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What is ‘financial assistance whitewashing’?

Section 260A of the Corporations Act 2001 (Cth) (‘Act’) prohibits a company from “financially [assisting] a person to acquire shares in [that] company”, except in specific circumstances (s 260A(1)).

Obtaining shareholder approval lifts the prohibition and ‘whitewashes’ the assistance. Importantly, undertaking this process protects the company and its directors from liability that would otherwise arise from the provision of financial assistance, and is often a pre-requisite for banks and other lenders providing finance for any transaction captured by the Act.

When should you be ‘whitewashing’?

The short answer? In any circumstances where a company is providing financial assistance of any kind to a person acquiring shares in the company, the most prudent course is to obtain shareholder approval first.

Why is this the case? What does the most recent case law say?

In the recent case of Connective Services Pty Ltd v Slea Pty Ltd (2019) 267 CLR 461 (‘Connective Services’), the High Court dealt squarely with this issue. The Court confirmed that the application and scope of s260A of the Act is very broad and may capture any action by a company which “eases the financial burden that would be involved in the process of [acquiring shares]” (472, [22]). In other words, the prohibition captures both direct and indirect forms of financial assistance and is not limited to direct contributions to payment of the share price.

In Connective Services, the High Court unanimously held that the funding of legal proceedings by a company which, if successful, would have enabled two interested parties to purchase shares in that company, amounted to ‘financial assistance’ within the meaning of the Act. The company and its directors were liable under s260A of the Act because they had not ‘whitewashed’ the financial assistance.

What about non-share securities? How does section 260A apply to them?

Although there is currently no case law that deals directly with this issue, the principles from Connective Services help to provide answers.

Section 260A refers only to the acquisition of ‘shares (or units of shares)’. However, a company which provides someone with financial assistance to acquire a non-share security, such as units in a related unit trust, may still fall foul of the prohibition. Whether or not the assistance is contrary to the Act depends in all cases on the surrounding circumstances.

As the decision in Connective Services indicates, what matters is not the ostensible purpose of the assistance, but the underlying substance of the non-share acquisition. In other words, if a substantive connection to the acquisition of, or process of acquiring, shares in the company can be established, then the financial assistance will be caught by section 260A, regardless of its stated purpose. In these circumstances, directors of a company should obtain shareholder approval in advance.

For example, consider Company A which acts as trustee of a unit trust. Company A holds 100% of Company B’s shares on trust for the beneficiaries of the unit trust. If Company B were to financially assist a person in acquiring units in the unit trust that Company A is trustee for without whitewashing the assistance first, it would most likely offend the prohibition.

Key takeaways

• ‘Financial assistance whitewashing’ describes the process of a company obtaining shareholder approval to financially assist a person in acquiring shares in itself.

• The scope of section 260A is very broad and captures any conduct by a company that eases the financial burden for someone of acquiring its shares. Therefore, any financial assistance provided by a company to someone who may acquire shares in itself should be ‘whitewashed’ first.

• Section 260A captures all forms of financial assistance that are substantively connected to an acquisition of shares or units of shares. Depending on the circumstances, this could include financial assistance given for the purpose of acquiring non-share securities, such as units in a unit trust. Out of caution, that assistance should also be ‘whitewashed’ in these circumstances.

Authors: Ben Dodds – Paralegal, Corporate Team
Grace Cairns – Lawyer, Corporate Team
Victoria Moffat – Associate Director, Corporate Team

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