Financial Assistance

Abstract

Current Danish legislation prohibits financial assistance, unless certain requirements are met. The ban on financial assistance was implemented into Danish corporate law in 1973 and has been influenced by EU-regulation since that time. The ban on financial assistance originally stems from English corporate law. This thesis examines the historic evolution of the ban and compares the relevant Danish legislation to English, German and Norwegian legislation regarding the ban of financial assistance. This thesis goes on to explore the purpose of the ban, which primarily is to protect creditors and minority capital owners, and how it was slightly relaxed with new Danish legislation in 2010. This thesis further analyzes the current rules of financial assistance, including legal consequences, the geographical scope, and critique of administrative practice.This thesis also examines the private equity and the leveraged buyout market, looking into how the capital structure and gearing of a company affects the company’s earnings. This analysis illustrates how it is possible to implement acquisitions with a high degree of gearing without the same amount of legal scrutiny, thus presenting a viable argument to examine and evaluate whether the regulation on financial assistance can or should be amended or relaxed. This thesis ascertains that there are some advantages to debt such as interest deductions and a tax shield, and goes on to analyze the use of a capital structure which utilizes debt-equity covenants and how this affects the debt-equity ratio.This thesis compares the advantages and disadvantages of the ban on financial assistance, and concludes that the disadvantages of the ban outweigh the advantages. Additionally, the thesis points out that there are other corporate law provisions that protect the owners and creditors of a company as well as a company’s liquidity, thus diminishing the necessity of a prohibition of financial assistance.This thesis concludes that the financial assistance restrictions as a minimum can be modified so as not to include private companies, which would be in accordance with Directive 2006/68/EC. Denmark has over-implemented the directive, meaning it also applies to private companies in Danish corporate law, which is not a requirement from the directive, and puts private companies in Denmark on an uneven playing field vis-á-vis their European counterparts. This modification is inspired by German and particularly English corporate law where there is no ban on financial assistance for private companies. Finally, it is suggested that the use of debt-equity covenants could be used as a tool for the relaxation of the ban on financial assistance, which would ensure that the purpose of the ban would be upheld.