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10 October 2012
Where the target company in an M&A transaction is a Maltese company, the financial assistance rules laid down in the Companies Act (Cap 386) must be considered when structuring the financing and security package of such acquisition. Financial assistance rules also regularly come into play in relation to leveraged buy-outs.
In principle, financial assistance is prohibited; however, there are exemptions to this absolute prohibition that apply if certain requirements are fulfilled. Any direct or indirect assistance of a Maltese company by means of a loan, guarantee or the provision of security for the purpose of the acquisition or subscription for shares in that company or its parent company is considered financial assistance. For example, a pledge over the shares of a Maltese target company to secure a loan, which finances the target company's acquisition, would be considered financial assistance.
If the transaction is effected with a view to the acquisition of shares by or for the company's employees or the employees of a group company, financial assistance is acceptable provided that the net assets of the company are not reduced below the thresholds set by capital protection rules. This exemption is frequently relied on in case of management buy-outs and also applies to employee share schemes.
The financial assistance prohibition is also inapplicable to investment companies with fixed share capital as regards the acquisition of fully paid-up shares by another undertaking, again provided that the net assets of the company are not reduced below the thresholds set by capital protection rules.
Financial assistance may also be granted by a private company, if a majority of the company's directors authorise the grant for a specific transaction after taking into account the financial position of the company. There is no reference to the capital protection rules in this exemption, although such consideration should fall within the duties of the directors in resolving whether to authorise the financial assistance. Furthermore, the company's shareholders are protected by the requirement for shareholders' approval of the directors' decision by extraordinary resolution. Before the grant of financial assistance, a declaration signed by two directors confirming the directors' authorisation and confirming that the grant of financial assistance has been duly approved by an extraordinary resolution of the shareholders must be registered with the Registry of Companies.
Although the Second EU Company Law Directive (2006/68/EC), on which the last described exemption is based, envisages the option of lifting the financial assistance prohibition for public limited liability companies, the Maltese legislature has decided to limit the financial assistance exemption to private companies only. Tailor-made security packages can be structured for the acquisition of Maltese private companies, provided that the necessary authorisations and filings are observed.
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