“Financial assistance” is a generally broad term which has been found to include loans, guarantees and the provision of security over company assets. The High Court case of Connective Services Pty Ltd v Slea Pty Ltd [2019] HCA 33 found that the definition is very broad. It does not need to involve the payment of money by the company to the person who is acquiring shares. Any act that relieves the financial burden of a company in acquiring its shares could be considered financial assistance (e.g., declaring dividends and issuing a debenture).
When this occurs, the company must consider whether this acquisition will not materially prejudice the shareholders or the company’s ability to pay its creditors. This regulation seeks to avoid a situation where a company is left financially depleted as a result of the acquisition of its own shares and not being able to meet its finance obligations. The acquisition must also be approved by shareholders. This, in summary and broadly, is the “whitewash procedure” that is governed by sections 260A-260D of the Corporations Act 2001 (Cth).
When an arrangement has been arrived at between the outgoing shareholder and remaining shareholders of an entity regarding their exit it is, for the most part, a condition of any finance documents and the relevant share sale/transfer agreement that the whitewash procedure be complied with where finance is to be obtained to by the company to fund the transfer.
Sections 260A–260C
In relation to the relevant sections of the Act:
· Section 260A sets out the broad elements of what is included in the whitewash process. This includes that the assistance must not materially prejudice the company’s ability to service its debts or the interests of the company or its shareholders, it is approved under section 260B of the Act or the assistance is exempted under section 260C of the Act.
· Section 260B provides that, when shareholder approval is obtained for the finance, a special resolution (i.e., 75% in favour) must be passed at a general meeting of the company (with no vote being cast in favour of the resolution by the person acquiring the shares) or a resolution that is agreed to, at a general meeting, by all ordinary shareholders.
When the notice of the meeting is to be provided, it must be accompanied by a statement setting out the relevant information that is known to the company and is material to the decision on voting on the resolution. This should include, at a minimum, details regarding the nature and effect of the assistance on the company. In addition, prior to the notice being issued to the shareholders, the notice and accompanying relevant documents must be lodged with ASIC via Form 2602.
Section 260C sets out the instances where the whitewash process is not required (e.g., acquiring or creating lien on partly paid shares or entering an agreement with a person where the person may make payments to the company on shares by instalments).
Key Steps in Obtaining Shareholder Approval
The key general steps for obtaining the shareholder approval are as follows for non-listed companies (subject to the individual circumstances of each company):
1. preparation of ASIC Form 2602, Notice of General Meeting, and accompanying documents (which should include the explanatory statement). Usually, 21 days’ notice of the meeting is required to be provided to shareholders, however, shareholders can agree to short service. The company’s Constitution and shareholders agreement must also be consulted to ensure that all notice periods and other relevant requirements are addressed;
2. lodge Form 2602, the Notice and attachments with ASIC (following director approval to issue same);
3. send the Notice, explanatory statement and other relevant documents to shareholders;
4. hold the general meeting and resolve to pass the special resolution approving the financial resolution. The company can also consider whether the shareholders consent to a circular resolution being passed;
5. lodge ASIC Form 2205 (attaching the resolution passed) within 14 days of the resolution being passed and ASIC Form 2601 which confirms that the financial assistance has been approved at least 14 days before it is given;
6. provide the financial assistance 14 days after ASIC Form 2601 is lodged. This 14-day window allows relevant stakeholders a final window to consider the transaction prior to assistance being given.
Practical Implications and Compliance
It is important, and mandated, that the whitewash process is followed when a company is obtaining finance for the purchase of its own shares. Therefore, if the value of a shareholder’s shares is to an amount that a loan will need to be obtained, before crystallising any obligations regarding same, it is important that legal advice is obtained to confirm whether the process is required to be followed or whether a section 260C exemption applies.
Should the whitewash procedure not be complied with, it may not invalidate the actual transaction, however it can result in offences being committed by officers involved and penalties may be imposed.
It is important that companies looking to obtain finance to fund the purchase of its shares obtain legal advice on same. The relevant ASIC forms, Notices, explanatory memoranda and resolutions should be drafted in a way that ensures that the shareholders have sufficient time and understanding of the transaction to assess whether they wish to dispute it, whether it affects their rights as shareholder and whether it will affect the company (e.g., in being able to service its debts and liabilities).
Understanding the mechanics, company approval, ASIC compliance and periods for implementation is essential for any individual looking to effect the whitewash procedure to permit financial assistance being provided to a company. The Commercial Team at Watson Webb is well-equipped to provide guidance on the requirements and processes involved in undertaking the whitewash procedure and ensuring compliance with the relevant statutory obligations.
Disclaimer
The above is general commentary only and is not legal advice. It is also not an exhaustive statement of the law, nor is it specific to your circumstances.
If you are a shareholder, prospective purchaser or company seeking to provide financial assistance in connection with the acquisition of shares, you should seek proper and tailored independent legal advice to understand the requirements of the whitewash procedure and ensure compliance with the relevant statutory obligations. Our teams of lawyers is well-equipped to assist you in this regard.
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