Company A acquired the shares of Company B, and in order to fund the acquisition Company B has provided its assets as a guarantee for the loan taken out by Company A to acquire the shares. What company law items need to be considered in relation to Section 82 and Section 239?
Section 82 of Companies Act 2014 deals with the provision of financial assistance for the acquisition of its own shares by subscription, purchase, exchange or otherwise. Section 82(2) CA 2014 states that it is unlawful (subject to Section 82(6)) for a company to give financial assistance whether directly or indirectly or by means of a loan or a guarantee for the purchase of its own shares (It applies to group companies also) other than where:
- the company’s principal purpose in giving the assistance is not to give it for the purpose of any such acquisition (Section 82(4)(b) CA 2014); or
- the giving of the assistance is only an incidental part of a large purpose (Section 82(4)(b) CA 2014).
- The summary approval process of Sections 202 and 203 of Companies Act 2014 have been complied with (Section 82(6)(a)).
Note this applies to not only loans but also guarantees.
In this case as Company B has given its assets as security for the loan taken out the acquire Company B’s shares by Company A, this is not permitted under Section 82(2) of CA 2014 unless a summary approval procedure is carried out in compliance with Section 202 and 203 of Companies Act 2014. (see related FAQ’s below for a details of how a summary approval procedure can be affected).
Transactions outside the scope of Section 82 as stated in Section 82(6):
- The payment of dividend or the making of distributions by it out of realised profits of the company;
- Discharge of liabilities;
- The purchase of own shares under Section 105 or 108 CA 2014 – share buyback/redemption route;
- Where lending is in the ordinary part of the business of the company;
- A loan given to an employee that is not a director to allow the purchase;
- The refinancing of a loan/guarantee which was previously approved by the summary approval procedure in Section 203 under of Section 60 of old Act;
- The payment of fees and expenses by the company for the expenses incurred in connection with the purchase of the shares;
- a LTD is not prevented from making or giving representations, warranties or indemnities to a person in connection with a purchase or subscription or a proposed purchase or subscription of shares by that person;
- expenses incurred by a LTD to ensure compliance by the company or its holding company with the Irish Takeover Panel Act 1997 and other legislation implementing the Takeover Bids Directive (2004/25/EC), are not prohibited.
- a private limited subsidiary of an offeree to paying the expenses incurred by an offeror within the terms of the Takeover Panel Act and as permitted by the Irish Takeover Panel.
A transaction entered into other than by the SAP 203 process is seen as a category 2 offence. The conviction on indictment of a category 2 offence can result in a term of imprisonment of up to five years and/or a €50,000 fine while a summary prosecution for a category 2 offence will result in a Class A fine of €5,000 and/or a term of imprisonment of up to twelve months
- Section 239 CA 2014
In addition Section 239 CA 2014 needs to be considered where a loan or guarantee is to be provided by Company for the benefit of the directors or their connected persons. Section 239 & 240 of CA 2014 does not permit a loan/quasi-loan/ guarantee to be entered into which is for the benefit of the directors and/or their connected persons unless it is less than 10% of net assets per the last financial statements laid before the last AGM of the company (or if it is a new company of the share capital) with certain exceptions.
for further details.
In this situation assuming the guarantee represents 10% of the relevant net assets, then it is not permitted unless a summary approval procedure under Section 202 and 203 is affected as is stated in Section 242 of CA 2014.
In this situation assuming the 10% rule is breached, then in order to permit this guarantee to be given, the director must either:
carry out a summary approval procedure under Section 203 to permit this guarantee; or
- create a parent-subsidiary relationship at the time/just prior to when the guarantee is given Where a parent-subsidiary relationship exists i.e. a group as defined in Section 7 and 8 of CA 2014, the restriction in Section 239 CA 2014 as stated in Section 243 of CA 2014. One way to achieve this is for the company to put in a golden share prior to the acquisition/at the date of acquisition of Company B’s shares (this golden share will give the holder of the shares the right to control the composition of the board and to appoint and remove directors) and then subsequently provide the guarantee. If this is done then no Summary approval procedure is required.