Financial Assistance and ‘Whitewashing’: What Companies Need to Know
When a person acquires shares in a company, the company itself may sometimes be asked to assist with financing that acquisition.
This may occur, for example, where the company lends money to the purchaser, guarantees the purchaser’s acquisition finance, or provides security over its assets in support of the purchaser’s borrowing.
These arrangements can constitute financial assistance under Part 2J.3 of the Corporations Act 2001 (Cth) (“Act”) and, if not properly addressed, can expose those involved to significant consequences.
Key Takeaways
- A company cannot simply use its funds, credit or assets to assist with the acquisition of shares in itself or its holding company.
- Financial assistance can include loans, guarantees and security arrangements, but the concept is broader than those conventional examples.
- Section 260A of the Act provides three pathways by which financial assistance may be permitted.
- One pathway is shareholder approval under section 260B, commonly referred to as a “whitewash”.
- The whitewash process involves formal corporate documents, shareholder approval, ASIC lodgments and mandatory timing requirements.
- The process should be identified and commenced well before the proposed settlement date.
What is Financial Assistance?
There is no exhaustive definition of “financial assistance” in the Act.
Typical examples include:
- a company lending or advancing funds to enable a purchaser to acquire its shares;
- a company guaranteeing finance obtained by the purchaser for the acquisition;
- a company granting security over its assets in support of that acquisition finance; or
- other arrangements under which the company assumes expenditure, liability or financial risk to facilitate the acquisition.
The concept is not limited to conventional lending arrangements. The High Court has confirmed that the question is one of commercial substance. In Connective Services Pty Ltd v Slea Pty Ltd [2019] HCA 33, company-funded litigation directed towards facilitating an acquisition of shares by existing shareholders was capable of constituting financial assistance.
Section 260A also expressly provides that financial assistance may be given before or after the acquisition and may even take the form of a dividend. It applies whether the shares are acquired by issue, transfer or another means.
When Can Financial Assistance Be Given?
Under section 260A, a company may financially assist a person to acquire shares in the company or its holding company only where:
- giving the assistance does not materially prejudice:
- the interests of the company or its shareholders; or
- the company’s ability to pay its creditors;
- the assistance is approved by shareholders under section 260B; or
- the assistance falls within an exemption under section 260C.
The appropriate pathway will depend on the nature of the proposed assistance and the company’s circumstances.
Where shareholder approval is sought, the process is commonly referred to as a financial assistance “whitewash”.
How Does the Whitewash Process Work?
Section 260B provides two principal methods by which a company’s own shareholders may approve financial assistance:
- by special resolution at a general meeting, with the person acquiring the shares and their associates excluded from voting in favour; or
- by a resolution agreed to at a general meeting by all ordinary shareholders.
The appropriate method will depend on the company’s ownership structure.
Where the company is, or will become, part of an Australian corporate group, additional approval may also be required from shareholders of its listed or ultimate Australian holding company.
Importantly, obtaining shareholder approval is not simply a matter of preparing a resolution for signature.
1. Prepare the Meeting Documents
The company must prepare a notice of general meeting and an explanatory statement containing all information known to the company that is material to the shareholders’ decision as to how to vote on the proposed financial assistance.
That statement will ordinarily explain matters including:
- the transaction being financed;
- the nature and extent of the proposed financial assistance;
- the financial exposure being assumed by the company;
- the commercial reasons for providing the assistance; and
- any material interests of the directors or other relevant parties.
2. Lodge the Meeting Documents with ASIC
Before the notice of meeting is sent to shareholders, the company must lodge with ASIC:
- the notice of meeting; and
- any documents relating to the financial assistance that will accompany the notice.
ASIC Form 2602 is used for this stage of the process.
The order is important: the relevant documents must be lodged with ASIC before they are sent to shareholders.
3. Hold the General Meeting
The shareholders then consider and vote on the proposed financial assistance.
Ordinarily, at least 21 days’ notice must be given of a general meeting. However, for a general meeting other than an AGM, the meeting may be called on shorter notice if members holding at least 95% of the votes agree beforehand.
This can significantly reduce the time required to obtain shareholder approval in companies with a simple ownership structure.
It does not, however, remove the separate statutory waiting period that applies after approval.
4. Notify ASIC After Approval
Once shareholder approval has been obtained, the company must lodge the prescribed notice with ASIC at least 14 days before the financial assistance is given.
ASIC Form 2601 is used for that purpose.
Depending on the particular approval pathway used, additional ASIC lodgments may also be required.
The company must therefore build the statutory waiting period into the proposed transaction timetable.
Timing is Critical
The whitewash process is highly sequential.
A company may need to coordinate:
- directors’ resolutions;
- preparation of the notice of meeting and explanatory statement;
- Form 2602 and the pre-meeting ASIC lodgment;
- notice to shareholders;
- any agreement to shorter notice;
- the shareholder meeting and minutes;
- Form 2601;
- the mandatory 14-day waiting period; and
- final approval and execution of the finance and security documents.
A failure to identify the issue until immediately before settlement may therefore cause an unavoidable delay.
For that reason, the proposed finance and security arrangements should be reviewed at an early stage of any share acquisition.
Are There Exemptions?
Section 260C contains a number of specific exemptions from section 260A.
These include certain assistance given by financial institutions in the ordinary course of business, approved employee share schemes and particular transactions associated with capital reductions, share buy-backs and court orders.
However, the exemptions are specific.
For example, the fact that a purchaser happens to be an employee does not, by itself, mean that financial assistance provided for the acquisition is exempt. The requirements of the relevant exemption still need to be satisfied.
Directors’ Duties Still Apply
Shareholder approval under section 260B does not give directors a complete answer to the commercial merits of the transaction.
Section 260E expressly provides that compliance with the financial assistance provisions does not relieve directors of their other statutory or fiduciary duties.
Directors should therefore still consider matters including:
- why providing the assistance is in the company’s interests;
- the amount and nature of the company’s exposure;
- what assets are being placed at risk;
- the effect on the company’s cash flow and borrowing capacity; and
- the company’s ongoing ability to pay its creditors.
What Happens if the Requirements Are Not Followed?
A contravention of section 260A does not itself invalidate the financial assistance or a contract or transaction connected with it.
However, a person involved in a contravention may be exposed to civil penalty consequences, and dishonest involvement may constitute a criminal offence.
Compliance should therefore be addressed before the company gives the assistance, rather than treated as an administrative exercise after the transaction has occurred.
Need Advice?
Financial assistance transactions can be commercially straightforward but procedurally technical. The appropriate pathway will depend on the structure of the acquisition, the nature of the proposed assistance and the company’s ownership arrangements.
ABKJ Lawyers can assist companies, shareholders and purchasers with reviewing proposed financial assistance arrangements, preparing the necessary corporate documents and coordinating the shareholder approval and ASIC lodgment process.
If a company is proposed to provide a loan, guarantee, security or other financial support in connection with an acquisition of shares, contact our commercial law team on (07) 5532 3199 or submit an enquiry online before the transaction proceeds.
