The Boundaries for relaxation of financial assistance prohibition

ENAs of 1 July 2008, following the belated implementation of the Directive 2006/68/EC amending the Second Company Directive 77/91/EEC ("Directive"), the financial assistance prohibition in Lithuania is retained, regardless of the option provided to the legislator by the Directive to replace it with a relaxed procedure. In the first draft1 of the law amending the Law on Companies of the Republic of Lithuania ("Law on Companies"), it was intended to follow the course of liberalisation, but the adopted amendments do not concern financial assistance at all, leaving the regime intact. The concept of financial assistance may be traced back at least to the British case law of the 19th century prohibiting share repurchase without the sanction of the court.2 The provisions of the UK Companies Act establishing the prohibition of financial assistance as a clearly defined body came into force in 1929, and ever since has been a notorious problem in company law. In 1976, despite the dubious British experience, the prohibition appeared in the first adopted text of the Directive. Eventually, in 1981, British law was amended to allow a procedure (later to become known as a "whitewash") that permitted financial assistance by a private company as long as the company's shareholders approved it and the directors determined that the company was solvent and was likely to remain solvent for a foreseeable period of time.It took almost 30 years to amend the European Union law in a similar fashion. In the meantime, the sheer volume of private equity buyouts in Europe indicated that the hindering effect of Art. 23 of the Directive was not significant. The new changes in the financial assistance regime are brought about against a background of the public opinion that eventually shifted from viewing leveraged buyouts (LBOs) as invariably questionable transactions to seeing them as mostly value-producing activities. Understanding financial assistance, which has not been analysed in Lithuanian legal literature, is material for the proper regulation of the Lithuanian market of private equity transactions. The aim of this article is to analyse the concept of financial assistance, rationale for the special regime, consequences of violation of financial assistance law, as well as to summarise the arguments presented in favour of full abolition of regulation of financial assistance.