Navigating Financial Assistance Provisions in Share Transactions

Navigating Financial Assistance Provisions in Share Transactions

In share transactions, it’s not uncommon for the company (in which the shares are being acquired or its holding company) to provide financial assistance in connection with the transaction.

Financial assistance can take many different forms, however, it is often aimed at securing finance for the payment of the purchase price. Where financial assistance is provided, it will trigger the requirements of Part 2J.3 of the Corporations Act 2001 (Cth) (the Act).

Below, we explore the common forms of financial assistance and the implications of the financial assistance provisions under the Act. 

Common forms of financial assistance

The Act does not define financial assistance, so it is interpreted broadly by way of its usual commercial meaning. Financial assistance can be provided in any form, and broadly speaking, will apply where the company’s actions (or inactions, e.g. not enforcing a debt) ease the financial burden of acquiring the equity or improve the buyer’s financial standing in relation to the acquisition.

Common forms of financial assistance include:

1. The company guarantees payment of the purchase price.
2. The company provides security or collateral for payment of the purchase price.
3. The company loans funds to the buyer for purchasing the equity.
4. The company covers transaction costs related to the transaction.

Key provisions: Sections 260A and 260B of the Act

If financial assistance is involved, section 260A of the Act requires the company to comply with specific requirements before providing that assistance. The company can only provide financial assistance if one of the following conditions is met:

1. No material prejudice: The financial assistance must not materially prejudice:
   1. the interests of the company or its shareholders; or
   2. the company's ability to pay its creditors.
2. Shareholder approval: The financial assistance is approved by shareholders following the procedure outlined in section 260B of the Act.

Ensuring compliance with section 260A

While it is possible to comply with section 260A(1)(a) by demonstrating that the financial assistance does not materially prejudice the company, this approach may leave room for dispute. For example, in the event of a legal challenge, it could be argued that the assistance did harm the company’s interests or financial position.

In this case, a contravention of section 260A will not invalidate the transaction, and nor will the company commit an offence. However, individuals who are knowingly involved in the contravention may face civil penalties. If their involvement is found to be dishonest, they may also be subject to criminal penalties.

Consequence of non-compliance

A person is ‘involved’ if they aid, abet, counsel, procure, or induce the contravention or if they are knowingly concerned in it in any way. This is particularly relevant for lenders, as they could be deemed to have ‘aided’ or ‘abetted’ the contravention if they fail to ensure compliance with the requirements of section 260A.

In Hunters Products Group Ltd (In Liq) v Kindly Products Pty Ltd (1996) 14 ACLC 826, a financial institution was deemed to have facilitated a breach of the financial assistance provisions. This occurred when the lender extended an overdraft facility to help finance the acquisition of shares and accepted security from the target company to back the overdraft. As a result, the lender was held liable and required to pay compensation totalling $4.348 million.

Whitewash procedure

For this reason, it is generally recommended to seek shareholder approval under section 260B before providing financial assistance. This process is often referred to as the ‘Whitewash Procedure’.

This procedure requires a special resolution from the shareholders of the company. Crucially, the party who is receiving the assistance must not cast any votes on this resolution. By following this approach, companies can eliminate any doubt about compliance and ensure that the financial assistance meets the legal requirements.

Timing is key under this section. The giving of financial assistance cannot occur until 14 days after the passing of the special resolution and lodgement of the ASIC Form 2601.

Exemptions to financial assistance provisions

Section 260C of the Act outlines specific exemptions to the financial assistance provisions.

These include:

1. Ordinary business activities: If the Target Company’s regular business involves providing finance, and the financial assistance is part of that ordinary business, the provisions may not apply.
2. Employee share schemes: If the financial assistance is under an employee share scheme.
3. Share buy-backs and capital reductions: Some transactions, such as share buy-backs and reductions of share capital, may also be exempt if certain conditions are met.

Conclusion

If you are planning to undertake a share transaction, it is crucial to understand whether the financial assistance provisions apply to your transaction. Failure to consider the issue in a timely manner may cause unexpected delays in completion or potential breach of contract.

Non-compliance can result in significant penalties, and it is always better to follow a clear, compliant process from the outset. Reach out to us for advice on structuring your next transaction.