Keep it Clean with a Whitewash

Current as of: 3 August 2023.

The financial assistance provisions in the Corporations Act 2001 (Cth) (“the Act”) are aimed at safeguarding the integrity of financial transactions within companies, to protect shareholders and creditors alike.  This article outlines the technical requirements, along with practical considerations, for private companies considering providing financial assistance for the purpose of acquiring its shares.

What constitutes Financial Assistance?

What constitutes financial assistance is quite broad. The assistance can be indirect or direct and can be given before or after the relevant acquisition of shares. The giving of financial assistance can include:

  • Loaning funds
  • Paying dividends
  • Granting security
  • Paying costs

The Corporations Act 2001 (Cth)

The Act prevents a company from financially assisting a person acquiring shares in the company (or a holding company), unless:

  • the assistance is exempted under the Act;
  • giving the assistance does not materially prejudice the interests of the company, its shareholders or the company’s ability to pay its creditors; or
  • the assistance is approved by shareholders (known as whitewashing).

In situations where financial assistance is to be provided, care should be taken to ensure that one of the relevant exceptions apply.  Whilst a breach of the financial assistance provisions will not invalidate a transaction, it will expose the officeholders of the company to potential civil penalty provisions under the Act.  

Assistance Exempted under the Act

A relatively small number of transactions are specifically exempted from the financial assistance requirements in the Act, for example, share buy-backs and capital reductions (see section 260C).  In many situations however, there is no applicable exemption making it necessary to establish that one of the other exceptions applies.

No Material Prejudice Exception

Establishing that there is no material prejudice can be difficult. The High Court’s decision in Connective Services Pty Ltd v Slea Pty Ltd [2019] HCA 33 [35] supports a conservative approach and highlights the issues with taking a view that there is no material prejudice.  Given the onus can be on the company itself to establish that the no material prejudice exception is enlivened and that banks will often insist upon financial assistance whitewashing (i.e. shareholder approval) regardless of the potential existence of the no material prejudice exception, having the assistance approved by shareholders is often the outcome.

Shareholder approval – Financial Assistance Whitewashing 

The most common approach when financial assistance is being provided by a private company to a person or entity acquiring shares in the company is for shareholder approval to be obtained. The Act stipulates how that is achieved.

  • Shareholder approval must be given by:
    • a special resolution, with no vote cast by the person acquiring the shares (or by their associates); or
    • unanimous resolution of all ordinary shareholders.
  • A special resolution approving the provision of the assistance must also be obtained by any holding company of the company providing the assistance.
  • Before the relevant notice of meeting is sent to shareholders, a copy of the notice and any document relating to the financial assistance that will accompany the notice, must be lodged with ASIC (Form 2602).
  • A notice of meeting sent to shareholders for the purpose of obtaining shareholder approval must include a statement outlining all information that is material to the decision being voted upon.
  • Within 14 days of the resolution being passed, and at least 14 days before actually providing the financial assistance, the company must lodge notice, and a copy, of the resolution with ASIC (Forms 2601 & 2205).

The timing of required steps and notice periods can make the relevant provisions of the Act difficult to comply with. This is only compounded by the fact that relevant ASIC forms can only be lodged in hard copy (no online lodgement available), creating the need to ensure that forms have actually been delivered to ASIC before they are considered lodged, which can add complexity to dating documents.

Key Takeaways

A conservative approach should be taken to the financial assistance provisions of the Act, with shareholder approval, or financial assistance whitewashing, remaining an effective way to reduce the risks of contravention. Care should be taken to ensure that the requirements of the Act in relation to obtaining shareholder approval are strictly followed, including timing requirements.

As always, the team at Acis is here to help. Contact us to discuss further or to obtain a quote in relation to Financial Assistance whitewashing.