Providing Financial Assistance for Share Acquisitions – What Companies Need to Know
What is Financial Assistance?
In Australia, financial assistance includes any action by a company that helps a person acquire its shares in a company or in its holding company. While not explicitly defined under Part 2J.3 of the Corporations Act, it is broadly interpreted as covering both direct and indirect assistance.
Categories that may fall under this branch include guarantees, indemnities, loans, security interests, asset reorganisations, selective dividends or anything deemed to ease the financial burden on a purchaser of shares.
When do the Financial Assistance rules apply?
The regime is governed by the Corporations Act 2001 (Cth) (Corporations Act). A company can only provide financial assistance if one of the listed scenarios applies:
No Material prejudice: The financial assistance provided must not materially prejudice the company, its shareholders or the company’s ability to pay its creditors (this is an objective test).
Shareholder Approval: The shareholders of the company providing financial assistance must provide approval to the proposed giving of assistance.
Exemption: An exemption under section 260C applies (i.e. given in the ordinary course of that business etc).
What is a Whitewash Procedure?
Because the ‘no material prejudice’ test is uncertain and therefore difficult to comply with, companies will often undertake a ‘whitewash procedure’, which is shareholder approval via:
Preparing a notice of meeting and an explanatory memorandum detailing the nature, effect and purpose of the assistance;
Passing a special resolution of shareholders, excluding the acquirer and related parties; and
Loding necessary documents with the Australian Securities and Investments Commission (ASIC) and adhering to the strict lodgement deadlines.
The whitewash procedure removes any ambiguity as to whether the assistance is materially prejudicial to the company, its shareholders and / or its ability to pay creditors. Additionally, lenders will frequently require whitewash approvals before they can accept guarantees or securities from the target company.
Why Financial Assistance matters for Companies
Understanding the potential breadth of financial assistance is crucial for companies involved in share sales, management buyouts, group restructures, employee share schemes, or intra-group finance arrangements. Even simple routine corporate activity can inadvertently trigger the regime.
Key risks to be aware of:
Director liability for breaching statutory duties;
Invalidation or delay of financing or acquisition steps;
Lender refusal to proceed without assurance that financial assistance rules are satisfied; and
Increased regulatory exposure, including public disclosure of certain documents.
How we can assist
Our team can assist you navigate the financial assistance process via a number of avenues, including:
Assessing whether your proposed transaction constitutes financial assistance;
Advice whether a no material prejudice determination is appropriate;
Preparing all documents for the whitewash procedure;
Liaising with lenders and banks to meet financing requirements; and
Assisting with compliance obligations, including ASIC lodgements and timing considerations.
If your company proposes to provide financial assistance for the acquisition of its shares, please contact:
Paul Gray
Principal
T 03 5225 5231 | M 0414 195 886
Epgray@ha.legal
Hugo Le Clerc
Senior Associate
T: 03 5225 5213 | M: 0438 089 334
E: hleclerc@ha.legal
Jemimah Fitzgerald
Lawyer
T 03 5225 5219
Ejfitzgerald@ha.legal
Prepared with the assistance of Charlotte Newman.
