Financial assistance often involves a target company lending or providing financial resources to a buyer of shares in the capital of that target company.
Until 2012 there was a legal prohibition on financial assistance. With the introduction of the "Flex-BV Act" this was abolished. Since then, it has been frequently used in practice, especially in private equity transactions.
Debt push down
For a buyer financial support can be attractive because (part of) the required financing is realized through the target company. In addition, the debt-equity ratio can be optimized by placing the financing debt with the target company (debt push down).
It also involves risks such as:
- Liquidity shortage and continuity problems at the target company;
- (Directors') liability; and
- impairment of legal acts.
Following are some tips given to mitigate those risks.
1: Check the articles of association for a prohibition
Articles of association drawn up before October 1, 2012 still regularly contain a prohibition on financial assistance. The target company would be well advised to have the articles of association amended by a notary public prior to the financing so that the prohibition no longer applies.
2: Decision-making by the right bodies
On the basis of Article 2:239 of the Dutch Civil Code, the management board is authorized to take a decision to provide financial support, unless the articles of association stipulate otherwise. Shareholder agreements also regularly include provisions on decision-making. For example, the general meeting must often grant approval to the board to take the management decision.
3: Deal carefully with conflicting interests.
Directors are often involved with both the target company and the buyer or seller. There may then be a conflict of interest. If a director believes that this is not the case, he should convince the other directors of this.
If it does, the director should not participate in the decision-making process. If this prevents a decision from being taken (because the entire board is conflicted), the decision is taken by the supervisory board. If there is no supervisory board, the general meeting takes the decision, unless the bylaws provide otherwise.
4: Observe liquidity and continuity.
The board must assess whether the target company can continue to pay its due debts after the transaction (the distribution test) and ensure that its continuity is safeguarded. This requires realistic forecasts.
For the buyer, it is important to take a critical look. The buyer can carry out a liquidity audit (or have one carried out) and would be wise to record the results in writing.
5: Consider the corporate interest and weigh the pros and cons.
Directors must act in the interest of the company and its affiliated business. The buyer (as a future shareholder) is also expected to already take into account the interest of the target company.
The board is well advised to weigh the advantages (of the transaction) against the disadvantages (of the financial support) and to provide financial support only if the corporate interest of the target company is sufficiently served and less onerous financing is not possible.
6: Document the above in the decision-making process
The above should be taken into account in decision-making. This can be recorded in the minutes or in the recitals of written decisions.
7: Lay down financing conditions
The buyer and the target company would also do well to accept only arm's length/market based financing terms and to set these out clearly in the financing documentation.
