Key takeaways
- The Corporations Act 2001 (Cth) (Corporations Act) prohibits a company from providing financial assistance for the acquisition of shares in the company itself or a holding company of the company, unless specific requirements are met or the assistance is exempt under the Corporations Act.
- Financial assistance involves any action by the company which eases the financial burden involved in the process of acquiring shares (or units of shares) in itself, or a holding company of the company.
- Companies offering or accepting financial assistance need to be aware of these requirements to ensure they comply with the Corporations Act.
What is financial assistance and why is it not allowed under the Corporations Act?
Your company is offering financial assistance if it is considering making a gift, issuing a debenture or granting a loan, security, guarantee or indemnity to assist a person to acquire shares (or units of shares) in your company or a holding company of your company. For example, if company A provides company B with a loan for the purpose of funding B’s purchase of shares in A.
While we have named specific examples here, financial assistance involves any action that is undertaken by A to ease the financial burden involved in the process of acquiring the shares in A.[1] It captures situations where the acquirer did not ask for, or need, assistance and includes more indirect support where that support is perceived to be a pre-condition of the acquisition. For example:[2]
- refinancing a secured debt with one lender with a secured debt from another lender (even though the debt is not used to directly assist in the acquisition);
- where a target company gives some collateral benefit to the vendor of its shares (for example, a preferential supply agreement); and
- where a target company releases a debt owed to it by a shareholder to enable the shareholder to sell shares at a reduced price.
Section 260A of the Corporations Act restricts a company from providing financial assistance except in certain circumstances. This prohibition is imposed to protect the existing shareholders and creditors from abuse by, and improper practices of, directors. Generally, financial assistance would also be considered a breach of director’s duties – specifically, the duty to act for a proper purpose and in the best interests of the company.
Is your circumstance an exception to the financial assistance rule? Can it be?
The Corporations Act allows a company to give financial assistance if any one of the following conditions is met:
- the company does not materially prejudice the interests of the company or its shareholders, or its ability to pay its creditors in giving the assistance; or
- the assistance is approved by shareholders under section 260B of the Corporations Act (this requires advance notice to ASIC); or
- the assistance is exempted under section 260C of the Corporations Act.
Material Prejudice: interests of company, shareholders, and creditors
When considering giving financial assistance, directors must consider the commercial interests and position of the company, its shareholders, and creditors, both before and after the financial assistance is provided. Generally, the assistance will be materially prejudicial if upon assessing the financial consequences of the assistance, the company, its shareholders or its creditors will be in a worse position as a result of the financial assistance.
Shareholder Approval
Directors of a company may give financial assistance if it is approved by the shareholders of a company either by:
- special resolution of the company, with no votes being cast by the acquirer or their associates; or
- a resolution agreed to at a general meeting by all ordinary shareholders of the company.
The directors must present to the shareholders a statement containing all the information that is known to the company pertaining to the decision; this must be given to the shareholders prior to the general meeting, or as an attachment to the circulating resolution. This is commonly referred to as ‘whitewashing’.
Throughout this process, various forms with the requisite documentation must be lodged with ASIC. While time consuming and costly, obtaining shareholder approval in accordance with section 260B is the best approach to ensure that the financial assistance is permitted.
Exemptions under section 260C
There are various exemptions to the financial assistance rule set out in section 260C of the Corporations Act, which include but are not limited to the following circumstances:
- it is in company’s ordinary business to provide finance;
- the financial assistance is given in the ordinary course of that business and on ordinary commercial terms, subject to certain requirements; or
- the assistance is a share buy buck or reduction of share capital in accordance with the Corporations Act.
What can we do to help?
If you are considering a transaction that you feel may fall in the scope of financial assistance, ANDE + Co. can help you to identify whether it does and if so, whether an exception applies, any risks involved, and the strategies that you may take to ensure compliance with the financial assistance rule and the Corporations Act generally.
Disclaimer
The information contained in this article is provided as a general guide only and is not intended as specific advice. Information contained in this article may have changed or may no longer be current.
[1] See Connective Services Pty Ltd v Slea Pty Ltd [2019] HCA 33, [22].
[2] See Sterileair Pty Ltd v Papallo (1998) 29 ACSR 461.