Navigating a Corporate Whitewash: Unlocking Finance through Shareholder Approval

Introduction

When shares are being purchased in a company, a company may wish to provide financial assistance to the prospective buyer. Under the Corporations Act 2001 (Cth) this is not allowed, except in certain circumstances and only once certain criteria is met.

Under section 260A of the Corporations Act, a company is allowed to provide financial assistance to a person acquiring shares in the company, if the provision of finance does not materially prejudice the company or its shareholders, it will not impair the company’s ability to pay its creditors, the provision of financial assistance is approved by the shareholders under section 260B of the Corporations Act or if the financial assistance is exempted under section 260C of the Corporations Act.

Exemptions under section 260C include but are not limited to where financial assistance occurs where the company’s ordinary business includes providing finance and the financial assistance is given in the ordinary course of business or where the financial assistance is given under an employee share scheme (amongst others). This article will not explore the types of exemptions available.

If the above criteria and requirements are met, the shareholder approval aspect of the financial assistance and the process to obtain it is referred to as a “whitewash”

This article explores what needs to be done to facilitate a whitewash.

Not Materially Prejudice the Company or its Shareholders

When a company provides financial assistance to a purchaser of shares, the arrangement must not cause significant harm or disadvantage to the company, its shareholders or its creditors. Examples of where the financial assistance may materially prejudice the company or its shareholders is where:

1. The transaction and provision of financial assistance puts the company at risk of financial instability or loss;
2. The transaction itself adversely affects the rights and interests of minority shareholders; and/or
3. The transaction and the provision of financial assistance impacts the ability of the company to meet its obligations to creditors.

Shareholder Approval

If the provision of financial assistance does not materially prejudice the company or its shareholders, shareholder approval for the financial assistance must be obtained. This is referred to as the “whitewash” process.

Shareholder approval may be obtained in one of two ways:

1. The shareholders pass a special resolution at a general meeting; or
2. A resolution by all ordinary shareholders at a general meeting is passed.

In either case, the person who is acquiring the shares (if they are already a shareholder in the company) cannot case a vote in favour of the resolution or have an associate vote on their behalf.

As to the process of obtaining this approval, private companies must take the following steps. However, you should also refer to your company’s constitution and/or shareholders agreement as there may be further requirements in these documents that you must comply with to obtain approval.

1. Prepare a Draft Notice of the General Meeting. This draft notice must include the proposed resolutions being voted on and include an explanatory statement to allow the shareholders to make an informed decision on how they should vote. The explanatory statement should include information such as the nature of, reason for and effect of the financial assistance.
2. Have the directors of the company hold a board meeting or sign a circular resolution approving the draft Notice of the General Meeting.
3. Lodge the requisite financial assistance documents with ASIC. The company must lodge the notice of the general meeting and explanatory statement, along with Form 2602 with ASIC. The form will provide details of the financial assistance, and it must be lodged with ASIC at least 22 days before the financial assistance is granted.
4. Send the Notice of Meeting to the Shareholders. Once Form 2602 has been lodged with ASIC, the company should send the Notice of the General Meeting and the explanatory statement to shareholders. Additionally, you must comply with the process and notice requirements for calling a meeting as per your company constitution and/or shareholders agreement. Generally, a company must give 21 days’ notice unless the constitution and/or shareholder agreement stipulates otherwise.
5. Hold the General Meeting. Once the above occurs, the general meeting can be held and shareholders can vote on whether they approve the provision of the financial assistance.
6. Lodge final documents with ASIC. If the shareholders have approved the provision of financial assistance, the company must lodge Form 2205 alongside the relevant resolution approving the financial assistance within 14 days of the resolution being passed. Additionally, Form 2601 which specifies that the financial assistance has been approved, must also be lodged with ASIC at least 14 days before the financial assistance is provided.

Once the 14 days has elapsed from the Form 2601 being lodged with ASIC, the company may proceed with providing the financial assistance.

Conclusion

There may be certain circumstances where it is necessary for your company to provide financial assistance to a purchaser of shares in the company. However, it is important to understand that this is not allowed unless the requirements of section 260A and section 260B are strictly complied with.

Before agreeing to provide any financial assistance, it is imperative that you have an understanding of your obligations under the financial assistance provisions of the Corporations Act 2001 (Cth) as well as under your company constitution and/or shareholder agreement.

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