfinanzierung auf dem
Prüfstand der Kapitalerhaltungsregeln, ZIP 2005 p 791. For English law, see section
678(1) of the Companies Act 2008: “... before or at the same time as the acquisition
takes place”.
(^29) See, for example, Armour J, Share Capital and Creditor Protection: Efficient Rules for a
Modern Company Law, Modern L R 63 (2000) p 368; Enriques L, Macey JR, Creditors
Versus Capital Formation: The Case Against the European Legal Capital Rules, Cornell
L R 86 (2001) p 1181.