Financial Assistance – Out with the old, in with the new
One of the most widely debated issues under the Companies Act, 1973 (Old Act), was the issue of the provision by a company of financial assistance in terms of section 38. In essence, section 38 provided for a general prohibition on a company from granting financial assistance, whether by means of a loan, guarantee, the provision of security or otherwise, in connection with the acquisition of shares of that company, or of its holding company.
This absolute prohibition was however tempered by the proviso that a company could in fact provide such financial assistance as contemplated in section 38 if the board of directors of the company was satisfied, in addition to the passing of a special resolution, that subsequent to the granting of any such financial assistance, (i) the consolidated assets of the company, fairly valued, will be more than its consolidated liabilities; and (ii) for the duration of the transaction, the company will be able to pay its debts as they become due in the ordinary course of the company's business.
Section 38 often found application in preference share funding transactions where a company would be required, by the preference share holder, to guarantee the issuer's obligations to the preference share holder to redeem the preference shares under the preference share subscription agreement.
Section 44 of the Companies Act, 2008 (New Act) however introduces a new regime in terms of which it is permissible for a company, unless its memorandum of incorporation provides otherwise, to grant financial assistance for the subscription of any option or any securities, provided inter alia that the financial assistance is granted pursuant to a special resolution of the shareholders, adopted within the previous two years, approving such financial assistance either for the specific recipient, or generally for a category of potential recipients (and the recipient falls into that category), and the board is satisfied that (i) immediately after providing the financial assistance, the company would satisfy the solvency and liquidity test; and (ii) the terms under which the financial assistance is proposed to be given are fair and reasonable to the company. The board must also satisfy itself that any conditions or restrictions in the company’s memorandum of incorporation have been satisfied.
It is noteworthy that the application of section 44 of the New Act has vastly extended the scope of application of the provisions in respect of financial assistance than those contained in the Old Act in that the section now applies not only to shares, as was the case under the Old Act, but to options and "securities" (which are defined as any shares, debentures or other instruments, irrespective of their form or title, issued or authorised to be issued by a profit company), and to "related" and "inter-related" companies as opposed to the company itself and/or its holding company as was the case under the Old Act.
Accordingly, if a company were to provide financial assistance (whether in relation to itself, its holding company or any related or inter-related company) for the subscription of debentures issued by that company, for example, the provisions of section 44 would need to be adhered to. Lastly, section 44 of the New Act has not retained the exemption relating to share buybacks, which means that if a company reacquires its shares and provides financial assistance to any person in connection with the repurchase, the company will be required to comply with the provisions of section 44.
Given the vastly widened scope of section 44, it is likely that the provisions relating to funding transactions will be even more prevalent under the New Act than was the case under the Old Act, and financiers and finance lawyers will be required ensure that section 44 is properly complied with.
