Credit Crunch enters the Lexicon
Cambridge Enterprise Conference

So farewell then Financial Assistance..............

We completed a management buyout last week, and as part of it we had to work through - with the lawyers - an arcane process called a Financial Assistance whitewash.    Company lawhas prohibited companies from giving assistance for  the purchase of their own shares.  Most commonly this would arise in a management buyout where the bank funding the transaction would lend to the Newco formed to effect the transaction - but of course the security for the lending was provided by the target.     The granting of the security being financial assistance.  It could also arise in plain vanilla M&A deals if for example fees were being paid out of the target.  

Some lawyers saw financial assistance lurking behind every bush - much to the frustration of the other advisers.      We closed a deal earlier this year involving a number of companies, where we had to whitewash the lot,  as the buyers lawyers saw financial assistance everywhere. Ca2006

So Financial Assistance was prohibited, but private companies could go ahead anyway provided they went through whitewash - essentially a declaration of solvency for the next 12 months, supported by an audit opinion.    This provided extra work for the legal and accounting professions, and I guess was supposed to protect the creditors.

The 2006 Companies Act provided for its abolition, and it is finally about to happen from 1 October.    So the whitewash will become a thing of the past,  deal costs in MBOs should decrease marginally without this extra step, and a  fewer trees will be felled to produce the legal documentation.

It remains to be seen if the banks will insist on some similar procedure to be incorporated into their due diligence processes as they have probably taken some comfort from it to date.   But there are other provisions to protect creditors and regulate directorbehaviour.  And it remains unlawful for public companies to give financial assistance. 

So farewell then financial assistance................

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