The case of Connective Services Pty Ltd v Slea Pty Ltd [2019] HCA 33 [35] has re-invigorated the issue of whitewashing and companies providing financial assistance for the acquisition of shares in themselves.
The Corporations Act [1] generally prohibits companies from providing financial assistance to acquire shares in itself or its holding entities. However, there are a couple of exceptions to this general rule including:
- Where there is no material prejudicial impact on the:
[1] Section 260A(1)(a) of the Corporations Act 2001.
- interests of the company or its shareholders; or
- the company’s ability to pay its creditors.
2. The company’s shareholders approve the assistance [1] (known as whitewashing).
The High Court has shown in Connective Services that forming a view that there is no material prejudicial impact is fraught with danger. Accordingly, if there is any doubt whatsoever, a whitewash shareholder approval process should be performed. The Court has also taken a very broad view of what it means to acquire shares and the type of financial assistance which is captured by provisions including the granting of security, advancement of funds, payment of dividends and costs incurred by a company to enforce pre-emptive share sale provisions under a Shareholders Agreement.
Whilst a breach of the financial assistance provisions will not invalidate a transaction, it will expose the officeholders of the company and parties involved in the transaction (including financiers) to the potential of civil penalty provisions under the Corporations Act.
In short, the whitewash process requires:
- Preparation of Draft Notice of General Meeting of Shareholders;
- Director Resolution to approve the draft Notice;
- Lodge Financial Assistances Documents with ASIC (Form 2602);
- Send Notice of Meeting to Shareholders;
- Hold Shareholders Meeting; and
- Lodge final documents with ASIC (Forms 2205 and 2601).
The compliance regime the stringent and an experienced commercial lawyer or accountant should be engaged to undertake the process.
If you require assistance with the whitewash procedure, please contact our office as we provide fixed fee services for the whitewash procedure.
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