Article 110 of the Companies Act renders unlawful, as a general rule, both the acquisition or holding by a company of shares in its parent company and the giving of financial assistance for the acquisition or subscription of shares, subject to the specific exceptions and procedures set out in the provision. Financial assistance continues to arise with regularity in acquisition structures, particularly where external financing is involved and the commercial expectation is that the target group will provide guarantees or security in support of acquisition debt. In Maltese M&A transactions, whether domestic or cross-border, such arrangements require ongoing consideration of Article 110 of the Companies Act, which regulates the circumstances in which a company may provide financial assistance for the acquisition of its own shares or those of its parent company.
The Maltese framework can be considered alongside developments in other jurisdictions. At EU level, financial assistance restrictions are rooted in capital maintenance principles reflected in the Second Company Law Directive, now consolidated into Directive (EU) 2017/1132. Those provisions apply mandatorily to public limited liability companies, while Member States retain discretion as to whether and how financial assistance restrictions are applied to private companies. In the United Kingdom, the general prohibition on financial assistance was removed for private companies in 2008, with the restriction retained primarily in relation to public companies under the UK Companies Act 2006. That change reflected a policy decision to rely on directors’ duties and insolvency law as the principal safeguards in private company acquisitions. In Malta, the legislator adopted a different approach, retaining the prohibition while introducing a procedural derogation that reflects, at national level, a safeguard-based model similar in structure to that applied under EU law in respect of public companies.
Under Article 110, financial assistance remains prohibited as a general rule. Since 2008, however, a private company may render the prohibition inapplicable by completing a pre-assistance procedure requiring approval by the board of directors, confirmation by an extraordinary resolution of the shareholders, and the filing of a statutory declaration prior to the assistance being given. While this process is administratively onerous and introduces additional formalities into transaction planning, it does not eliminate the ability of private companies to support acquisition financing. Rather, it embeds such support within a defined corporate decision-making framework.
From a transactional perspective, the operation of this procedure has practical implications. The possibility of financial assistance must be identified at an early stage of the transaction and addressed before any guarantees or security are granted by the target group. This influences transaction timetables, the sequencing of signing and closing, and the drafting of conditions precedent. It also requires clarity as to the scope, timing and purpose of the assistance being contemplated.
The procedural requirements of Article 110 place particular emphasis on the role of the board of directors. By requiring directors to approve the transaction and to make a statutory declaration prior to the assistance being provided, the legislation ensures that the company’s financial position and the directors’ fiduciary obligations are considered contemporaneously with the transaction. In practical terms, the decision to sanction financial assistance is one for which responsibility is assumed at board level, with directors required to stand behind the assessment that the transaction is in the company’s interests and consistent with their duties. In this respect, the provision continues to reflect capital maintenance considerations, while operating primarily as a preventative mechanism that shapes transactional conduct rather than relying on remedies after the event.
As M&A transactions involving Maltese companies continue to evolve, acquisition financing arrangements have become increasingly structured and often involve layered debt, group guarantees and post-closing refinancings. In this environment, counterparties and lenders continue to require clarity as to the scope and application of Maltese financial assistance rules. As transaction structures and acquisition financing arrangements continue to increase in sophistication, issues relating to the application of Article 110 may, in due course, be examined by the Maltese courts in circumstances that have not yet been the subject of detailed judicial consideration.
Against this backdrop, Article 110 continues to play a practical role in Maltese M&A transactions. While there is discussion as to whether financial assistance restrictions remain necessary in respect of private companies, the general prohibition on financial assistance continues to reflect capital maintenance considerations that remain relevant under Maltese company law. Within that framework, the whitewash procedure, while introducing an additional layer of process, preserves capital maintenance considerations while allowing acquisition structures that involve target group support to proceed within a defined corporate framework. In that sense, and notwithstanding its procedural demands, the Maltese whitewash procedure continues to earn its place in contemporary transactional practice.
By: Jeanelle Cachia
