An overview of financial assistance rules in Emerging Europe
October 2009 – An overview of financial assistance rules in the Czech Republic, Hungary, Serbia, Slovakia and Romania.
CZECH REPUBLIC
What is prohibited?
Granting advance payments, loans and credits or monetary means by a company for the purpose of acquiring its shares or its parent company’s shares, and granting security by such company for these purposes.
Does the prohibition apply to all types of companies?
No. The prohibition only applies to limited liability companies (společnost s ručením omezeným -''SRO”) and joint-stock companies (akciová společnost - “AS”).
Exceptions
SRO[1]: Unless the articles of association provide for other conditions[2], SROs may provide financial assistance under the following terms:
(a) the financial assistance is provided on an arm’s-length basis[3];
(b) the provision of financial assistance will not cause the immediate insolvency of the company;
(c) the company’s accounting records show no unpaid balance sheet loss;
(d) the executive director prepares a report[4] which contains the following:
(e) the provision of financial assistance is approved by the general meeting[5].
AS[6]: An AS may provide financial assistance under the following terms:
(a) the provision of financial assistance must be allowed under the company’s articles of association;
(b) the financial assistance is provided on an arm’s-length basis[7];
(c) the board of directors examines the financial eligibility of the person[8] to which financial assistance is provided;
(d) a prior consent is given for the provision of financial assistance by the general meeting[9] on the basis of the board of directors’ report referred to in (e) below;
(e) the board of directors prepares a report[10] which contains (i) a substantive justification for the provision of financial assistance, including the company’s benefits and risks arising therefrom, (ii) the conditions under which the financial assistance will be provided, including the price for which shares will be acquired by the recipient of financial assistance, (iii) conclusions on the examination of financial eligibility, and (iv) an explanation as to why the provision of financial assistance is in the company’s interests;
(f) if shares are acquired from a company providing financial assistance with the use of the same financial assistance then the price for which these shares are acquired is fair[10];
(g) the provision of financial assistance does not cause any decrease of the equity capital below the level of the registered capital plus funds which under the articles of association or the law cannot be distributed among the shareholders minus the amount of the registered capital which has not yet been paid up;
(h) the company creates a special reserve fund in the amount of the provided financial assistance[12]; and
(i) the provision of financial assistance does not cause the immediate insolvency of the company.
Under certain conditions the prohibition does not apply to transactions involving the acquisition of shares by employees of the company, and banks acting in their normal course of business.
Sanctions
Loans granted in breach of the prohibition are invalid and have to be repaid on grounds of unjust enrichment. Any security, guarantee, etc. granted in breach of the prohibition is invalid. Potential civil liability for damage and criminal liability of the directors of the company.
Market practice
The most common method of dealing with the prohibition of financial assistance is an upstream merger of the target and an acquisition vehicle.
Another method is structuring the acquisition facility agreement to include various financing tranches with different purposes (target to secure those tranches which purpose is other than its acquisition).
Other methods such as (a) downstream merger of the target and an acquisition vehicle, (b) distribution of dividends by the Czech target to the acquirer or (c) decrease of the capital of the Czech target are not commonly used.
Other
The financial assistance prohibition also applies to acquisition refinancing.
Non-Czech subsidiaries of a Czech target are not caught by this prohibition, but are subject to any financial assistance restrictions in the jurisdiction of such subsidiary.
Shares in the Czech target held by the acquirer prior to the transaction may be used for securing the acquisition facility without breaching the financial assistance prohibition.
HUNGARY
What is prohibited?
Making a loan, providing any security or guarantee, or performing any of its financial obligations before their due dates by a company, if the transactions are for the purpose of the subscription or acquisition by a third party of the company’s shares.
Does the prohibition apply to all types of companies?
No. The prohibition only applies to companies limited by shares (Zrt. / Nyrt.)
Exceptions
Under certain conditions the prohibition does not apply to transactions involving the acquisition of shares by employees of the company, and banks acting in their normal course of business.
Sanctions
Loans granted in breach of the prohibition are invalid and have to be repaid on grounds of unjustified enrichment. Any security, guarantee, etc. granted in breach of the prohibition is invalid. Potential civil law liability for damages and criminal law liability of the directors of the company.
Market practice
The most common method of dealing with the prohibition of financial assistance is the use of an acquisition vehicle and then an upstream merger of the target into the acquisition vehicle.
Another method is the distribution of dividends by the Hungarian target to the acquirer.
A third method is structuring the acquisition facility agreement to include various financing tranches with different purposes (target to secure those tranches which purpose is other than its acquisition).
A fourth method is that a company limited by shares may be transformed into a company limited by business quotas to which the financial assistance rules do not apply.
Other
The prohibition does not apply to both Hungarian and non-Hungarian subsidiaries of the target.
Shares in the Hungarian target held by the acquirer may be used to secure the acquisition facility without breaching the financial assistance prohibition.
ROMANIA
What is prohibited?
A company may not grant advance payments or loans or issue any guarantee when a third party subscribes for or acquires its own shares.
Does the prohibition apply to all types of companies?
No. The prohibition only applies to joint-stock companies and limited liability companies[13].
Exceptions
Under certain conditions the prohibition does not apply to transactions involving the acquisition of shares by employees of the company, and banks acting in their normal course of business.
Sanctions
No sanction expressly stipulated by law. The generally accepted view is that (a) loans granted in breach of the prohibition are invalid and have to be repaid on grounds of unjustified enrichment, and (b) any security, guarantee, etc. granted in breach of the prohibition is invalid.
Potential civil law liability for damages and criminal law liability of the directors of the company.
Market practice
The most common method of dealing with the financial assistance prohibition is the upstream merger of the target and an acquisition vehicle.
Another method is the distribution of dividends by the Romanian target to the acquirer.
A third method is to decrease the capital of the Romanian company resulting in a distribution of funds which would be used to repay a loan incurred in connection with the acquisition of the Romanian target’s shares.
A fourth method is structuring the acquisition facility agreement to include various financing tranches with different purposes (target to secure those tranches which purpose is other than its acquisition).
Other
It is arguable whether the following falls under the scope of the prohibition:
(a) an auction sale in which a due diligence report prepared and paid for by the company is included in the data room;
(b) taxes related to the acquisition paid by the company;
(c) material support (assets) provided by the company to the buyer or subscriber; or
(d) a takeover in which the target-company wishes to agree to pay the bidder a “break fee” in the event a competing bid is successful[14].
SLOVAKIA
What is prohibited?
Granting advance payments, loans and credits or monetary means by a company for the purpose of acquisition of its shares or its parent company’s shares, and granting security by such company for these purposes.
Does the prohibition apply to all types of companies?
No. The prohibition only applies to joint-stock companies (“akciová spoločnosť“).
Exceptions
Under certain conditions the prohibition does not apply to transactions involving the acquisition of shares by employees of the company, and banks acting in their normal course of business.
Sanctions
Loans granted in breach of the prohibition are invalid and have to be returned on grounds of unjust enrichment. Any security, guarantee, etc. granted in breach of the prohibition is invalid. Potential civil liability for damage and criminal liability of the directors of the company.
Market practice
The most common method of dealing with the prohibition of financial assistance is an upstream merger of the target and an acquisition vehicle.
Another method is the distribution of dividends by the Slovak target to the acquirer.
A third method is to decrease the capital of the Slovak target resulting in a distribution of funds which would be used to repay a loan incurred in connection with the acquisition of the Slovak target's shares.
A fourth method is structuring the acquisition facility agreement to include various financing tranches with different purposes (target to secure those tranches which purpose is other than its acquisition).
Other
The financial assistance prohibition also applies to acquisition refinancing.
Non-Slovak subsidiaries of a Slovak target are not caught by this prohibition but are subject to financial assistance restrictions in the jurisdiction of the subsidiary.
Shares in the Slovak target held by the acquirer prior to the transaction may be used for securing the acquisition facility without breaching the financial assistance prohibition.
SERBIA
What is prohibited?
Granting advance payments, loans and credits, or monetary means by a company for the purpose of direct or indirect acquisition of its shares or its parent company’s shares, and granting security by such company for these purposes.
Does the prohibition apply to all types of companies?
The prohibition applies to joint-stock companies and limited liability companies.
Exceptions
Under certain conditions the prohibition does not apply to transactions involving the acquisition of shares by employees of the company, and banks acting in their normal course of business.
Sanctions
Loans granted in breach of the prohibition are invalid and have to be returned on grounds of unjust enrichment. Any security, guarantee, etc. granted in breach of the prohibition is invalid. Potential civil liability for damages and criminal liability of the directors of the company.
Market practice
One method of dealing with the prohibition of financial assistance is an upstream merger of the target and an acquisition vehicle.
Another method is the distribution of dividends by the Serbian target to the acquirer.
A third method is to decrease the capital of the Serbian target resulting in a distribution of funds which would be used to repay a loan incurred in connection with the acquisition of the Serbian target's shares.
A fourth method is structuring the acquisition facility agreement to include various financing tranches with different purposes (target to secure those tranches which purpose is other than its acquisition).
Other
Financial assistance prohibition also applies to acquisition refinancing.
Non-Serbian subsidiaries of a Serbian target are not caught by this prohibition, but are subject to any financial assistance restrictions in the jurisdiction of such subsidiary.
Shares in the Serbian target held by the acquirer prior to the transaction may be used for securing the acquisition facility without breaching the financial assistance prohibition.
Shares in the Serbian target acquired during a transaction may be used for securing the acquisition facility without breaching the financial assistance prohibition, from the moment of registration of the acquirer as the owner of such shar
[1] Conditions under which financial assistance can be provided are less stringent for SROs.
[2] Articles of association may only make the conditions more stringent but not less stringent.
[3] A question is how arm’s length will be established and what criteria (e.g. for a loan) need to be taken into account in addition to interest rate. Establishment by way of an expert opinion could be an option.
[4] The report is to be filed in the collection of documents maintained by the Commercial Register.
[5] General meeting’s consent is not a prior consent. Therefore, in accordance with the standard decision-making practice of the Czech Supreme Court its absence causes ineffectiveness (but not invalidity).
[6] Conditions not applicable to SROs are in italics.
[7] A question is how arm’s length will be established and what criteria (e.g. for a loan) need to be taken into account in addition to interest rate. Establishment by way of an expert opinion could be an option.
[8] This is a new concept, which has not yet been interpreted by the courts.
[9] The general meeting’s consent is a prior consent. Ttherefore, with regard to the recent rulings of the Czech Supreme Court, invalidity ex tunc can be expected if the consent has not been given prior to the financial assistance.
[10] The report is to be filed in the collection of documents maintained by the Commercial Register.
[11] It is not clear how the fair price will be determined. An expert opinion could be an option.
[12] An interesting question is by what amount the reserve fund will have to be increased if financial assistance is provided in the form of security – would it have to be increased by the value of the security or value of the secured receivable or not at all?
[13] Although it is not clear under Romanian law whether the prohibition also applies to limited liability companies, the prevailing view is that it does.
[14] Financial assistance in the form described under (a), (b), and (c) above is likely to be prohibited. Financial assistance in the form described under (d) above is likely to be allowed.