The Prohibition on a Company Financing the Purchase of its own Shares

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The prohibition on a company offering financial assistance for the acquisition of its own shares represents one of the easiest ways in which a company can inadvertently breach the rules and regulations provided for in the Companies Act 2014. Careful consideration of this rule is required as a company acting in breach of the rule exposes itself to a range of both criminal and civil consequences.

The Rule

The rule is provided for in section 82 of the Companies Act 2014 and prohibits a company from directly or indirectly giving any financial assistance for the purpose of acquiring any shares in the company. Where a company is a subsidiary company this rule applies equally to parent companies. In practice this rule operates so as to cover almost any form of loan, guarantee or the provision of security.

An example of this rule in operation can be seen in the prosecution of two former Directors of Anglo Irish Bank where the directors approached ten of the bank’s top customers and offered them loans to purchase shares in the bank so as to stabilise the bank’s share price.

The Summary Approval Procedure

A transaction which would otherwise fall foul of the rule can be validated by the Summary Approval Procedure (SAP) which replaces the older validation process sometimes referred to as a ‘whitewash’. The SAP process requires a meeting of the board of directors, resulting in the directors making a declaration as to the nature, circumstances and purpose of the transaction as well as the solvency of the company. This declaration is then attached to a notice for a shareholder meeting at which the transaction is approved of by the passing of a special resolution (75% or more in favor) of the members which is then delivered to the Registrar of Companies.

Distributable Profits

In addition to the SAP the Companies Act provides for a number of exceptions to the rule. Section 105 allows a company to acquire its own shares by purchasing them out of the distributable profits of the company. This action must be authorised by either the constitution of the company, the rights attaching to the shares in question or by a special resolution of the company. Once the company has acquired it’s own shares it may cancel them or hold them as treasury shares. An important distinction must be drawn between a company acquiring it’s own shares, which is an important aspect of capital maintenance and is regulated by the Companies act, and a company offering financial assistance to another for the acquisition of it’s own shares as prohibited by the rule in section 82.

Other Exceptions

The Act provides for certain exceptions in the cases of:

  • Discharging lawfully incurred debts or refinancing.
  • Lending money as part of the ordinary business of the company (not applicable in the prosecution of the Anglo Irish Bank Directors as the primary purpose of the transaction was to stabalise the share price).
  • Representations, warranties or indemnities.
  • The payment of fees, commissions or expenses.
  • Where the primary purpose of the transaction is not the purchase of shares, for example where it is incidental to some larger purpose of the company and is done in good faith.

Criminal and Civil Consequences

Where a company contravenes this rule the company and every officer of the company who acted in contravention will be guilty of a category 2 offence which can result in up to five years imprisonment. For example, the Directors of Anglo Irish Bank were sentenced to 240 hours of community service. This light sentence was justified on the basis that the financial regulator had essentially given the “green light” to the transaction.

A Director who makes a declaration as to the solvency of the company for the purposes of engaging the in SAP process without having reasonable grounds for the making of the declaration exposes himself to personal liability for any and all of the debts of the company under section 210 (1) of the Act in addition to the usual rules for reckless trading.

Where a transaction is entered into by a person who has notice of the fact that they have received the financial assistance for the purpose of acquiring shares in the company the company can seek to void the transaction. This may be of particular relevance if a company goes into liquidation, the liquidator (on behalf of the company) could seek to set aside the transaction so as to maximise the assets of the company.

For further information concerning Company Financing please contact:

John C. O’Connor
Partner
O’Connor Solicitors
8 Clare Street
Dublin 2
Tel: 6764488
E: john.oconnor@oclegal.ie