The leveraged buy out (LBO) and management buy out (MBO) are common tools of American businesses whereby an acquiring entity will purchase its target through a combination of debt and equity. No brilliance there, right? The clever part, however, comes in where the target company (i.e. its assets) are given as collateral for the debt. In essence the target helps facilitate its own acquisition. This is accepted as normal in the U.S., presumably under the belief that it leads to the most efficient allocation of capital and assets.

Across the pond though, the UK market takes a dim view of such financial moves — it is in fact unlawful for a company to assist in the acquisition of its own shares. This is commonly referred to as the “no financial assistance” rule. Assistance is defined generally as a guarantee, indemnity, gift or security provided to the acquiror. Aside from apparent common sense foundation that if you can’t afford it on your own, you shouldn’t buy it, this rule is primarily designed to protect creditors and the capital inside the target corporation. It is not a blanket prohibition however, and the UK provides for a “whitewash” test (what we would call a “safe harbor”). The “whitewash” rules will not be covered in this posting.

France and Germany similarly have rules against financial assistance for much the same policy reasons as the UK. France allows no whitewash, whereas German transactions can be structured generally to comply with the legal tests.

There remain open issues as to whether and how the emergence of

the EU will standardize national corporate legal policies. For now, transactions within a country are controlled by that country’s corporate legal structure. As shown here, Europe can be quite a different playing field that the U.S.

[Many thanks to Focus Europe Summit 2004, and Gibson, Dunn and Crutcher LLP for source materials on this topic.]
About Adishian Law Group, P.C.

Adishian Law Group is a California law firm with a statewide practice in the areas of Corporate law, Employment law, Real Estate law and Mediation Services. Adishianlaw.com is one of the oldest continually operating law firm websites on the Internet. The firm serves its clientele via three offices located in the major business hubs of El Segundo, Palo Alto and San Francisco. As of March 2013, Adishian Law Group, P.C. has represented individual and corporate clients located across 20 California counties, 4 States outside of California and 9 foreign countries — in over 340 legal matters.

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