European M&A: Financial Assistance Overview

The leveraged buy out (LBO) and management buy out (MBO) are common tools of American businesses whereby an acquiring entity will purchase its target through a combination of debt and equity. No brilliance there, right? The clever part, however, comes in where the target company (i.e. its assets) are given as collateral for the debt. In essence the target helps facilitate its own acquisition. This is accepted as normal in the U.S., presumably under the belief that it leads to the most efficient allocation of capital and assets.

Across the pond though, the UK market takes a dim view of such financial moves — it is in fact unlawful for a company to assist in the acquisition of its own shares. This is commonly referred to as the “no financial assistance” rule. Assistance is defined generally as a guarantee, indemnity, gift or security provided to the acquiror. Aside from apparent common sense foundation that if you can’t afford it on your own, you shouldn’t buy it, this rule is primarily designed to protect creditors and the capital inside the target corporation. It is not a blanket prohibition however, and the UK provides for a “whitewash” test (what we would call a “safe harbor”). The “whitewash” rules will not be covered in this posting.

France and Germany similarly have rules against financial assistance for much the same policy reasons as the UK. France allows no whitewash, whereas German transactions can be structured generally to comply with the legal tests.

There remain open issues as to whether and how the emergence of

the EU will standardize national corporate legal policies. For now, transactions within a country are controlled by that country’s corporate legal structure. As shown here, Europe can be quite a different playing field that the U.S.

[Many thanks to Focus Europe Summit 2004, and Gibson, Dunn and Crutcher LLP for source materials on this topic.]