FINANCIAL ASSISTANCE TO PURCHASE SHARES IN PRIVATE COMPANIES
It has long been the case that using the financial resources of a company to enable a shareholder to acquire shares in that company is objectionable and the reason for it being objectionable is that it has the economic effect of diluting the resources of the company that would otherwise be available to meet the claims of creditors. It has a diluting effect on the capital of the company.
This objection is enshrined in the Corporations Act 2001 (“the Act”) at Chapter 2J.
Whilst the provision of financial assistance for this purpose is prohibited the Act does provide a regime for such assistance to be given in certain circumstances as set out in Chapter 2J.
The meaning of the term “financial assistance” was recently considered in Slea Pty Ltd & Ors – v- Connective Services Pty Ltd & Ors [2018] VSCA 180 – although noting that this decision is under appeal.
In its judgement the Court noted as follows:
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As to the meaning of financial assistance, Almond J relied upon the oft-cited description of the term given by Hoffman J in Charterhouse Investment Trust Ltd-v-Tempest Diesels Ltd. He also relied upon Australian Securities and Investments Commission-v-Adler and Adler-v-Australian Securities and Investments Commission in holding that the court’s task was to consider the relevant transaction as a whole, with all its interlocking elements, and to consider whether the commercial realities of the transaction indicated the provision of assistance of a financial kind. Almond J held that, given the potential consequence of contravention, including civil penalties for individuals involved in a contravention, a court “should not strain” the provisions so as to cover transactions which did not fall squarely within it. |
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The issue in this case was where a company was incurring legal costs in funding legal proceedings for the purposes of enforcing a term of shareholders agreement compelling one shareholder to offer its shares to other shareholders was that expenditure “financial assistance”. The evidence before the Court was that the receiving shareholders had not incurred any legal costs to secure the acquisition of the shares.
The Court of Appeal observed as follows:
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The purpose of the proceeding is to compel Slea to make the offer. If Slea is forced to do so, Millsave and Mr Haron will have the option of accepting the offer and, if they do accept, of acquiring the shares. The proceeding seeks to procure that outcome. This “assists” Millsave and Mr Haron to both obtain the offer (which is an option) and to acquire the shares (if they decide to do so). The “assistance” is properly characterised as “financial assistance” because the assistance given to Millsave and Mr Haron comes at a financial cost. The Connective companies have incurred and will continue to incur, legal costs in instituting and pursuing the proceeding……. On the material before us, there is in the relevant sense a net transfer value from the Company which is bearing the cost to shareholders other than Slea, who will see the benefit. |
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The message is clear that in shareholders disputes it is not for the company, the subject of the shares to fund litigation as amongst the shareholders as this will have the effect of contravening s256A of the Corporations Act.