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ACCA Applied Skills · Corporate and Business Law (Global) · Capital maintenance and dividend law

Lakeview plc is a public company. A bidder, Mr Osei, is buying a majority of its shares. Lakeview plc's directors plan to give a guarantee over Mr Osei's bank borrowing used for the purchase, and the guarantee is not covered by any exception. Under the typical rule for public companies, what is the position?

The guarantee is prohibited financial assistance. A public company generally may not guarantee borrowing used to buy its own shares unless a specific exception applies. Directors' good faith, disclosure or an ordinary shareholder vote does not make it lawful.

  1. AThe guarantee is lawful if the directors state it is in the company's best interests
  2. BThe guarantee is lawful if disclosed in the annual report
  3. CThe guarantee is lawful only if approved by a simple majority of shareholders
  4. DThe guarantee is prohibited financial assistance for the acquisition of the company's sharesCorrect

Explanation

A guarantee given by the company to support borrowing used to buy its shares is a classic form of financial assistance. Under the typical rule for public companies, it is prohibited unless an exception applies. Directors' belief about the company's interests, disclosure or a simple majority vote does not cure it.

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