Financial Assistance

Financial Assistance: Banned Transactions:

Article 143 of the Capital Companies Act (LSC) outlines the various transactions that Public Limited Companies (SL) are prohibited to carry out. However, as mentioned above these slightly vary for Public Companies (or Incorporations, or Public Limited Companies, or “Sociedades Anónimas) ( hereinafter, SA).

The transactions prohibited by the LSC for Public Limited Companies (SLs) are the following:

1. Agree to the sale of their shares in securities or other forms of guarantee.
2. Agree to the sale of shares created by a company within the same group as the SL, in securities or other forms of guarantee.
3. Advance funds to purchase their shares or those of companies within the same group.
4. Grant credit or loans to purchase their shares or those of companies within the same group.
5. Providing guarantees to purchase their shares or those of companies within the same group.
6. Providing financial assistance to purchase their shares or those of companies within the same group.

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Reasons for Financial Assistance

The Law does not ban a company from carrying out these transactions but rather bans a company from purchasing their shares or those of companies within the same group.

The aim of Financial Assistance is to try to avoid the following:

• From an equity point of view, that a partner is financed from the company’s assets.
• From a political point of view, that the administrators favour that third parties, whom they trust and then become partners. This alters the company’s process of decision-making.

Extent of the Financial Assistance Ban:

This ban must be understood in absolute terms and although the same does not apply to Public Companies, there are some cases in which the ban is also stringent.

The ban must always be understood and applied from the original purchase of shares and therefore any other derivative from this purchase. The original purchase is when the Company is established whereas the derivative occurs after. The ban applies regardless of whether the financing occurs before or after the purchase.

The aim is to prevent the partner or third-party beneficiary breaching the contract and consequently damaging the company’s assets. This would further cause detriment to the interests of the company, to the other partners and creditors.

Therefore, this ban allows the parties involved to resolve the prohibited conduct before it reaches a breach of the contract. Although, the purchase of the company’s shares should be paid for with the Company’s funds. The following transactions are prohibited: donation, granting of loans or guarantees to secure financing for the purchase of shares, etc.

However, there is a small nuance to pay attention to:

Neither the law nor jurisprudence clarifies this, but financial assistance includes the involvement of a third party, meaning that the company provides financial assistance to a third party so they purchase their shares. This is not the same as when the company goes into debt (or insolvency) to purchase its shares however in this scenario, none of the transactions carried out are prohibited.

Violation of the Financial Assistance Ban:

The consequence of carrying out prohibited financial assistance should be that it is ineffective. However, the ban is not clear in this respect.

The invalidity of the financial assistance may affect the financing transaction but not necessarily lead to an invalid purchase of the company. For an invalid purchase of the company to occur, the cause of the violation must be clear. In other words, there must be a clear link between the company purchasing the shares and the granting of financial assistance.

However, any violation must be assessed on a case by case basis.

Legitimisation to ensure the invalidity of prohibited companies which carry out Financial Assistance

It is reasonable to request the invalidity of the transaction if it causes a sufficient problem to justify a claim of invalidity. In other words, the plaintiff must be harmed or affected in any way by the act or legal transaction in question.

Jurisprudence indicates that the contract cannot be challenged by the same person who entered into it by causing this violation and thus invalidity.

An essential feature of Financial Assistance in Public Companies

The Capital Companies Act make an exception to the restrictions of financial assistance when the company is trying to help employees, for example when financial assistance is intended to facilitate the company’s employees to purchase shares in the company or group company.

Nor does the ban apply in the case of:

• Transactions carried out by banks;
• Transactions for the company’s purpose, which are paid for with the free goods of the company.

However, the balance sheet must establish a reserved amount which is equivalent to the amount of credits recorded in assets.