1. WHAT IS 'FINANCIAL ASSISTANCE'?
The term 'financial assistance' refers to a situation where a company (Target Company) financially assists a person (purchaser) for, or in connection with the process of, acquiring shares in the Target Company. The Target Company can be either a public company or proprietary company. Although 'financial assistance' is not defined in the Corporations Act 2001 (Cth) (Act), Courts have interpreted it to cover a broad range of actions which are financial in nature and which ease the purchaser's financial burden or improves the purchaser's net balance of financial advantage.
An example of direct financial assistance is when the Target Company provides a guarantee and indemnity or grants security to support a loan used by the purchaser to finance the price payable for the Target Company's shares. Assistance can also occur indirectly; for example, where the Target Company's action enables the selling shareholder to reduce the consideration payable for the shares, by releasing a debt owed to the selling shareholder.
2. THE GENERAL PROHIBITION ON FINANCIAL ASSISTANCE AND EXEMPTIONS
Part 2J.3 of the Act sets out a general prohibition on financial assistance. The rationale behind the prohibition includes protecting shareholders and creditors of the Target Company, as well as ensuring that the Target Company's resources are not used for improper purposes. It is important to note that a contravention of the prohibition does not invalidate the financial assistance and the Target Company itself will not be guilty of an offence. However, persons involved in a breach (such as the board of directors and other officers of the Target Company) may be liable for criminal and civil penalties. As such, where there is a financial assistance issue, it is important to consider the available exemptions to this prohibition as early as possible.
A Target Company is permitted to financially assist a person to acquire its own shares if:
- the giving of the assistance does not materially prejudice the interests of the company or its shareholders or the its ability to pay the creditors (no material prejudice exemption); or
- the assistance is approved by shareholders under section 260B (whitewash shareholder approval exemption); or
- the assistance is exempted under section 260C (section 260C exemptions).
a. No material prejudice exemption
The exemption applies where it can be established that the financial assistance is not materially prejudicial to the interests of the Target Company, its shareholders or its ability to pay creditors. There are risks with relying on this exemption, as this ultimately is a question of fact to be determined by the Court, not based on the reasonable conclusion of the Target Company's board.
b. Whitewash shareholder approval exemption
A more conservative approach is to rely on the shareholder approval exemption under section 260B of the Act, which permits financial assistance where the Target Company obtains approval from its shareholders and complies with ASIC's filing requirements.
Obtaining shareholder approval generally requires either a special resolution passed at a general meeting or a resolution agreed to by all ordinary shareholders at a general meeting. If the Target Company will become a subsidiary of a listed domestic company or have an ultimate Australian holding company, then approval must also be obtained by the shareholders of that corporation by special resolution passed at a general meeting.
With respect to notice of the general meeting, the Target Company must include with the notice a statement setting out all the information that is material to members' decision to vote – unless such information had already been disclosed to members previously.
Timing is an important factor in the whitewash procedure, as ASIC prescribes specific timeframes with respect to filings:
- Before the notice of the meeting is sent to members, a copy of the meeting notice and any documents relating to the financial assistance to be sent to members must be lodged with ASIC.
- After obtaining shareholder approval, and at least 14 days before giving the financial assistance, the special resolution and notice must be lodged with ASIC.
- The notice must be in the form prescribed by ASIC and lodgement of the special resolution passed must occur within 14 days after it is passed.
- Section 260C exemptions
This section provides a number of specific exemptions to the general prohibition of financial assistance, for example the reduction of share capital, employee share schemes, share buy-backs, and the creation of a lien on partly paid shares in the company's ordinary course of commercial dealings.
Financial assistance is interpreted broadly and can capture a range of conduct in the context of share purchases. To avoid uncertainty and risks of adverse claims, early identification of any potential financial assistance issues and consideration of the available exemptions are recommended.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
