REALWorld Law

Real estate finance

Corporate governance

Does the law lay down any rules which must be complied with before a corporate entity can give valid security over its real estate assets, for example 'financial assistance' rules and 'corporate benefit' rules?

Angola

Angola

In Angola, a company is not allowed to finance another company or to provide its assets, such as real estate, as a guarantee, unless it has a direct interest in the transaction or in cases where the debtor is part of the same group of companies.

The law also provides for the prohibition of financial assistance, which means that a company cannot grant loans or create any type of security over its assets to or in favour of third-parties to finance or pay for the subscription or acquisition of shares in its share capital.

Australia

Australia

There are no specific corporate governance rules which must be complied with before a corporate entity can give valid security over its real estate assets where the transaction is between unrelated parties although certain general corporate law provisions will apply.  It is prudent for creditors to consider the following issues:

  • Whether the company has acted for the benefit of the company in entering into the transaction.
  • Whether the company has the power to enter into the relevant transaction. A person dealing with a company is entitled to make an assumption that internal procedures have been satisfied (such as complying with the companys constitution and that people holding themselves out as officers of the company are validly appointed officers) unless the party knew or suspected that the assumptions were incorrect.

Where a company is providing a loan, security or other financial assistance to acquire shares in the company, appropriate resolutions must be passed by the company and notices must be given to shareholders and the Australian Securities and Investments Commission (ASIC).

Subject to certain exceptions, if a public company proposes to give a financial benefit to a related company (such as providing a loan to the related company), it must obtain the approval of shareholders in a general meeting.

Breaches of the above-mentioned financial assistance rules and related party rules will not affect the validity of the transaction but may constitute breaches of the Corporations Act with consequences to the parties involved in the transaction.

Belgium

Belgium

Legal restrictions on providing security by Belgian companies are, as a rule, mainly driven by:

  • The principles of financial assistance, and
  • Corporate formalities and issues

Financial assistance

The granting of a security by a Belgian company should comply with the Belgian financial assistance rules.

The Belgian rules on financial assistance apply to public limited liability companies (NV/SA), private limited liability companies (BV/SRL) and co-operative limited liability companies (CV/SC).

Under the new Belgian Companies and Associations Code, it is permitted for a company to advance funds, grant loans or provide security, with a view to the acquisition or the subscription of its shares or profit-sharing certificates by a third party, provided the following stringent conditions are met:

The transaction must be subject to prior approval by way of a general meeting of the shareholders (with the same quorum and majority requirements as for an amendment to the company’s articles of association).

The board of directors must draft a special report explaining the reasons for the transaction, the applicable conditions and the related risks regarding the liquidity and solvability of the company.

Furthermore, the financial assistance must be paid out of and cannot exceed the amount of distributable profits. The company must set up a non-distributable reserve on the liabilities side of its balance sheet equal to the total amount of the financial assistance.

In relation to public limited liability companies (NV/SA), article 7:227 of the BCAC further provides that the transaction must take place under the responsibility of the company’s board of directors at fair market conditions (i.e. taking into account the usual market interest rate and the usual collateral agreements or arrangements for similar types of financing, as well as the credit standing of the third party) and that where the shares are acquired directly from the assisting company, either through the sale of its own shares, or through a subscription by the beneficiary to a capital increase, the acquisition of the company’s shares must take place at a fair price.

A transaction breaching the financial assistance rules may be declared null and void upon the request of any interested party. Such nullity will not necessarily be limited to the transaction itself but may also affect all connected transactions, which would not have occurred without the relevant act or which led to the existence of the unlawful legal scheme that was set up, as far as these transactions were willingly performed by all the parties involved.

Corporate formalities and issues

In order for a Belgian company to validly grant security, the company will have to ensure that:

  • The granting of security is permitted pursuant to its corporate purpose
  • The granting of security is in its corporate interest

The corporate purpose of a Belgian company is set out in its articles of association and Belgian companies can only act within the boundaries of this corporate purpose. Transactions entered into by a Belgian company which are deemed not to fall within its corporate purpose can be nullified and result in liability for the directors.

The granting of a security by a Belgian company must always be in the company’s corporate interest. However, as this mainly depends on the factual situation (such as the benefit that the company will obtain from the transaction as a whole) this remains a vague concept. Under Belgian law there is no legal concept of group interest. Benefit to the group is not sufficient. It must be clear that the company will derive a direct or indirect benefit from the transaction that is being guaranteed.

Corporate benefit justifications may be that the guarantor is able to benefit from lower interest rates or better conditions or that the parent company will provide inter-company loans to the subsidiary. It is general practice in Belgium to include guarantee limitations including any or a combination of limitations:

  • To an absolute figure to be determined by the directors
  • To one or more tranches of the facility (for instance the tranches that are available to the guarantor (whether as direct borrower or as beneficiary of an on-loan))
  • To a percentage of the net assets of the guarantor
  • To amounts borrowed by the guarantor, directly or indirectly through intercompany loans

Under Belgian law, directors have a duty to act in the interest of the company.

Other rules

There are other corporate law issues which include rules relating to capital maintenance, restrictions on transactions between a company and connected parties, and provisions relating to bankruptcy, which must be complied with.

Bosnia-Herzegovina

Bosnia-Herzegovina

No. Financial assistance and corporate benefit rules are not incorporated into local company laws.

Canada

Canada

As with all corporate transactions, the granting of a mortgage or hypothec over real property requires the officers of corporate grantor to comply with its applicable articles of incorporation and by-laws and the laws or regulations of the jurisdiction governing such transaction. As an example, certain jurisdictions may restrict the ability of a corporation to grant financial assistance if at the time of granting such assistance, the corporation is insolvent.

China

China

The most important rules relating to real estate debt are that real estate foreign-invested entities (FIEs) cannot borrow until:

  • their registered capital is fully paid up (the registered capital for real estate FIEs must be at least 50% of the total investment amount which must be at least US$10 million)
  • the land use right has been obtained and the State-owned land use right certificate has been issued, and
  • capital funds are available for development that amount to at least 35% of the total investment amount of the development project.

Corporate entities must comply with financial assistance rules before they can give valid security. That is, PRC company law prohibits the directors and managers of the target company from using its assets as security for the debts of its shareholders.

PRC company law does not have 'corporate benefit' rules. However, it does prohibit director fraud etc.

Croatia

Croatia

As a general rule, any transaction in which a public limited liability company provides another party with an advance payment, a loan or security for the purpose of acquiring shares in that company is null and void.

The one exception to this rule is that a financial institution may, in certain specified circumstances, make advance payments or loans or provide security to its employees or an affiliated company if it is deemed to be in the best interests of that company. However, such transactions will be null and void even in relation to financial institutions if, in the acquisition of its own shares, the company is not able to create the required reserves for these shares without reducing its share capital or the reserves dictated by the company's articles of association.

No such rules apply to limited liability companies. However, a limited liability company must not effect payments or benefits to its shareholders (including “providing security for liabilities of shareholders") which affect its share capital, unless there is a corporate benefit for the company.

Czech Republic

Czech Republic

Where security consisting of a pledge of an enterprise or security granted to a related entity is concerned, a decision of the general meeting of the members of the company is requested. Specific conditions relating to the entry into such a security agreement may also be set out in the entity's articles of association.

Special provisions relating to financial assistance apply when assistance is granted for the purposes of acquiring the shares of limited liability companies and joint-stock companies by these companies, ie acquisition of their own shares. Under the Business Corporations Act, the grant of advance payments, loans and credits or monetary means by a company for the purpose of acquiring its shares or its parent company's shares is prohibited, as is the grant of security by a company for these purposes. However, provided that conditions expressly stipulated in the Business Corporation Act are met, several statutory exceptions apply. These restrictions do not apply to banks and financial institutions which are subject to special legislation.

Denmark

Denmark

There are both financial assistance rules and corporate benefit rules which must be complied with.

Financial assistance rules

The Companies Act part 13 contains rules regarding financial assistance by a limited liability company.

It is unlawful for a company to provide security in the company’s real estate assets for a third party’s acquisition of shares in the company or its parent company, unless certain conditions are met. It must be approved at a general meeting where a written report on the matter is submitted. Further, it must also be financially advisable, and the security must be provided on arm’s length terms.

A company can only provide security in the company’s real estate assets for obligations of shareholders or members of the management in either the company or its parent company if certain conditions are met. Hence, it is a requirement that the financial assistance do not exceed the company's distributable reserves and that it is provided on arm’s length terms. Further, the decision must be approved on a general meeting and the financial assistance cannot exceed an amount proposed or accepted by the company’s management. However, notwithstanding that these conditions are not met, a company may provide security in the company’s real estate assets for the obligations of Danish and certain foreign parent companies.

Corporate benefit rules

The board of directors for a company must comply with the law and act in the company's interest. The Companies Act Section 127 states that a company’s management must not enter into transactions which are obviously calculated to provide others with an unfair advantage at the company’s expense. This assessment is more stringent when the company has financial difficulties.

France

France

Yes, there are both financial assistance rules and corporate interest rules which must be complied with:

A. Financial assistance rules

Article L. 225-216 of the French Commercial Code prohibits a target company from advancing monies or granting loans or any security in connection with the subscription or purchase of its own shares by a third party. This prohibition applies to limited liability companies (eg Sociétés Anonymes, Sociétés par Actions Simplifiées) and does not apply to partnerships or civil real estate companies (eg Sociétés en Nom Collectif, Sociétés Civiles, Sociétés Civiles Immobilières). This prohibition is subject to criminal and civil sanctions, which could result in the rescission of the transaction and / or a fine amounting to €150.000 in accordance with article L. 242-24 of the French Commercial Code.

As a consequence, a French limited liability company will not be able to provide a valid guarantee or security over its assets to secure the repayment of a loan (in whole or in part) granted to finance a third party’s subscription or acquisition of the guarantor’s shares or the related transaction costs.

B. Corporate interest

Any decision or act taken by a French entity that is not consistent with its corporate interest, a concept which is quite narrowly defined, exposes management to criminal and civil sanctions.

In financing transactions, this principle limits the ability of French limited liability companies (such as Sociétés Anonymes, Sociétés par Actions Simplifiées or Sociétés à Responsabilité Limitée) to give upstream guarantees or guarantees to affiliated companies. An upstream guarantee (or guarantee to affiliated entity) may give rise to management liability if such guarantee is considered to be a misappropriation or misuse of the subsidiary guarantor’s corporate assets or misuse of credit (abus de biens sociaux), ie "an act of using the powers which they [managers, chairman, directors, managing directors] possess or the votes which they have in this capacity, in bad faith, in a way which they know is contrary to the interests of the company, for personal purposes or to encourage another company or undertaking in which they are directly or indirectly involved” (Articles L. 241-3 and L. 242-6 of the French Commercial Code).

Such an act may be punished by a prison sentence of five years and/or a fine of €375,000.

More specifically, the French Supreme Court (Cour de Cassation) has set out the following criteria for meeting the test:

  • The transaction (including the granting of guarantees and security interests) needs to be consistent with each of the French companies’ corporate purpose and objectives as well as with the strategy of the group to which they belong, insofar as the transaction is dictated by a common economic, labour-related or financial interest, based on policies developed for the entire group
  • The transaction is not devoid of consideration and does not upset the balance between the respective undertakings of the companies concerned, and
  • The financial support provided or to be provided by each of them in connection with the transaction does not exceed their respective financial capacity at the time such guarantee is given.

Accordingly, loan documentation will usually contain limitation clauses such as:

  • The amount made available, directly or indirectly, to the guarantor (whether as borrower or under intra-group loans made available to it by other entities in the group, from the proceeds of the facility), and/or
  • A percentage of the net assets of the guarantor.

It is market practice in France to reduce the liability to the amount outstanding at the time the guarantee is called.

Withholding tax on interest payments

The only tax issue that could be relevant with respect to the granting of securities in France relates to the withholding tax on interest payments.

Payments of interest will not be subject to the withholding tax set out under article 125 A III of the French General Tax Code unless such payments are made outside France in a "non-cooperative State", as defined in article 238-O A of the French General Tax Code (Non-Cooperative Jurisdiction). If such interest payments are made on a bank account located in a Non-Cooperative Jurisdiction or paid or accrued to persons established or domiciled in such a Non-Cooperative Jurisdiction, a 75% withholding tax will be applicable as defined in article 125 A of the French General Tax Code.

Such payments of interest are not deductible from the borrower’s taxable income, as from the fiscal year starting on 1 January 2011, if they are paid on a bank account located in a Non-Treaty Country or paid or accrued to persons established or domiciled in such a Non-Treaty Country.

Neither the 75% withholding tax nor the non-deductibility will apply if the borrower proves that the principal purpose and effect of such issue was not to allow the payments of interest or other revenue to be made in a Non-Cooperative Jurisdiction.

Corporate authorizations

Corporate authorizations may be required when a French company contemplates granting security over its assets. Pursuant to article L. 225-35 of the French Commercial Code, any guarantee granted by a Société Anonyme to secure the liabilities of a third party must first be authorized by its board of directors. In addition, by-laws of the company (whatever type of entity it is) may require prior approval by the board of directors and/or the shareholders’ general meeting before the facilities agreement is entered into and the security is created.

A specific corporate authorization may also be required in the event of a pledge of shares in Sociétés Anonymes, Sociétés par Actions Simplifiées or Sociétés en Commandite, the by-laws of which may contain an approval clause (clause d’agrément). In such cases, the beneficiary of the pledge, which will become a shareholder of the company if the pledge is enforced, must be approved (by the board of directors or the shareholders’ of the company, as the case may be) as potential new shareholder of the company. While the approval may be given at any time, in practice it should be obtained before the constitution of the pledge.

In the event of a pledge of shares in Sociétés à Responsabilité Limitée, Sociétés en Nom Collectif, or Sociétés Civiles, the shareholders must also approve the beneficiary of the pledge as a new potential shareholder.

Consultation of the works council (comité social et économique)

Pursuant to article L. 2311-2 and the following articles of the French Labour Code, the Works Council – the existence of which is mandatory in companies with at least 11 employees – must be informed of and/or consulted on the decisions which may have significant consequences for the company’s future. Consequently, parties to financing transactions or reorganizations including the grant of security over the assets of the company shall ensure that the works council is duly informed and consulted about such transactions when the criterium referred to in article L. 2311-2 et seq. of the French Labour Code is met.

Germany

Germany

Yes, there are financial assistance rules and corporate benefit rules which must be complied with.

Financial assistance rules

The prohibition on financial assistance only applies to German stock corporations (Aktiengesellschaft). The definition of ‘assistance’ is wide; there is no distinction between assistance by the company itself and assistance by its subsidiaries. There is no ‘whitewash’ procedure which can be applied.

Since November 2008, the prohibition has not applied if there is a control agreement or a profit transfer agreement (Beherrschungs- oder Gewinnabführungsvertrag) in place between the stock corporation and the ‘financially assisted’ company. The consequence of a violation would be that the transaction would be void.

Corporate benefit rules

Managing directors have a statutory duty to their company to act as prudent business people. This is a broad concept and various factors such as the group interest can be taken into account when assessing whether it has been met. In case of up-stream or cross-stream loans within a group, there is an obligation to the lending entity to take security if there is credit risk in relation to the borrowing entity.

The German Code of Corporate Governance (GCCG) applies to German listed stock corporations. Members of the managing board and of the supervisory board must declare that they have followed the recommendations of the GCCG.

If there is a violation the transaction is not invalid but the directors, managing board, or supervisory board are potentially liable.

Other rules

There are other corporate and insolvency law issues which apply and include rules relating to capital maintenance, restrictions on transactions between a company and its affiliates other than its own subsidiaries and provisions relating to transactions which disadvantage creditors and which have been entered into within certain periods before the commencement of insolvency proceedings.

Hong Kong, SAR

Hong Kong, SAR

Yes, there are both financial assistance rules and corporate benefit rules which must be complied with.

Financial assistance rules

Pursuant to section 275 of the Companies Ordinance (Cap. 622 of the Laws of Hong Kong), subject to certain exceptions, it is unlawful for a company to provide financial assistance for the purpose of acquiring its own shares, but a company can provide financial assistance for the purpose of acquiring shares in its holding company if the holding company is incorporated outside Hong Kong.

Corporate benefit rules

Directors must comply with both common law rules and provisions under the Companies Ordinance (Cap. 622 of the Laws of Hong Kong). To summarize, a director of a company must only act in a way that he considers, in good faith, is most likely to promote the success of the company for the benefit of its members as a whole. Further, a director must exercise independent judgment and reasonable skill, care and diligence and act in accordance with the companys memorandum and articles of association.

Other rules

There are other corporate law issues which include rules relating to capital maintenance, restrictions on transactions between a company and connected parties and provisions relating to transactions which take place within certain periods before the company entering into an insolvency process. 

Hungary

Hungary

Currently, there are no statutory restrictions on financial assistance in Hungary, other than in relation to public limited companies (nyilvánosan működő részvénytársaság). Public limited companies may only provide financial assistance for the purchase of their shares if:

  • the financial assistance is provided at market conditions;
  • the source of the financial assistance is such fund of the company that could be used for the payment of dividends; and
  • the shareholders' general meeting, on the basis of the proposal of the board of directors, consented to the financial assistance with at least three-fourth majority.

Hungarian law does lay down corporate benefit rules. For example, the directors of a company must exercise the levels of care generally expected from people occupying such positions and act in the best interests of the company as long as the company is solvent. If the company becomes insolvent, directors must act in the best interests of creditors.

The articles of association of a company may contain provisions requiring the shareholders’ prior approval for certain transactions, such as granting security over the assets of the company.

Ireland

Ireland

Yes, there are both financial assistance rules and corporate benefit rules which must be complied with in relation to Irish incorporated companies: 

Financial assistance rules

Section 82(2) of the Companies Act 2014 (Section 82) creates a general prohibition on the provision of financial assistance (the Section 82 Prohibition). The Section 82 Prohibition states that the provision by a company (either directly or indirectly) of financial assistance – whether in the form of loans, guarantees, the provision of security or otherwise – for the purpose of, or in connection with, the acquisition of its own shares or the shares in its holding company is unlawful. In certain circumstances it is possible to carry out a "Summary Approval Procedure" which allows an otherwise prohibited transaction to proceed.

Corporate capacity rules

Under the Companies Act 2014, an Irish incorporated company limited by shares has the same unlimited capacity as an individual. The 2014 Act however also introduced a new type of private company under Irish law, a Designated Activity Company (DAC), (similar to the old form of private company limited by shares as provided under the Companies Act 1963). Such a company must have specific powers under its Constitution allowing it to purchase real estate and to enter into security. If these specific powers are not contained in its Constitution, then purchasing real estate and granting security by the company may be subject to challenge.

Corporate benefit rules

Directors of Irish incorporated companies must comply with both general rules of law and provisions under the Companies Act 2014. The 2014 Act codified the existing common law fiduciary duties of directors and sets out eight duties of directors. To summarize, a director of an Irish incorporated company must only act in a way that he considers, in good faith, is most likely to promote the success of the company for the benefit of its members as a whole. Further, a director must exercise independent judgment and the care, skill and diligence which would be exercised in the same circumstances by a reasonable person having:

  1. The knowledge and experience that may reasonably be expected of a person in the same position as the director, and
  2. The knowledge and experience that the individual director has

Other rules

There are other company law issues which apply to Irish incorporated companies. These include rules relating to capital maintenance, restrictions on transactions between a company and its directors (or persons connected with its directors) and provisions relating to transactions which take place within certain periods (often referred to as the “hardening period”) prior to a company entering into an insolvency process (eg the fraudulent preference rules).

Italy

Italy

Yes, there are both financial assistance rules and corporate benefit rules which must be complied with.

Financial assistance rules

Financial assistance by an Italian company for the acquisition or the subscription of its own shares, for a SpA, or quotas, for a Srl, is prohibited by:

  • section 2358 of the Italian Civil Code (in relation to SpAs), and
  • section 2474 of the Italian Civil Code (in relation to Srls).

This prohibition includes all forms of financing, either direct or indirect, any refinancing of existing loans granted for acquisition purposes, and all loans, security or guarantees granted by a company for the benefit of third parties.

Additionally an Italian company cannot accept its own shares as a collateral security.

The Italian Civil Code does however provide that financial assistance to SpAs is possible in some instances subject to the satisfaction of a number of strict requirements (see Legislative Decree no. 142/2008 enacting the EU Directive 2006/68/EC).

Corporate benefit rules

To the extent that security or guarantees (downstream, upstream or cross-stream guarantee) are provided by a group company, each group company must itself have a specific and economic interest in guaranteeing/securing the financial obligations of its parent company.

As the subsidiary must have an autonomous interest in granting a security, the granting of such security should not have a negative impact on the subsidiary's net worth. This is measured in terms of the potential total payments under any guarantee and/or security not causing the net worth of the Italian grantor to fall below zero (leading to the Italian grantor’s insolvency). This concern is generally recognised in Italian legal circles and is often raised by the directors and/or auditors of an Italian subsidiary called upon to give upstream/cross-stream guarantees. The existence of a corporate benefit is a pure business decision and as such it is a matter for the directors to resolve upon. There is no test to certify the existence of a corporate benefit and it should be evaluated on a case by case basis.

Other rules

Please note that in certain instances, the granting of a guarantee or related security may trigger the company's directors to be liable to the company and its creditors.

In addition, in a declaration of the company's bankruptcy, the directors could incur liability, and therefore be subject to criminal sanctions, if it is ascertained that they had wilfully caused the misuse of corporate assets to the detriment of the company's creditors.

Japan

Japan

Yes, there are both financial assistance rules and corporate benefit rules.

Financial assistance rules

A company may not provide any benefit to its shareholders in relation to or in connection with the exercise of shareholder rights by a shareholder.

Corporate benefit rules

Directors must comply with the provisions of the Companies Act and other laws and regulations.  A director must exercise independent judgment and reasonable skill, care and diligence and act in accordance with the company's constitution.  Whether or not a director's decision or act is lawful is determined by (i) the process taken to make such decision or act and (ii) the content of the decision or act.

Other rules

There are other corporate law issues which include, without limitation, rules relating to capital maintenance (prohibition of certain distributions to shareholders), restriction on transactions between a company and interested parties and provisions relating to transactions which take place within certain periods before the company entering into an insolvency process.

Netherlands

Netherlands

Conflict of interest

The Civil Code stipulates that if there is a conflict of interest (tegenstrijdig belang) between a limited liability company or a private limited liability company and one or more of its managing or supervisory director(s), the conflicted (supervisory) director(s) are not allowed to participate in the deliberations and the adoption of the relevant resolution.

If, as a result, no managing board resolution can be adopted because of a conflict of interest, the relevant resolution must be adopted by the supervisory board of the company or, if no supervisory board has been established the general meeting of shareholders is allowed to adopt the relevant resolution, unless specified differently in the articles of association.

Similarly, if due to a conflict of interest no supervisory board resolution can be adopted, the relevant resolution will be adopted by the general meeting of shareholders, unless specified differently in the articles of association.

Although managing board resolutions taken contrary to the decision-making rules above are subject to nullification by any party having a reasonable interest in observance of such rules, a transaction with a third party will not be affected by these void resolutions if the third party was not or should not have been aware of the conflict of interest.

Ultra vires or corporate benefit

Pursuant to Article 2:7 Civil Code, any legal person incorporated under Dutch law or, as is most frequently the case, its trustee in bankruptcy (faillissementscurator), may annul a legal act entered into by the legal person, if the act exceeded its objects (as set out in the objects clause in a company's articles of association) and its counterparty knew or (without investigation) should have known that the legal person's objects were exceeded.

Legal acts which are expressly permitted by a company's objects clause, or which may generally be assumed to be conducive to furthering the company's express objects, are a good indication that the legal act does not violate Article 2:7 Civil Code. However, according to the case law of the Supreme Court, all relevant circumstances of a case at hand, including the question as to whether the performance of the legal act is in the company's corporate interest, should be taken into account in order to determine whether a legal act exceeds a company's objects clause and consequently violates Article 2:7 Civil Code. Examples of relevant factors include, but are not limited to, whether:

  • the legal act expressly falls within the objects clause of a company's articles of association;
  • the legal act can be considered proportionate (eg the amount of a guarantee vis-à-vis the company's financial condition or, for example, shareholders equity);
  • the company forms part of a group of companies who are all affected (to a greater or lesser extent) by the performance of the relevant legal act, and the performance of the legal act is seen as being in the interests of the group as a whole;
  • other group companies are performing similar legal acts (such as the provision of guarantees);
  • the continuity of the company is safeguarded by its performance of the legal act (eg the issuing of a guarantee); and
  • the company will derive direct or indirect benefit from the performance of the legal act, monetary or otherwise. An example would be the giving by the company of a guarantee under a loan facility agreement, which facility also benefits the company performing the relevant legal act.

Financial assistance

The Civil Code stipulates that neither a public company (naamloze vennootschap) nor any of its subsidiaries (dochtermaatschappijen) – including, most likely, foreign subsidiaries – may, with a view to (met het oog op) the taking or acquisition by third parties of shares in its capital, create security, grant a guarantee or otherwise accept liability (including providing loans which exceed statutory thresholds). Any acts in contravention with the aforesaid prohibition will violate Dutch law and most likely be void.

The equivalent financial assistance prohibition for private limited liability companies (besloten vennootschappen met beperkte aansprakelijkheid (BVs)) was repealed on 1 October 2012, and therefore no longer applies. However, the articles of association of many BVs may need to be amended to delete provisions which are a remnant of the previous financial assistance prohibition.

Other rules

Security rights may be affected and limited by the general defences available to obligors under Dutch law in respect of the validity and enforceability of contractual obligations. Without purporting to be comprehensive, we note that the security documents may be voided if they were made through undue influence (misbruik van omstandigheden), fraud (bedrog), threat (bedreiging) or error (dwaling) of any of the parties thereto and any claims under the security documents may be, or become, subject to set-off, counterclaim or suspension (opschorting). The rights and obligations of the parties to the security documents are subject to the principle of good faith/reasonableness and fairness (redelijkheid en billijkheid), that under Dutch law governs the relationship between the parties to a contract and which, in certain circumstances, may limit or preclude the reliance on, or enforcement of, contractual terms and rules relating to force majeure.

Nigeria

Nigeria

The law in relation to providing financial assistance for the purpose of acquiring the shares of a company has been recently reviewed. Previously, it was unlawful for a company to provide financial assistance including but not limited to guarantee, security or indemnity, loan or any form of credit and any financial assistance for the purpose of a person acquiring or proposing to acquire its shares, the company acquiring its own shares or the shares in its holding company.

However, under the recently enacted Companies and Allied Matters Act, 2020, the rules on financial assistance have been revised to provide flexibility and to match international standards for corporate transactions. A limited liability company may purchase its own shares including redeemable shares, subject to certain conditions. Other instances include:

(i) where any payment is made pursuant to an order of the Federal High Court under a scheme of arrangement; (ii) a scheme of merger or any other scheme or restructuring of a company done with the sanction of the Federal High Court; (iii) lending in the ordinary course of the company’s business, (iv) an assistance given by a company where its principal purpose in

giving the assistance is not to reduce or discharge any liability incurred by a person for the purpose of the acquisition of shares in the company or its holding company.

Directors stand in a fiduciary relationship towards the company and shall observe the utmost good faith towards the company in any transaction with it or on its behalf thus a director of a company must only act in a way that he considers, in good faith, is most likely to promote the best interest of the company. In this regard, a director is required to consider the rationale for decisions taken by the board in connection with assets of the company including real estate.

It is also important to note that under Nigerian law, any conveyance mortgage, payment etc done or made in relation to property, which if done or made in bankruptcy of an individual shall be deemed as a fraudulent preference, shall if done or made against a company be deemed as fraudulent preference of its creditors and therefore invalid when done or made in the event of a winding up.

Norway

Norway

Yes, there are both financial assistance rules and corporate benefit rules which must be complied with.

Financial assistance rules

The Norwegian rules regarding financial assistance were changed with effect from 1 January 2020. As before, pursuant to the first paragraph of section 8-10 of the Companies Act 1997, a limited liability company can, subject to certain conditions, provide financial assistance to a third party for the purpose of acquiring the company’s shares or the shares in its holding company. The company cannot provide such assistance to the company itself for the purpose of acquiring its own shares. The statutory provision also applies to public companies (under similar provisions in the Public Companies Act 1997), and to a certain extent, with modifications, to companies with unlimited liability such as unlimited partnerships ‘KS’ (kommandittselskap) and ‘DIS’ (silent partnership or indre selskap).

Financial assistance may only be provided validly up to the amount of the assets which the company may legally use for the distribution of dividends (distributable reserves). However, if the target company following the acquisition becomes a subsidiary of acquirer (which must be incorporated within the EEA), the distributable reserves limitation will, if certain conditions are met, not apply. In brief, the conditions are as follows:

  • the company’s assistance can only be provided in accordance with customary commercial terms and principles (normally this will include some sort of guarantee commission or similar);
  • the board must make a credit appraisal of the person(s) or entity(ies) receiving the financial assistance;
  • the board must give a report in connection with the provision of the assistance and such report must at least contain:
    • the background for the provision of the financial assistance;
    • the terms and conditions relating to completion of the transaction;
    • the price to be paid by the third party for the shares;
    • an assessment of the company’s interest (corporate benefit) in providing the financial assistance; and
    • an assessment of how the financial assistance may impact the equity and liquidity of the company.
  • the board must declare separately that the financial assistance is provided in the interest of the company and that the equity and liquidity will remain sound;
  • the report and the declaration must be dated and signed by all board members;
  • the report and the declaration must be attached to the summons to the general meeting of the company and the general meeting must vote in favour of the granting of the financial assistance by at least two thirds of the votes; and
  • before the financial assistance is given, the report and declaration must be submitted to the Norwegian Register of Business Enterprises ( Foretaksregisteret).

In addition, the board must report whether or not adequate security must be furnished for the claim for repayment or recovery. Section 8-7 of the Companies Act and the Public Companies Act limits a Norwegian limited liability company’s right to grant credit to or provide security for the benefit of its shareholder(s) or a party closely connected to a shareholder. Parties closely connected to a shareholder include companies where the shareholder has a determining influence, typically subsidiaries of the shareholder. A party is always deemed to have a determining influence over a company if it owns sufficient shares in another company as to represent a majority of the votes in that other company, or has the right to vote in or vote out a majority of the directors of that other company.

The credit to or guarantees for the benefit of such companies may only be validly granted up to the amount of the assets which the company may legally use for the distribution of dividends (distributable reserves), and only if adequate security is furnished for the claim for repayment or recovery. Whether a credit or security may legally be granted pursuant to the Act must be determined on the basis of the situation at the time when the credit or security is granted.

The term ‘security’ covers both real security (ie, security interests, mortgages etc) as well as personal security (ie guarantees, co-debtor arrangements etc). A negative pledge from the subsidiary in connection with the shares in the company being pledged as security for a loan to a shareholder is generally considered not to involve a grant of security under section 8-7.

An exemption from this prohibition is available where the financial assistance is provided to another company within the same group of companies (No. konsern) as defined in the Companies Act. However, if the parent of the group is not a Norwegian limited company, the financial assistance must serve the group’s ‘economic interests’ which for all practical purposes means that such financial assistance must not be serve to pay dividends to the ultimate owners of the group.

Corporate benefit rules

The directors of a limited liability company are obliged to ensure that they act responsibly and in the best interests of the company and its shareholders with regard to corporate management.

The Norwegian Limited Companies Act (aksjeloven/allmennaksjeloven) also contains provisions designed to ensure that agreements entered into with shareholders and other group companies are made on arm’s-length terms.

However, there is limited regulation of the precise requirements related to corporate benefit. For the assessment of corporate benefit, the following matters must be considered:

  • the equity and liquidity situation of the company;
  • other obligations on the company (including potential future and contingent obligations);
  • exposure under any guarantees or security arrangements;
  • the extent of cross guarantees for the benefit of the company; and
  • whether parts of a loan facility are transferred to or made available to the company

The question of whether the corporate benefit arising from a transaction is sufficient is ultimately a commercial decision to be made by the company’s board of directors.

Other rules

There are other corporate law issues which include rules relating to adequate capital maintenance, restrictions on transactions between a company and connected parties and provisions relating to transactions which take place within certain periods before the company entering into an insolvency process. The Norwegian Limited Companies Act contains requirements that board resolutions are required when the company makes any decision of material importance to the company.

The Norwegian Limited Companies Act section 3-8 was also changed with effect from 1 January 2020 and contains rules stating that ‘agreements’ between a company and its shareholders/the parent of the company’s shareholders are not binding on the company unless the agreement is approved by a board of directors of the relevant company (ie the guarantor/security provider).

The ‘agreement’ must have a ‘real value’ amounting to at least 2.5% of the balance amount of the latest available audited annual accounts of the company at the time of agreement. The term ‘agreement’ also comprises guarantees and other types of security provided. The rule applies equally when the agreement is entered into by the company with someone who is acting ‘according to an agreement or an understanding with’ its shareholder. Guarantees/security which benefit a third party (such as banks) may thus fall within the scope of section 3-8.

There are certain exceptions to this, ie for agreements entered into in the course of the ‘ordinary business’ of the company and is based on customary commercial terms and principles. Furthermore, guarantees or security provided on behalf of a group company, in accordance with section 8-7, third sub-section, no 2 and 3, are exempted from the scope of the clause providing that the shares of the subsidiary company must be wholly owned by the parent company. Likewise, agreements to provide financial assistance from the company to a third party for the purpose of acquiring its own shares or the shares in its holding company, in accordance with section 8-10, are exempted from the scope of the clause. These exceptions also apply to public companies (by virtue of similar provisions in the Public Companies Act 1997).

If the agreement/security in question does not fall within the exemptions of section 3-8 of the Norwegian Limited Companies Act, the procedure set out there must be followed for it to be valid. Section 3-8 also sets out a formal procedure which must be followed in these matters, namely that (i) the board must prepare a report in accordance with section 2-6 of the Norwegian Limited Companies Act where the agreement/security and the value of the company’s contribution is set out in more detail and that the equity and liquidity of the company will remain sound, (ii) the board must separately declare that the agreement is in the interest of the company, (iii) the declaration and the report must be dated and signed by all board members. The report  and declaration from the board must all be sent to all shareholders with known address as well as to the Norwegian Business Register for registration.

Poland

Poland

In general, the company may grant loans, provide security, make advance payments or in any other manner, whether directly or indirectly, finance the acquisition or taking up of its shares. Financial assistance is permitted if it is performed on open market terms and requires the resolution of a general meeting of the company's shareholders.

Portugal

Portugal

In Portugal, a company is not allowed to finance another company or to provide its assets, such as real estate, as a guarantee, unless it has a direct interest in the transaction or in cases where the debtor is part of the same group of companies.

The law also provides for the prohibition of financial assistance, which means that a company cannot grant loans or create any type of security over its assets to or in favour of third-parties to finance or pay for the subscription or acquisition of shares in its share capital.

Romania

Romania

In Romanian Law, the concepts of both financial assistance and corporate benefit are well known and are particularly applicable to joint stock companies.

Financial assistance rules

Under Romanian Company Law, a joint stock company may not advance funds or make loans or provide security interests for the subscription or acquisition of its own shares by a third party. This rule does not apply to transactions entered into by credit institutions and other financial institutions in the normal course of their business, or to transactions involving the purchase of shares by or for the company’s employees, as long as the operations do not result in the net assets becoming worth less than the total value of the subscribed registered capital and the reserves that the law or the articles of association of the company prevents them being distributed.

Corporate benefit rules

Under Romanian law, companies are established for the purpose of obtaining profit. Consequently, it is not possible for a company to unilaterally assume obligations that reduce its patrimony (ie by granting a guarantee and creating security, especially in favour of a third party) without achieving a certain form of consideration in return. Otherwise, if the security interest or guarantee has been granted in lack of any corporate benefit for the respective company, there is the risk that the security interest or guarantee may be challenged by a third-party creditor.

Several methods are used on the market to mitigate this risk (ie including all security providers as borrowers under the facility, structuring the transaction so that the Romanian company receives a part of the proceeds of the loan or a fee for the provision of the guarantee/security). Nevertheless, where the benefit received by the guarantor/security provider is not proportionate to the risk undertaken, there is a higher risk that the transaction will be voided for corporate benefit grounds.

Other rules

In the case of joint stock companies, the board of directors or, as the case may be, the managing board, may enter into transactions in the company’s name and account, by which the company acquires or disposes of leases, changes or creates charges over the company's assets, the value of which exceeds half of the book value of the company’s assets at the time the agreement is concluded, only with the approval of the shareholders in an extraordinary general meeting. For listed companies these conditions refer to the total value of fixed assets, less receivables, and the threshold is set at 20%.

Slovak Republic

Slovak Republic

Yes, there are both financial assistance rules and corporate benefit rules which must be complied with:

Financial assistance rules

Pursuant to mandatory provisions of the Commercial Code, a company cannot acquire its own ownership interests. Furthermore, a controlled company (being a company in which a party owns the majority of the voting rights, because that party holds shares in the company to which the majority of the voting rights is attached, or because a company has entered into agreements with other authorised companies and may as a result exercise the majority of the voting rights, regardless of whether or not the agreement is valid) is not permitted to acquire the ownership interest of its controlling company. These restrictions do not apply if the ownership interest is acquired through succession or if the controlled company becomes a successor in law and replaces the former ownership interest holder in respect of all the rights and duties of the former ownership interest holder.

Corporate benefit rules

The Commercial Code provides that managing directors must carry out their duties with due care and in line with the interests of the company and the company's members. In particular, the managing directors must collect and consider any available information to make a decision in relation to the company. Managing directors cannot disclose any confidential information and facts in respect of the company where a disclosure to a third party could cause damage to the company or prejudice its interests or the interests of its members. While discharging their duties, managing directors must not prioritise their own interests, the interests of certain members or the interests of third parties over the interests of the company. The same rules apply to the members of the board of directors of joint stock companies.

Other rules

There are other corporate law issues which include rules relating to capital maintenance, restrictions on transactions between a company and connected parties (executives, shareholders and close persons) and provisions relating to transactions which take place within certain periods before the company enters into an insolvency proceeding.

As of 1 January 2016, the amendment of the Commercial Code ("Amendment") introducing new provisions with respect to companies in crisis becomes effective. The amendment has effects described below:

A “company in crisis” is a company that is bankrupt (over-indebted/insolvent) or is in a risk of bankruptcy. A company is also considered a “company in crisis” in the period from its dissolution to its entry to liquidation. There is a risk of bankruptcy if the ratio of equity to obligations is less than 8:100 as of 2018. A company which has a negative equity balance is in any case regarded as being in crisis. The Amendment also creates the concept of "Equity substituting loans", which are loans made to a company in crisis by the following qualified persons:

  1. a member of the company’s statutory body, an employee reporting directly to the statutory body, an authorised signatory (procurator), head of a branch of an enterprise, member of the supervisory board,
  2. a person who holds a direct or indirect share representing at least 5% of the company’s registered capital or voting rights in the company, or can exercise influence over the management of the company which is comparable to the influence corresponding to the share,
  3. a silent partner,
  4. a person related to persons referred to in points a), b) or c),
  5. a person acting on the account of the persons referred to in points a), b) or c)

(collectively referred to as Qualified Persons)

If a Qualified Person provides collateral to secure the company´s debts during the crisis, the creditors may enforce their rights secured by the collateral directly against the Qualified Person.

The Amendment also proposes the introduction of a general ban on the repayments to Qualified persons during the crisis. The purpose is to promote the claims of other creditors ahead of the claims of the shareholders. Repayments made in breach of this prohibition must be returned to the company. The managing directors of the company are liable jointly and severally for ensuring the return of these funds.

Spain

Spain

Yes, there are both financial assistance rules and corporate benefit rules which must be complied with.

Financial assistance rules

A Spanish joint-stock company (sociedad anónima) may not advance funds, grant loans or guarantees, or provide any kind of financial assistance for the acquisition of its shares or the shares of its parent company by a third party. Likewise, a Spanish private company (sociedad limitada) may not advance funds, grant loans or guarantees, nor provide any kind of financial assistance for the acquisition of its shares or the shares of any company in its group of companies.

Breach of financial assistance regulations may result in fines for the directors of the company granting the assistance, but may also result in the security or even the relevant transaction being deemed void. In any event, any objection to the financial assistance must be invoked by:

  • The shareholders (normally minority shareholders), or
  • The creditors of the company

Corporate benefit rules

The directors of a company must exercise their powers for the commercial benefit of the company and its members. Basically, Spanish company legislation provides that directors have a duty of care towards the company (ie they must act diligently when running the company), must act faithfully and loyally with regard to the company (ie they must comply with legal obligations and company by-laws, etc in good faith and cannot use the good name of the company for their own personal transactions).

The board, a CEO, a lawyer or any other person with sole signing authority to bind and represent a company may grant security over its real estate assets by means of a public deed. Security over real estate assets must be executed by means of a public deed under Spanish law.

Prior shareholder approval is required for significant transactions, such as the acquisition, disposal or contribution to another company of assets whose value exceeds 25 percent of the company's balance sheet.

Other rules

Security granted by a company prior to insolvency may be revoked or terminated by clawback action if it is created less than two years prior to insolvency or bankruptcy and is viewed as harmful to the rest of the creditors. Also, certain special rules (especially tax rules and transfer pricing) govern intragroup and related party transactions.

Sweden

Sweden

As a general rule, all transactions must entail commercial benefit for the company. In evaluating what constitutes commercial benefit, several factors are to be considered. Note however that this is primarily a matter of fact rather than a matter of law and it is the responsibility of the board of directors to ensure that commercial benefit accrues to the company.

Swedish legislation prohibits financial assistance in relation to an acquisition of shares in

  • The company providing such assistance, and/or
  • A parent company in the same group as the company providing such assistance. 'Group' in this context means a group of companies where the parent company is also domiciled in Sweden

The Swedish Companies Act (Aktiebolagslagen) also provides general upstream restrictions in that a Swedish limited liability company may not provide loans or security to or for the benefit of anyone owning shares in the company. However, this restriction does not apply where the debtor/beneficiary is a company in the same group of companies as the company lending funds or granting security. In contrast to what is stipulated in relation to financial assistance, 'group' in this context means a group of companies where the parent is a legal entity domiciled within the European Economic Area.

In addition, enforcement of upstream security in Sweden is always subject to certain restrictions aimed at protecting the restricted equity of the company. Depending on the conditions on which security is given, it may be considered to be a value transfer to the shareholders of the company. As such, it will only be enforceable if and to the extent that:

  • It is equal to or less than the unrestricted shareholders' equity (the 'free capital reserves') in the relevant company at the time of the granting of security, and
  • It can be justified in view of the amount of equity and cash required for the running of the company's business, having due regard to the type and size of and risks involved in the business. Anyone who has received a payment which was not made in accordance with these restrictions is obliged to repay those funds immediately
Thailand

Thailand

No. There is no such restriction in Thailand but the board of the directors of the company must give approval before a corporate entity can give valid security over its real estate assets.

United Arab Emirates - Abu Dhabi

United Arab Emirates - Abu Dhabi

Pursuant to UAE Commercial Companies Law Federal Law No. 2 of 2015 (as amended), it is not possible for a public joint-stock company (PJSC) target, or any of its subsidiaries, to provide any financial aid (such as loans and guarantees) that will assist a purchaser in acquiring its shares. However, limited liability companies are exempt from such restrictions under Ministerial Resolution No. 272 of 2016 on the Implementation of Certain Provisions of the PJSC to LLCs.

We also note that, as a matter of good practice, all companies would be advised to demonstrate that there is a corporate benefit to the company in granting any particular security.

United Arab Emirates - Dubai

United Arab Emirates - Dubai

Pursuant to UAE Commercial Companies Law Federal Law No. 2 of 2015 (as amended), it is not possible for a public joint-stock company (PJSC) target, or any of its subsidiaries, to provide any financial aid (such as loans and guarantees) that will assist a purchaser in acquiring its shares. However, limited liability companies are exempt from such restrictions under Ministerial Resolution No. 272 of 2016 on the Implementation of Certain Provisions of the PJSC to LLCs.

We also note that, as a matter of good practice, all companies would be advised to demonstrate that there is a corporate benefit to the company in granting any particular security.

UK - England and Wales UK - England and Wales

UK - England and Wales

Yes, there are both financial assistance rules (which are now of extremely limited application) which may have to be complied with and corporate benefit rules which must be complied with.

Financial assistance rules

It is unlawful for a public company or a company which is a subsidiary of that public company to provide financial assistance for the purpose of a person acquiring or proposing to acquire the shares in the public company. The statutory provisions no longer apply to a private company (except where the shares are in its public holding company). There are various exceptions which may apply and legal advice needs to be taken on the position on a transaction by transaction basis if a public company is involved in the structure of the group receiving the finance.

Corporate benefit rules

Directors must comply with both common law rules and provisions under the Companies Act 2006. To summarize, a director of a company must only act in a way that he considers, in good faith, is most likely to promote the success of the company for the benefit of its members as a whole. Further, a director must exercise independent judgment and reasonable skill, care and diligence and act in accordance with the company's constitution.

Other rules

There are other corporate law issues which include rules relating to capital maintenance, restrictions on transactions between a company and connected parties and provisions relating to transactions which take place within certain periods before the company entering into an insolvency process.

UK - Scotland

UK - Scotland

Yes, there are both financial assistance rules and corporate benefit rules which must be complied with.

Financial assistance rules

Pursuant to section 678 of the Companies Act 2006, it is unlawful for a public company to provide financial assistance for the purpose of acquiring its own shares or the shares in its holding company. The statutory provision no longer applies to a private company (with certain exceptions where the shares are in its public holding company).

Corporate benefit rules

Directors must comply with both common law rules and provisions under the Companies Act 2006. To summarize, a director of a company must only act in a way that he considers, in good faith, is most likely to promote the success of the company for the benefit of its members as a whole. Further, a director must exercise independent judgment and reasonable skill, care and diligence and act in accordance with the company's constitution.

Other rules

There are other corporate law issues which include rules relating to capital maintenance, restrictions on transactions between a company and connected parties and provisions relating to transactions which take place within certain periods before the company enters into an insolvency process.

Ukraine

Ukraine

Ukrainian law does not recognize concepts such as ‘financial assistance’ rules or ‘corporate benefit’ rules.

Although the content of the ‘financial assistance’ rule is partially used in Ukrainian legislation, it does not relate to establishment of the security over the real property.

‘Corporate benefit’ rule is not prescribed by Ukrainian legislation either, but relevant rules may be determined by the company in its charter.

Under certain circumstances (eg misuse of company's assets), granting of security to third parties may trigger directors' liability to the company and its creditors. Furthermore, in case of company's bankruptcy, the directors could be subject to criminal liability, if it is established that they had wilfully caused the misuse of corporate assets to the detriment of company's creditors.

United States

United States

As with all corporate transactions, the granting of a security interest in property requires the officers of such entity to comply with its applicable articles of incorporation and by-laws, the laws or regulations of the state governing such transaction and those of the federal government, and any contract that the corporation has with another party. The debtor should also obtain a copy of a resolution of the board of directors authorizing the corporation to grant the security over its real estate assets.

Zimbabwe

Zimbabwe

Yes, there are financial assistance rules.                                                  

Section 208 of the Companies and Other Business Entities Act [Chapter 24:31] states that it is generally unlawful for a company to provide financial assistance for the purpose of a person acquiring, or proposing to acquire, shares in a public company unless such assistance is given in accordance with a special resolution of the company and it is able to pay its debts as they become due in the ordinary course of its business.

Furthermore, before a company can give valid security over its real estate, for example, in the case of debenture registration (if a debenture binds movable and immovable property), registration should be effected in the Deeds Registry.

In terms of corporate benefit, directors are bound by their fiduciary duties under common law  and Part IV of the Companies and Other Business Entities Act [Chapter 24:31]. They have a duty to act in good faith to the benefit of the company and its members.