558 20 Acquisition Finance
Financial assistance not prohibited under the Second Directive. Although the
main rule is broad because of the open definition of financial assistance and the
recipient of financial assistance, the prohibition of financial assistance has not
hindered corporate takeovers in practice.
First, the Second Company Law Directive only applies to public limited-
liability companies. Whether the prohibition applies to private limited-liability
companies depends on the governing law.
In England, sections 155–158 of the Companies Act 1985 dealt with the “whitewash proce-
dure” for private companies. Those provisions have been repealed. Private companies
ceased to be subject to the financial assistance regime under the Companies Act 2006.^30 In
Germany, the rules depend on the company form. The AktG prohibits financial assis-
tance.^31 Where the company is a GmbH, the general prohibition of distribution of assets to
shareholders applies. This means that the distributable assets of the company can be used to
finance the acquisition.^32
Second, the prohibition only applies to the purchase of shares. It does not restrict
asset deals.
Third, the provisions of the Second Directive on financial assistance do not
prohibit permitted distributions to shareholders regulated by other provisions of
EU company law (see below).
Fourth, the Directive does not prevent mergers. Where shares of the target are
bought by an acquisition vehicle that will be merged with the target after the suc-
cessful completion of the takeover, the debts of the acquisition vehicle will be re-
paid from the assets of the target company.
In Anglo Petroleum Ltd v TFB (Mortgages) Ltd,^33 it was accepted that the use of money by
a company to repay its existing indebtedness would not normally fall within the concept of
the company giving financial assistance to another person.
Arguably, Article 23(1) of the Second Directive prohibits neither mergers where
the target company is the surviving company (downstream merger, reverse take-
over) nor mergers where the acquisition vehicle is the surviving company (up-
stream merger). This is because the Merger Directives permit both kinds of merg-
ers. The provision on financial assistance should be construed and applied strictly
so as not to frustrate the application of the rules applicable to mergers. On the
other hand, downstream mergers may be constrained by Article 15(1) of the Sec-
ond Directive which restricts the distribution of funds to shareholders.
(^30) For the scope of the restrictions, see sections 677–681 of the Companies Act 2006; Proc-
tor C, Financial Assistance: New Proposals and New Perspectives, Comp Lawyer 28
(2007) pp 5–7. For the older rules, see also Cabrelli D, In Dire Need of Assistance? Sec-
tions 151–158 of the Companies Act 1985 revisited, JBL (2002) pp 272–291.
(^31) See § 71a(2) AktG. See also § 57(1) AktG on the distribution of assets to shareholders.
(^32) §§ 30 and 31 GmbHG.
(^33) Anglo Petroleum Ltd v TFB (Mortgages) Ltd [2007] EWCA Civ 456.