Navigating The Financial Assistance Provisions of the Corporation Act

November 1, 2021

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Key takeaways

  • The term ‘financial assistance’ in the Corporations Act has a broad commercial meaning and can even extend to a company relieving certain shareholders of the financial burden of taking legal proceedings to enforce a pre-emptive rights provision in its constitution.
  • The necessary connection between the assistance and an acquisition or proposed acquisition can be indirect and contingent.
  • At least in injunction proceedings, ‘no material prejudice’ must be affirmatively established by the company giving the financial assistance.
  • If it is not clear that the company, its shareholders and its ability to pay creditors are in no worse position after the giving of the financial assistance, then a ‘whitewash’ under the shareholder approval procedure in s260B is a sensible course of action.
  • Directors seeking to enforce pre-emptive rights for the benefit of some shareholders should seek advice from a commercial litigation lawyer to ensure they will not cause the company to breach s 260A, and that the directors themselves will not commit an offence under s 260D(3).

Background to s 260A

Section 260A(1) of the Corporation Act provides that a company may financially assist a person to acquire shares in the company only if 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 Court has determined that there are three elements necessary to establish a contravention of s 260A: 

  1. financial assistance given by the company; 
  2. to acquire shares or units of shares in the company; and
  3. which materially prejudices the interests of the company or its shareholders or its ability to pay its creditors.

In the first High Court decision on s 260A (Connective Services Pty Ltd v Slea Pty Ltd [2019] HCA 33), the Court considered whether the taking of legal proceedings by a company, at its own expense and risk, to enforce a pre-emptive rights provision for the benefit of majority shareholders, was financial assistance for the acquisition of shares. The Court found that such conduct was financial assistance, and that the company had failed to discharge its onus of showing there was no material prejudice.

Clarification: what is ‘financial assistance’?

The question of what constitutes ‘financial assistance’ need not involve any diminution or depletion of assets, but rather is a commercial and financial issue. Financial assistance need not involve a money payment by the company to the person acquiring the shares. Any action by the company can be financial assistance if it eases the financial burden that would be involved in the process of acquisition or if it improves the person’s “net balance of financial advantage” in relation to the acquisition. For instance, the assistance might involve the company paying a dividend by means other than by payment of cash, issuing a debenture, granting security, or agreeing to pay consultancy fees.

Approach to determining whether there has been ‘material prejudice’

The Courts determine the issue of material prejudice to the interests of the company or its shareholders or creditors by conducting an assessment of and comparison between the position before the giving of the financial assistance and the position after it to see whether the company or its shareholders or its ability to pay its creditors is in a worse position.

‘To acquire shares or units of shares’

The element of ‘acquiring’ requires a sufficient link between the financial assistance and the acquisition of the shares or units of shares. Section 260A(1) does not require that an acquisition actually take place, since the provision can be contravened and injunctions can be ordered before any acquisition actually takes place. In this sense, ‘to acquire’, like the express words of s 205(1) of the Corporations Law, includes conduct that is in connection with the process of an acquisition of the shares or units of shares and not limited to conduct for the purpose of acquisition. Acquisition also has broad connotations. It does not require a transaction or transfer. It includes acquisitions by issue or transfer or any other means.’

How Carneys Lawyers’ commercial litigation lawyers can assist

Our commercial litigation lawyers are highly experienced in navigating the financial assistance provisions of the Corporation Act and regularly advise directors and shareholders on their rights and obligations. Get in touch today for the expert legal advice you require.