Clarity on financial assistance. The High Court rules in Connective Services v Slea
In a unanimous judgement, the High Court recently held that Connective Services Pty Ltd had breached its obligations under the Corporations Act (Act) by bringing and funding litigation in respect of the enforcement of its shareholders’ constitutional pre-emption rights against an outgoing shareholder.
For the purposes of the Act:
an acquisition is not to be construed narrowly and does not require the provision of direct purchase monies or an actual acquisition of shares; and
financial assistance has broad commercial meaning and can extend to any action taken by a company which relieves shareholders of a financial burden in connection with an acquisition.
Slea Pty Ltd (Slea) was one of three shareholders in Connective Services Pty Ltd (Connective Services). The constitution of Connective Services included a “pre-emption clause” requiring shareholders to offer their shares to fellow shareholders before the shares could be transferred to a third party. Slea sought to sell their shares and entered into agreements with a third-party buyer, Minerva Financial Group.
Connective Services commenced proceedings to compel Slea to offer its shares to other Connective Services shareholders in accordance with the company’s constitution.
Slea consequently commenced proceedings seeking an injunction to prevent the proceedings brought by Connective Services regarding the enforcement of constitutional pre-emption rights on the basis that the proceedings commenced by Connective Services contravened the financial assistance provision contained in Part 2J.3 of the Act.
Section 260A(1) provides that a company may “financially assist” a person to acquire shares in the company only if the financial assistance does not materially prejudice the interests of the company or its shareholders, or the company’s ability to pay its creditors.
The High Court unanimously held that in seeking to enforce the pre-emptive constitutional rights, Connective Services had provided financial assistance to the remaining shareholders in breach of s 260A(1), even though an acquisition of the Slea’s shares had not actually taken place and purchase monies had not been provided.
The High Court stated that under the Act, the provision of financial assistance does not require a money payment. Rather, any action by a company can be financial assistance if it eases the financial burden that would otherwise be incurred during an acquisition, or if it improves the person’s net balance of financial advantage.
Accordingly, the High Court reasoned that as Slea was only ever going to offer the shares to the remaining shareholders for purchase subject to a court order to that effect, the company incurring the costs of obtaining that court order, coupled with the company failing to discharge the burden to establish that incurring those costs would not materially prejudice the interests of the company or its shareholders or the company’s ability to pay its creditors, resulted in the company providing financial assistance to the remaining shareholders in breach of section 260A(1).
As such, if there is a concern that a company’s conduct may amount to the provision of financial assistance in breach of section 260A(1) in relation to a transaction or a proposed transaction, it is vital that the company discharges the burden of establishing that the proposed actions will not materially prejudice the interests of the company or its shareholders, or the company’s ability to pay its creditors.
For queries related to the operation of the financial assistance provisions contained in the Act, or for general business and corporate law advice, please contact:
Rod Payne
Principal
T: 03 5226 8541
E: rpayne@ha.legal
Paul Gray
Principal Lawyer
T: 03 5225 5231
E: pgray@ha.legal
Alexander Gulli
Lawyer
T: 03 5226 8573
E: agulli@ha.legal
