Prohibition of Financial Assistance
Our legal system, under Article 150 of the Companies Act, prohibits advancing funds, granting loans, providing guarantees, or, in general, offering any form of financial assistance to facilitate the acquisition of a company’s own shares, or the shares or stakes of its parent company, by a third party.
This prohibition applies, as the law states, to acquisitions of a company’s own shares by a third party. If the company were to assist its parent in purchasing its shares, this prohibition would not generally apply, as the legislature is primarily concerned with the scenario in which a company provides credit or support to a third party, thus risking its own capital and assets, disregarding the differing interests involved.
Supreme Court Judgment No. 582/2023 (Section 1)
However, what would happen in cases where a third party intends to acquire shares in a company and enters into an agreement for the company itself to guarantee the value of those shares for a specified period? Is this scenario covered by the prohibition on financial assistance?
This is the issue examined by the Supreme Court. In the case, one company negotiated the acquisition of shares in another company through subscription in a capital increase specifically arranged for that purpose. The parties also signed an investment agreement, which included a clause whereby the company whose shares were being acquired undertook to compensate the acquiring company if the share value dropped below a certain threshold.
Key Elements of Financial Assistance
In this case, the Supreme Court found that three key elements characterise financial assistance and were present in the analysed case:
Firstly, there must be an act or transaction of financing or financial assistance by the company for the benefit of a third party (whether a shareholder or not). In this instance, there is an acquisition of shares in one company (Ezentis) by another (MCIM).
Secondly, there must be an acquisition, original or derivative, of shares in the assisting company by the third party. Here, Ezentis assumed an economic obligation as part of the provisions within the Investment Agreement, specifically, the financial compensation to MCIM for any decrease in value below a set level.
Thirdly, there must be a purposeful, teleological, or causal link between the act of assistance and the acquisition, which is present in this case, as the compensation for a drop in share value constitutes financial support or benefit for the acquisition.
Guarantee on the Value of Shares
However, even though these requirements are met, the Supreme Court interprets that the legal agreement aims to secure the value of the shares, exempting the investor (in this case, MCIM) from the risk of a drop in share price, with the company whose shares are being acquired assuming this risk.
Contrary to doctrinal opinions that view these agreements as falling under the prohibition, the Supreme Court concluded that this type of legal arrangement actually constitutes an asset attribution act. Here, it is intended to protect the investor from any potential loss in share value by taking on the risk of this potential decrease.
In reaching this conclusion, the Court considered that the agreement does not guarantee payment for the share acquisition but simply ensures the shares’ value and the expected investment return. In other words, the guarantee does not cover the primary obligation related to the acquisition of shares; it only limits the investor’s risk concerning the share value within a specified period, which prevents it from being deemed prohibited financial assistance.
Guidelines on the Prohibition of Financial Assistance
Therefore, to determine if a legal transaction is subject to the prohibition on financial assistance, it is crucial that, in addition to the objective elements being present, the financial guarantee or assistance must be directly related to the acquisition of shares or payment of the price. Cases where the guarantee covers an accessory obligation or one distinct from the share acquisition itself would not be included.
Nevertheless, despite the Supreme Court’s guidance in this case, it is evident that this is a factual matter dependent on the circumstances. It may be questionable to consider an act compliant with the law if, in form, it guarantees an accessory obligation separate from the acquisition of shares but, in substance, provides the third party with assistance or a guarantee on the price. Therefore, it is essential to consult with a specialised professional in commercial law for the necessary advice at all times.
Please find the PDF of the judgment attached below:
