Leveraged buy-outs and prohibition on financial assistance

By a recent judgment of October 7, 2005, the Danish Supreme Court gave important guidance on the interpretation of the prohibition against financial assistance in the Danish Companies Act in connection with leveraged buy outs.

The Supreme Court approved of a planned post closing financing through the target’s free reserves, which were distributed to the purchasing company as dividend by resolution of the annual general meeting and on the basis of audited annual accounts only a few days after closing of the share deal.

In Danish law it has been argued that the prohibition against financial assistance by a company to the acquisition of shares of the company is violated if dividends were distributed to purchaser with the aim of enabling the purchaser to repay the acquisition financing debt. Even if all formalities were met, dividends could not be distributed to the purchaser if the share acquisition and the dividend distribution had a connection in time. In effect, the purchaser would be liable to repay dividends received under such circumstances.

The Supreme Court clearly reputed this interpretation. Neither the wording nor the parliamentary preparatory materials of the Companies Act gave sufficient grounds to favour the view that a planned post closing financing with the free or distributable reserves of the target company in accordance with Section 110 of the Companies act would violate the prohibition against financial assistance in Section 115 (2) of the Companies Act.

The judgment implies that also a lawful distribution of interim dividends (i.e. at other times than on an annual general meeting and without the audited annual accounts) is compatible with the prohibition against financial assistance.

Finally, the same possibilities of post closing acquisition financing should be available in private limited companies (ApS).