Article 110 (1)(b) of the Companies Act, Chpater 386 of the Laws of Malta, prescribes that a company may not give directly or indirectly, whether by loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of an acquisition or subscription made or to be made by any person of or for any shares in the company or its parent company.
At the outset, it is important to note that the aforesaid prohibition does not extend to transactions effected with a view to the acquisition of shares by or for the company’s employees or the employees of the group company (this is an employee fringe benefit that may apply in some companies with the intended effect to incentivising the employees into better productivity, since they have a personal stake in the company). However, this derogation shall apply insofar that the said transaction shall not have the effect of reducing the company’s net assets below the amount of its issued share capital together with its undistributable reserves.
Another slight exception is permitted in the case of financial assistance granted to units in investment companies with fixed share capital (INVCOs) for the purpose of or in connection with the acquisition of shares by another undertaking. Once again though, this exemption is qualified by the need for the assistance not to have the effect of reducing the company’s net assets below the amount of its issued share capital together with its undistributable reserves.
Interestingly, the aforesaid prohibition does not apply to Shipping Companies whereby private companies regulated by the Merchant Shipping (Shipping Organisations – Private Companies) – Chapter 234 of the Laws of Malta, are afforded absolute carte blanche provided that such financial assistance may only be given after due notice thereof has been given to the Registrar of Companies – through the filing of the so called Form D. Likewise, Article 110 (1)(b) shall not apply to securitisation vehicles – provided that such securitisation vehicle is not set up as a public company (implying therefore that a securitisation vehicle set up as a private limited liability company shall have no restrictions whatsoever).
The reason for this prohibition is to avoid a distortion of the internal shareholding of the company, but artificially allowing third parties to acquire an equity participation in the company, and thereby gain control of the company. It would be indeed a travesty if the company in which shares are being acquired or its parent is providing a loan or guarantees to a third party for the acquisition of companies, within it. The legislator has extended the financial assistance to “any means possible” – thereby implying that the prohibition shall remain intact, even if complex financial structures are put in place with the aim of acquiring shares within the company. A corollary to this is the provision speaks of ‘acquisition of shares’ – which denotes a wide scope of actions from outright purchase, to exchanges, partition, donation etc; It therefore matters not what transaction is used for this acquisition, insofar that the
However, a further dissection into Article 110(1)(b), makes it evident that the prohibition of financial assistance lies in the provision of actual help. Mere co-operation or advice would therefore not be deemed to trigger any prohibition, albeit, the directors of the company should approach such possible co-operation with great care.
The extension of the prohibition to shares in the parent company is an interesting mention, intended to apply as wide interpretation as possible to the prohibition. However, it should be stated that subsidiaries of companies registered in Malta are not subject to this prohibition, since the Companies Act, cannot by way of its jurisdictional scope, be extended to foreign subsidiaries. Likewise, the prohibition would not extend to parent companies of a Maltese subsidiary, although it would be strongly advisable that clearance be sought with legal counsel in the jurisdiction where the subsidiaries or parent companies are incorporated, to exclude the applicability of a corresponding Article 110(1)(b).
If the provisions relating to financial assistance are in fact triggered then the transaction shall be deemed to be unlawful and therefore null and void. The directors who have assisted in this financial assistance, through the provision of monetary sums or loans etc; would be deemed to have breached their duties inherent in the office of directors and therefore be held liable.
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