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Financial Assistance

∕ The regulation of financial assistance must be taken into account when structuring

many M&A transactions

∕ Financial assistance is assistance provided by a target company for the acquisition of

its shares by means of

a loan, or

security (collateral)

Introduction

∕ Financial assistance provided in connection with the acquisition of shares in public

limited companies has been subject to regulation by Community law since the 70s

∕ Originally financial assistance was entirely prohibited

∕ Argument: the capital of public limited companies representing creditors’ security

would be reduced by financial assistance (which in fact constitutes fictitious capital)

∕ 2006: shift to less restrictive regulation of financial assistance in Community law

∕ 2012: subject to certain conditions and an approval procedure within the company

(whitewash procedure), the new Council Directive permits public limited companies to

provide financial assistance

Community Law

∕ Regulation of financial assistance in the Czech Republic is based on EU legislation

(outlined previously)

∕ In addition to public limited companies (joint-stock companies, or akciové společnosti

in Czech (AS)), Czech law also regulates financial assistance in relation to limited

liability companies (in Czech: společnosti s ručením omezeným (SRO))

∕ Czech regulation of financial assistance allows an AS and an SRO to provide financial

assistance subject to the fulfilment of certain conditions and the completion of the

whitewash procedure

∕ The requirements are different in respect of the AS and SRO

Czech Law

∕ Financial assistance with respect to an SRO goes beyond the EU requirements

∕ Generally allowed and subject to less strict conditions

∕ May be provided subject to the statutory conditions specified in the Act on Business

Corporations

∕ An SRO’s Memorandum of Association may contain further conditions

Financial Assistance: SRO

∕ Must be provided on an arm’s length basis (interest, security, etc.)

∕ The company must not become insolvent (bankrupt) as a (immediate?) result

∕ No uncovered accumulated losses in the financial statements of the company

SRO: Statutory Conditions

∕ Executives must prepare a written report containing

Risks and benefits for the company

Description of the terms under which the financial assistance is to be provided

Explanation why the financial assistance is not in conflict with the interest of the

company

∕ The report must be published in the Commercial Register

∕ The provision of financial assistance must be approved by the general meeting of the

company

SRO: Whitewash Procedure

∕ Differing opinions on the consequences of failing to comply with the requirements

∕ All agreements made contrary to any of these requirements may be invalid

∕ Some experts believe that the failure to comply would only result in the liability of the

directors and should not negatively affect the position of a third party acting in good

faith

SRO: Sanctions

∕ Implementation of the rules of Community law

∕ More requirements in place and its regulation is stricter than that relating to SROs

∕ Generally prohibited unless explicitly permitted by the company’s Articles of

Association

Financial Assistance: AS

∕ The company must not become insolvent (bankrupt) as an immediate effect of the

provision of financial assistance

∕ Financial assistance must be provided on arm’s length terms (interest, security, etc.)

∕ Financial assistance must not result in the company’s equity dropping below the

amount of the subscribed capital increased by reserve funds which the company

must not use for payment to shareholders

∕ The company must create a special reserve fund in the amount of the provided

financial assistance; the company may only use retained profit or other funds for the

creation of this fund

AS: Statutory Conditions

∕ Financial assistance must be approved by the company’s general meeting (by a two-

thirds majority)

∕ The board of directors must prepare a written report containing

A description of the proposed financial assistance and its form

The risks and benefits for the company

A description of the terms under which the financial assistance is to be provided

An examination of the creditworthiness of the beneficiary

An explanation why it is in the interest of the company

∕ The report must be published in the Commercial Register before the general meeting

∕ If financial assistance is to be provided to related individuals/entities, the report must

be examined by an independent expert (appointed by the supervisory board) who

must confirm that the provision of financial assistance is not contrary to the company’s

interests

∕ The expert’s report must be published in the same way as that of the board of

directors

AS: Whitewash Procedure

∕ Lenders usually require security from the target company for financing provided to the

purchaser of the shares in the target company

Especially when the acquisition company is an SPV

∕ A pledge of the acquired shares only is usually not sufficient

∕ The target is required to provide security on its assets and cash-flow, including

mortgage of real estate

pledge of assets

security assignment of receivables

security assignment of accounts

∕ Providing security by the target company qualifies as financial assistance

Acquisition Finance

Summary of Key Indicative Terms and Conditions

(Syndicated Amortising Term Loan)

Facility A Syndicated Term Loan Facility (the „Facility“).

Group SPVs, Parent, Sponsor

Acquisition Acquisition of X% shares of TARGET by SPV owned by the Group

Target Target

Guarantor for Facility A

Tranche 2 Guarantor

Permitted Merger The merger of SPV/Borrower and Target

Facility Amount Up to CZK X divided into Facility A and Facility B as set out below.

Currency CZK

MLA/Underwriter Bank A, Bank B, Bank C (together „MLA“)

Lenders MLA and other 1- 2 banks selected by the Borrowers and MLA

Term Loan Facility (Facility A)

Borrower SPV - incorporated in the Czech Republic , 100% owned by X (directly or indirectly)

Facility A Amount

Up to CZK X:

Tranche 1: up to CZK Y

Tranche 2: up to CZK Z

Purpose Tranche 1: Financing of the Acquisition and related costs

Tranche 2: Financing of the Acquisition and related costs

Equity

Cash equity invested by the sponsor: min. X% of the acquisition price in the form of registered

capital or a shareholder loan fully subordinated to the Facility (i.e. in the amount of min. CZK

X)

Non-cash equity: min. X% stake in the Target (direct or indirect)

Interest Rate PRIBOR + Margin

Margin Before the permitted merger:

Tranche 1: 4,20 % p.a.

Tranche 2: 3,50 % p.a.

After the merger: the Margin grid Senior Debt/EBITDA according to half-year financial

statements and audited financial statements and will be applicable for Tranche 1 (TBD, pro-

forma consolidation)

bank debt/ Tranche 1

EBITDA

D/E≥4,00 4,2

3,00≤D/E<4,00 3,9

2,50 ≤D/E<3,00 3,6

1,75 ≤D/E<2,50 3,3

D/E<1,75 2,9

Term Loan Facility (Facility B)

Borrower Target

Facility B Amount Up to CZK X

Purpose Refinancing of existing loan

Interest rate PRIBOR + Margin

Interest period 1 or 3 months

Margin X% p.a.

Common Conditions for Both Facilities

Security Before Merger:

Facility A

1. pledge of 100% shares of Borrower/SPVs in Group

2. unconditional and irrevocable guarantee issued by Parent will cover the Tranche 2 amount plus

accessories

3. pledge of accounts

4. pledge of receivables

5. pledge of enterprise

Facility B

1. selected immovable assets

2. pledge of insurance benefit

3. pledge of shares of X

4. pledge of trade marks of Borrower

5. pledge of bank accounts

6. blank promissory note

7. notarial deed on direct enforcement title

8. pledge of enterprise

After Merger:

Facility A and B:

1. pledge of 100% shares of X

2. irrevocable guarantee issued by Parent will cover the Tranche 2 amount plus accessories

3. selected immovable assets

4. pledge of insurance benefit

5. pledge of trade marks of Borrower

6. pledge of bank accounts

7. blank promissory note

8. notarial deed on direct enforcement title

9. pledge of enterprise

Mandatory Prepayment 1) Ownership clause

2) Illegality

3) The permitted merger is not completed within 12 months from signing, the SPV shall

prepay all amounts borrowed under Tranches 1 and 2 of the Term Facility together with all

interest

4) Excess cash (X%) will be used for Tranche 2 until its full repayment, after that for Tranche

1 and Facility B pro rata as long as Debt/EBITDA will be X or higher

∕ The whitewash procedure set up for an AS is complicated, time consuming and the

statutory conditions are very strict and limiting

∕ Financial assistance may be provided only up to the amount of equity

distributable to the shareholders of the AS and a special reserve fund must be

created in this amount

∕ The security limited by such amount is rarely acceptable for the provider of acquisition

financing

∕ The provision of financial assistance by an SRO using the whitewash procedure may

be a suitable alternative to the more traditional structure with a merger

Limits of Financial Assistance

∕ Upstream merger

The target company merges into the purchaser after the acquisition

Subsequent provision of security for acquisition financing by the purchaser (which

has become the successor of the target company)

Practical Approaches

1) PRE - MERGER

CREDITOR BUYER

TARGET

PARENT

SUBORDINATED LOANS

PLEDGE OF SHARES

SENIOR LOAN

2) POST - MERGER

CREDITOR BUYER

PARENT

LOAN

TARGET

MORTGAGE

ASSIGNMENT

PLEDGE

∕ The prevailing opinion of law firms is that the provision of collateral by the successor

company is not considered to be financial assistance

∕ The original target ceases to exist as a result of the upstream merger and is no longer

subject to such limitation

∕ The original purchaser has never been subject to financial assistance regulation

Legal View

∕ The creditor cannot be secured using the assets of the target company until the

merger is completed

∕ Certain licenses or even contractual relationships of the target company necessary or

essential for the continuation of the target company’s business may not survive the

up-stream merger

New ICO, ISO, VAT registration etc.

Disadvantages

∕ Downstream merger

The purchaser merges into the target company after the acquisition

As a result the target company will assume the acquisition debt

Subsequent provision of security by the target company

Licenses and contractual relationships of the target company will not be affected

1) PRE - MERGER

CREDITOR BUYER

TARGET

PARENT

SUBORDINATED LOANS

PLEDGE OF SHARES

SENIOR LOAN

2) POST - MERGER

LENDER

LOAN

TARGET

MORTGAGE

ASSIGNMENT

PLEDGE

BUYER

∕ Law firms are more hesitant to confirm that providing security following a downstream

merger is not contrary to the rules of financial assistance

arg. security for the acquisition debt is provided by the target company which is

subject to financial assistance rules

∕ Other lawyers argue that there is no economic difference between an upstream and a

downstream merger

∕ The risk that the whole structure could be interpreted as being designed to evade the

rules of financial assistance is the same

Legal View

∕ The aim of the financial assistance rules is to protect the capital of the company

∕ As a result of a downstream merger the target company acquires the original

acquisition debt and will secure such debt using its assets

∕ Providing security for the company’s own debt would have no negative impact on its

capital; it is neutral and, therefore, not prohibited by financial assistance rules

If the merger is valid, security may be provided

Invalidity of Security

∕ Another aim of the financial assistance rules is to protect creditors and minority

shareholders

∕ Creditors and minority shareholders are protected during the merger process by the

Transformation Act

∕ Only the court may decide that the merger decision or the merger project are invalid

∕ Invalidity can only be declared before the merger is registered in the Commercial

Register

∕ After the registration of the merger in the Commercial Register it is impossible to

declare the merger decision invalid

change or cancel the merger project

If the merger is registered it may not be declared invalid

Invalidity of the Merger

Contacts

∕ Hungary

Millenaris Avantgarde Office Building

Fény u 16, H-1024 Budapest

Tel: +36 1 336 0443

Fax: +361 1 336 0444

E-mail: budapest@prkpartners.com

∕ Slovakia

Hurbanovo námestie 3

811 01 Bratislava

Tel: +421 232 333 232

Fax: +421 232 333 222

E-mail: bratislava@prkpartners.com

∕ Czech Republic - Prague

Jáchymova 2, 110 00 Prague 1

Tel: +420 221 430 111

Fax: +420 224 235 450

E-mail: prague@prkpartners.com

∕ Czech Republic - Ostrava

Stodolní 3, 702 00 Ostrava 1

Tel: +420 558 272 505

Fax: +420 569 112 306

E-mail: ostrava@prkpartners.com

PRK Partners